Financial Services Bill
Lord Flight Excerpts(12 years, 2 months ago)
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Lord Flight
Lord Flight
My Lords, I have previously raised the issue of the potential costs of the regulatory regime, which will ultimately fall on clients. I have also raised the common sense aspect. I suggest in part a reply to the very fair points raised by the noble Lord, Lord Eatwell: why on earth should both regulators have to be involved with the approval of a bank? Approval of a bank is fundamentally about its capital, the soundness of its shareholders and the propriety of its directors. The approval stage is not really about whether what it intends to do meets all the potential consumer interest elements; it is about its safety and its propriety.
In essence, the amendments in my name would remove the need for the PRA to consult the FCA over the authorising of a bank. The subsequent amendments make corresponding alteration to the regulatory actions, such as variation of permission, cancellation of permission and imposition of requirements.
I think that I may be the only Member of this House present today who has been through a bank application process with the FSA, having had responsibility for steering the Metro Bank application. That is an issue on which I could speak in greater depth. I was surprised to have someone from BIS contact me and ask whether they could come along and talk to me about it. In many ways, the crisis was at its height at that time and one can understand the FSA being extremely cautious and changing its approach, but taking a year and a half was quite excessive. There is already much improvement in the way in which the FSA is looking to deal with banking applications, but involving another organisation that does not have prime responsibility for banking safety is unnecessary from the perspective both of costs and of the delay and complication involved in meeting the key elements required for approval of a banking licence.
Lord Sassoon
As my noble friend Lord Flight has explained, his amendments would remove the requirement for the FCA to consent to authorisation decisions taken by the PRA relating to banks and other deposit-takers, including the decision to grant or remove permission. I should say at the outset that I cannot accept this group of amendments.
My noble friend spoke about his direct personal experience, of which I am aware, of going through an authorisation with the FSA. He will understand from that that, when the FSA approaches the authorisation of a bank or other deposit-taker, it now looks both at matters that will be within the ambit of the PRA and at matters that will be within the ambit of the FCA. As he will understand, if it was to be a matter only for the PRA, it would be an authorisation process that dropped a certain amount of what is done at the moment. I know full well that the FSA’s authorisation processes were becoming very slow. I am glad that my noble friend acknowledged that it has worked hard at improving them because it is important that the barriers to new entry are lowered as far as possible.
However, I should explain why I believe that it would be unsafe to drop the FCA leg of the authorisation process. Yes, the process should be improved in the way that is happening already, but half of it should not be dropped. The PRA will be responsible, as we know, for the prudential regulation of deposit-takers, including banks, but with the FCA being responsible for the conduct regulation of such firms. The authorisation process for a deposit-taker will be led by the PRA, but the FCA’s consent will be required before an approval can be granted and before a firm can acquire permission for any new activities once it has been authorised. It will be a dual authorisation and regulation process, as we know.
It is right that these matters should be looked at before a firm starts to get into business, rather than leaving it, as my noble friend suggests, to afterwards, because it is going to be much more costly to address issues within firms following authorisation if they were to engage in activities that the FCA believed to be inappropriate in any way. This is particularly important for the FCA, which is going to be looking at many more firms than the PRA. It is not only for the safety of the system but it will ultimately lower the cost in terms of the regulatory burden on firms and, as my noble friend says, in the end on the users of financial services if problems can be nipped in the bud or sorted out before they become an issue.
One only has to look at and think about the example of PPI. I know that it is not precisely the point that my noble friend makes, but PPI shows, lest we forget it, that deposit-takers can put consumers as much at risk as any other part of the industry, if their conduct is not appropriate. The FCA will have a significant role in the authorisation process, in assessing the range of products being proposed by the applicant, its systems and controls, and its processes for treating customers fairly, including dealing with complaints, ensuring that the business is not being used for a purpose connected with financial crime and promoting effective competition in the interests of consumers.
The Government believe that these issues need to be addressed up front as an absolute requirement. As a practical matter, if we went down the route that my noble friend suggests, dealing with problems as they came up afterwards, it not only would be to the detriment of consumers but would ultimately be more costly in terms of the regulatory burden. I hope that with those explanations my noble friend will be able to withdraw his amendment.
Lord Flight
My Lords, I suggest that the areas that the Minister referred to are already in the rulebook and in the legislation. Anyone going into business knows that they have to be good boys and behave appropriately. Authorisation of a bank at the beginning is concerned with the essentials: is there enough capital, is the banking plan safe and are the proposed directors proper people? That is what the FSA has now pulled itself back to looking at. I do not think that the FSA—while it still exists—is looking at all these other issues; it is looking at the fundamentals of a bank.
In my view, there is a muddle between the ongoing regulation and what matters up front. I remain of the view that there is a very strong common-sense and functional case for limiting the approval and granting of licences for banks to the PRA. I will add that I have found that a number of heavies, from both the regulatory world and related territories, strongly agree with this point and perceive dualling it up as adding to both costs and complications. However, I am sure that we can return to this matter on Report and hope I may persuade the noble Lord to think again on this point. On that basis, I beg leave to withdraw.
Lord Flight
“(3) The PRA and FCA must, in relation to dual-authorised persons—
(a) specify in rules those functions carried on by authorised persons which are significant-influence functions;(b) set up and maintain joint arrangements to exercise their power under section 59(3)(a) to approve holders of any significant-influence function.(4) The FCA must, in relation to FCA-authorised persons—
(a) specify in rules those functions carried on by authorised persons which are significant-influence functions;(b) set up and maintain arrangements to exercise its power under section 59(4)(a) to approve holders of any significant-influence function.””
Lord Flight
My Lords, I think it is self-evident that in gaining the advantage of twin peaks and what I hope will be a much better regulation of the safety of banks comes the cost of the requirement for elements of dual regulation and involvement. Rather contrary to what I had to say earlier about the authorisation of banks, when it comes to the authorisation and approvals of holders of controlled functions my amendment proposes, in essence, joint responsibility on behalf of the PRA and the FCA to approve holders of significant-influence functions for dual-regulated firms. Generally the industry has concerns that the proposed process for approving holders of controlled functions covered in Clause 12, which amends Section 59 of FiSMA, appears unnecessarily complex and might not have been fully thought through. From the drafting, it is unclear which regulator will be responsible for designating and approving some functions. The only straightforward, common-sense approach would be a joint responsibility on the part of the PRA and the FCA for granting approvals. Whatever system is put in place, it is important that it is run jointly in order to be as efficient as possible.
The draft MoU between the PRA and the FCA gives further details of the proposed system, but this makes it clear that there is an assumption that certain roles—for example, the CEO and the chairman—are inherently prudentially focused and so should be approved by the PRA, although with FCA consent. The holders of these senior roles are as much responsible for ensuring that the firm meets conduct standards as prudential standards; in the case of many businesses, the conduct standards may be more fundamental than the prudential standards.
I would like to hear the Minister’s comments on this territory, but one approach that might make life simpler is to have joint responsibility for the more senior dual-registered holders.
Viscount Trenchard
My Lords, I support my noble friend Lord Flight in his amendment, principally because it reads much better and is much easier to understand than the equivalent part of the Bill, which is confusing to say the least. I further agree that there is a very considerable risk that approved firms, having to apply to two regulators separately, is going to reduce the attractiveness of London and lead foreign firms to consider establishing in other centres businesses that could be established in London. There is already a perception that it is extremely cumbersome to obtain approval for significant-influence persons and that it is more difficult to do that here than in other financial centres around the world, so I definitely believe that my noble friend’s amendment would represent a significant improvement.
It is also important to ask my noble friend the Minister whether, if joint responsibilities are to be agreed between the PRA and the FCA, that would mean a single procedure. If the two regulators are made jointly responsible but operate slightly different procedures that with time become more different, it makes it much more time-consuming and expensive for regulated firms to comply with the requirements.
Has my noble friend also thought about customer-dealing functions? His amendments deal perfectly with the significant-influence functions, but the Bill as drafted also deals with customer-dealing functions, and I see no reason why these should not also be dealt with in an extremely simple and understandable manner using a form of words similar to his.
Where joint responsibilities between the two regulators are agreed, will this lead to the avoidance or elimination of the duplication of staff between them? If you have two regulators doing the same thing, you have double the people and you may have even more people who are responsible for talking to their equivalents at the other regulator. Where joint responsibilities under the memorandum of understanding or elsewhere are agreed and put into force, can that be done in a way that reduces rather than increases the number of persons necessary to carry out the process?
Lord Sassoon
My Lords, I can assure my noble friends that these matters have been carefully thought about. To some extent, the somewhat tortuous drafting is entirely to achieve a simpler and more cost-effective result, even if the drafting of the Bill is more complex than my noble friend has suggested, although I do not think he is doing it to make the drafting more comprehensible.
As with our earlier discussion about the authorisation of firms, we need to recognise that there are already difficulties in this area. My noble friend Lord Trenchard quite rightly points out how aspects of the authorisation processes in London are of concern to firms, particularly from outside Europe. I understand that. As he and I have discussed over a long period, different aspects of this go over many years. Whether it is the FCA or the new regulators, there is an ongoing challenge to make sure that the system is sensitive, appropriate and efficient, quite regardless of the new architecture. He makes an important point, but I suggest that it is a different point from the narrow but equally important one here about where best to do it in a dual-regulation, dual-supervision environment.
Amendment 165A would establish a different system for designating significant-influence functions, or SIFs. For dual-regulated firms, the PRA and the FCA would jointly make rules specifying which functions are SIFs and then put in place joint arrangements for approving individuals to perform them. For FCA-only firms, this would be done by the FCA alone. I can see the attraction of the approach which my noble friend Lord Flight is proposing. The language and the on-the-face-of-it approach perhaps appear simpler than the arrangements in the Bill at present. However, the arrangements in the Bill have been thought about, and we believe that they are preferable because they put one regulator in charge of leading the process for approving those who wish to carry out roles involving significant influence over the conduct of affairs of an authorised person. In most cases, this will be the relevant prudential regulator, although the FCA will be able to designate SIFs in dual-regulated firms where the PRA has not done so. For example, the FCA will have a greater interest than the PRA in the chief anti-money laundering officer, so it may wish to designate this function in the absence of the PRA.
We certainly do not think that the administrative process should be excessively difficult or lead to log-jams. The Government expect the two authorities to run a single administrative process for SIF applications, taking into account the statutory timeline. Indeed, the draft memorandum of understanding, published by the Bank and the FSA, makes clear that that is exactly what they will do: run one administrative process. I cannot answer my noble friend’s question about whether there will be more or fewer people. All I can say is that they have already documented a process to make it as efficient as possible.
With the explanation that this has all been very carefully thought out and that, although there is no perfect way to do it, we believe that the basis in the Bill as drafted will work better in practice for firms and for the regulators, I hope that my noble friend will withdraw his amendment.
Lord Flight
My Lords, I appreciate that this is a tricky issue to solve to the optimum, whichever route you choose to go down. I would just comment that, particularly as the drafting of the legislation is less than clear, I hope the Minister might give an undertaking that the two new regulatory bodies would issue codified statements for people wanting to seek approval as to where they should go as a first port of call, depending on their functions. This would make life easier, particularly for non-UK parties. With that proviso, I beg leave to withdraw the amendment.
Lord Flight
“( ) In section 72—”
Lord Flight
My Lords, this group of amendments is concerned really with the same issue: the designation of the competent authority in the Bill. When FiSMA was introduced, it was straightforward to transfer authority to the LSE as the definition was of competent authority. The Bill as redrafted clearly makes the definition the FCA itself. These amendments seek to revert to the previous arrangement as an insurance policy against a potential, albeit unlikely, wish to change the listing authority in the future, so they are designed to retain all existing references to the competent authority in the FiSMA, to change the designation of competent authority to the FCA and all existing references to the authority to the FCA, to retain existing provisions relating to the duties and powers of the competent authority and to retain the existing ability to transfer the designation of competent authority to another person.
I am aware that the Treasury’s position has been to want to put beyond all doubt the fact that the FCA would remain as the listing authority, and I understand that point. There had been some discussions about merging the listing function with the Financial Reporting Council, although the consensus of consultation was against it. There is a practical argument in favour of leaving things defined the way they are, to enable changes to be made in the future without having to revert to primary legislation.
Lord Sassoon
I am not the first noble Lord to have jumped up a bit fast this afternoon but will probably not be the last—apologies for that.
On the amendment, we need to go back over a little of the history, which is all to do with the question of who was going to be the listing authority at the time FiSMA came in. My noble friend Lord Flight refers to the past couple of years, but as I understand it—and I remember a little of this—it was unclear at the time FiSMA was enacted whether the FSA would undertake the listing functions on a permanent basis. As a result, Part 6 of FiSMA was prepared as a self-contained part of the Act and included some provisions—for example, those relating to fees and penalties—that are included elsewhere in FiSMA to apply to the FSA in its general capacity.
I suggest, on the point about the listing authority having a special status and being more flexible in order to be moved around in the future, that that would not have been considered at all if it had not related to the circumstances a decade or so ago. Since then, not only was the listing authority with the FSA through that period but, as my noble friend said, the Government considered the question, at a very early stage of the work leading up to this Bill, of the appropriate future home of the listing function. As my noble friend recognises, as a result of that consultation in July 2010, which was essentially about whether the listing function could be merged with the Financial Reporting Council, the clear view among the vast majority of respondents was that listing should be with the FCA, along with other parts of market regulation. FiSMA also includes provision for the possible transfer of the competent authority functions to another organisation.
Clause 14 gives effect to that decision. I say again to my noble friend that if it had not been for the particular circumstances of uncertainty going back a decade and more, there would not have been this anomaly. We are now tidying it up and making the listing function a core part of the FCA, as with all other major parts of its activity. I hope that, on the basis of that explanation, my noble friend will withdraw his amendment.
Lord Flight
My amendment was there to raise the matter for discussion and I am satisfied with the Minister’s response. I beg leave to withdraw the amendment.
Lord Flight
Lord Flight
My Lords, it is widely known that there are some concerns within the industry that in a more interventionist and judgment-based regulatory environment, the ability to challenge the regulators’ decisions should be strengthened rather than weakened. My amendments in this group essentially seek to retain the current provisions. I am obviously aware that the Government’s Amendments 184 and 185 go a long way to alleviate the underlying concerns here. Under them, the regulator will be obliged to issue another decision notice, not a final notice, when the tribunal gives a direction to the regulator to reconsider a non-disciplinary case.
However, if I have understood it correctly, the Government’s amendments enable the tribunal to substitute its opinion only in disciplinary cases and not in judgment-led decisions. I am not clear why judgment-led decisions should not be included, because they are the most sensitive and perhaps the most appropriate for further consideration. I look forward to hearing the Government’s case for tabling amendments on this issue. I beg to move.
Lord Sassoon
My Lords, I am happy to speak next. In doing so, I will first need to go through the analysis of my noble friend’s amendments and the effect of the Government’s amendments in the group. I invite the noble Baroness to break in at any stage if it would help her.
The starting point is that the experience of the last few years has shown that we do not want a regulator with broad responsibilities that is too much focused on narrowly policing compliance with rules. We are still dealing with the consequences of that approach. The reforms, in particular those in this clause, are about giving the new regulators the right focus and mandate. They are also about judgment, and empowering the regulators to use their knowledge, experience and expertise to take difficult decisions, often on a proactive and preventive basis. The changes to the arrangements for appealing firm-specific decisions set out in Clause 21 play a key role in making this happen.
I will be clear about what our changes will mean. Clause 21 carries forward the rights of those who are dissatisfied with a firm-specific decision of the FCA or PRA to refer the matter to the tribunal, and preserves the ability of the tribunal to reconsider the matter afresh on a full-merits basis. There have been no changes to the grounds on which the tribunal will consider references. It will continue to consider references on a full-merits basis. In addition, for disciplinary matters or references under Section 393 of FiSMA that relate to third-party rights, the ability of the tribunal to substitute its opinion for that of the regulator remains unchanged.
What has changed is the nature of the directions that the tribunal will be able to give in the case of references that do not fall into the above category. In these cases, where the tribunal decides not to uphold a decision, it will not be able to substitute its decision for that of the regulator. Instead, it will be required to remit the decision back to the regulator, giving directions that it considers appropriate. The directions will be limited to findings relating to matters of fact or law that should or should not be considered by the regulator, and whether or not there were any procedural deficiencies. This is an important part of the move to judgment-led regulation, which recognises that it is the regulator’s job to take regulatory decisions, while providing a mechanism for judicial scrutiny of the fairness of those decisions.
I have already set out why the Government attach significant importance to the new arrangements for appealing non-disciplinary decisions. However, we must also ensure that we provide a fair regime for firms, and give certainty and clarity around procedures. That is what government Amendments 184 and 185 seek to do. Where a non-disciplinary reference is made, the tribunal remits the matter to the regulator. The regulator must then reconsider the matter in accordance with the tribunal’s directions. These amendments seek to provide clarity about what happens next. They require the regulator to issue a second decision notice rather than moving straight to a final notice, as would be the case under the Bill as drafted. Once a final notice has been issued, the firm’s or individual’s options for further challenge are strictly limited. A final notice can be appealed to the High Court only by way of a judicial review, on more limited grounds and at the risk of higher costs and lengthier delay.
Amendments 184 and 185 would require the relevant regulator to issue a second decision notice in all such cases once it has considered the tribunal’s direction and reached a new decision in accordance with the tribunal’s findings. This means that the firm or individual could challenge the second notice, for example if they do not think that the regulator has properly considered the tribunal’s direction in reaching its new decisions. There will be a second hearing before the tribunal, which will be able to consider the full merits of the matter and deal with the case more speedily and, because it will already be familiar with the case, at lesser cost to the firm and the regulator.
The amendments will increase fairness for firms and substantially strengthen the new arrangements. I hope that I have done enough to convince my noble friend. I think he already recognises that the government amendments go a considerable way toward allaying his concerns. Having heard the further explanation of how the process is intended to operate, I hope that he will feel able to withdraw his amendment.
Lord Flight
My Lords, I thank the Minister for his explanation of a rather complicated territory. Certainly I think it is as much as we are likely to get here. There is still a slight question in my mind about whether tribunals should be able to overrule judgment-led decisions. However, it seems that a reasonably fair system has been set out for members of the industry. I beg leave to withdraw the amendment.
Baroness Kramer
My Lords, I will speak to Amendment 173AAZA in this group and I will be brief. Your Lordships will recognise that this amendment is part of the family of amendments that we on these Benches have moved. Amendment 173AAZA addresses the issue of social enterprise. It gives the FCA the power to make general rules for social enterprises to advance the consumer protection objective and the competition objective, and for services to small and medium-sized businesses, to defined groups within the more deprived economic and social environment and for environmental purposes.
It is the contention on these Benches and through much of this House that the current organisations that provide financial services fail to meet the needs of important communities, especially small and micro-businesses and deprived communities, and very often they certainly do not provide the necessary financial services to environmentally-oriented projects. Part of the barrier to the entry of new organisations that could meet those financial needs is the approach of the regulator which is very much a one-size fits all approach. Throughout this Bill we have been calling for the regulator to have the power to deliver appropriate regulation. This amendment addresses those issues particularly around social enterprises and other organisations with a social objective.
We recognise that the Government are somewhat sympathetic to the issues that we have raised. This is a probing amendment but also a reminder that although we went away for the summer we have not dropped, and will not be neglecting, these issues as this Bill proceeds to its end.
Lord Flight
My Lords, three different sets of amendments that I have tabled are grouped together here and they cover rather different territories. I will be as organised as I can in presenting them.
Amendment 173AA is about fair process for product intervention powers. I understand, and have a deal of support for, the regulator being able to ban promptly products that are clearly undesirable. However, if additional product intervention powers are put in place, there ought to be legislative safeguards to ensure that the powers are used as a last resort and not regularly. Amendment 173AA seeks to put in place safeguards for the use of product intervention powers, such as those set out in the EU markets in financial instruments directive.
Many noble Lords may have noted that Martin Wheatley, the designate head of the FSA, had made statements about shooting first and asking questions later and had perhaps over-made his point. One of the issues I want to speak about on Report regarding the new regulatory order is that I have encountered reluctance by the industry to raise criticisms with the regulator for fear of unpleasant reciprocal action. I fear we are slightly swinging from an era where regulation was very lax to one in which there may not be enough open debate between the regulator and the industry.
My Amendments 173ACA to 173AE seek to remove the requirement to publish details of directions prior to the conclusion of the representation process. There is an analogous issue that will come up in due course with regard to warning notices. In a world where anything published is a label of guilt, I am inherently opposed to the publication of notices before there has been fair representation and a fair judicial process.
My Amendment 173AF covers slightly different territory. The Bill already gives the FCA the right to introduce rules without consultation where it would be considered that a delay would be prejudicial to the interest of consumers. This additional power, which my amendment seeks to block, is unnecessary and provides the FCA with excessive powers without appropriate checks and balances.
Amendment 173AG raises the issue that very little detail is included about what should be covered by the statement of policy. It would be better if the statement of policy were clear and transparent, particularly if there is no consultation on the specific use of the powers. Finally, the statement of policy should be used for production intervention powers generally.
I cannot find the appropriate notes. Amendments 187RA and 173AAC both cover completely different territory. As noble Lords will be aware, financial advisers are the only category of people who do not have protection from the statute of limitations for a period beyond 15 years. In practice, this means that if there are any outstanding issues when a financial adviser retires, there is no closure. There are many such situations. Sometimes issues may be with the ombudsman or the regulator from way back and there is no indication whether any action will be taken. This is a messy situation and it is ultimately unfair to financial advisers, and not helpful to clients, as it stops financial advisers being able to hand on or sell their businesses to others in the industry. I can see no really fair justification why financial advisers should not enjoy the same protection as those in other industries. I may add something further after the Minister’s response.
Baroness Hayter of Kentish Town
My Lords, I am sorry that we do not have the other amendments in order to be able to have a long discussion about “may” and “must”, but such are the events of the evening.
There are two major areas of concern for us in this set of amendments, and I am afraid that they are found in the amendments tabled by the noble Lord, Lord Flight. Unsurprisingly, one involves the so-called toxic products powers, and the other financial promotions. We have already congratulated the Government on their initiatives in this Bill on both of these issues, so it will come as no surprise that we would not support any weakening of their well chosen tools. Product intervention powers are absolutely key. They will allow the FCA to take prompt action to prohibit the sale of a particular product or to counter a product feature either on a temporary or permanent basis. There has been widespread mis-selling of endowment mortgages, PPI, interest-only mortgages and self certified mortgages; we all know the list. It demonstrates that the FSA failed to act swiftly enough to prevent widespread consumer detriment. It is highly unlikely, despite some of the lobbying that I know we have been receiving, that the retail distribution review would have had an effect on any of those, and nor indeed the TCF initiative. After all, treating customers fairly was always a part of FiSMA.
Product intervention needs to be seen as more than just a decision on whether to ban a particular product. It can also be used to control the way banks vary the terms or other specifics. Many products are not in themselves toxic. Even PPI was a very good product for a certain group of people, as were interest-only mortgages. The issue arose over the way they were sold—their packaging and their terms. That is what made them toxic. We would not want to see any weakening of what the Government have already put in the Bill.
With regard to the new and, I think, long overdue powers on financial promotion, these will allow the FCA to publish details about misleading adverts once they have forced their withdrawal. It seems extraordinary that that is not already the case. Surely if an advert is found to be misleading, every consumer who might have seen it or been influenced by it should know that it was not all that it sounded. Making public the findings on financial advertisements will also encourage other consumers to report anything that they think is a little suspicious. The power to publish will provide a real incentive for firms to improve standards and, I think, to be wary of allowing their marketing departments to push the boundaries. Research by Which? shows that many adverts for financial products have been in breach of consumer law. The organisation asked consumers about this, and two-thirds responded saying that they want the financial regulator to be proactive in taking misleading financial adverts off the market. We know some of the numbers in this area. Which? asked the FSA how many adverts it had removed. In 2010 the authority removed 262 misleading adverts, and last year it removed 327, which is almost one for every working day. However, we do not know what the adverts were because no details are available to us as consumers. So the fact that in future the FCA will be able not just to take action but to publicise it is a power that we welcome. We would not want to see it diminished in any way.
We are sympathetic to the quite different amendments spoken to by the noble Lord, Lord Sharkey, and the noble Baroness, Lady Kramer, and again we look forward to the Minister’s response.
Lord Flight
My Lords, I congratulate the Minister on embracing such a broad range of issues, which have been grouped together here. I would like to add only the following. I am pleased to hear what he had to say about the publication of directions relating to promotions, which was really the main point of my amendment. Regarding the issue of the Limitation Act and the 15-year longstop, I am also very pleased to hear that the Minister is focusing on this. As things stand, RDR is likely to result in many thousands of financial advisers ceasing to be in business, with other major problems that can be dealt with at another time in another place. It will be a much bigger issue than it is at present in terms of all these people who are, if you like, retiring and going out of business, and it seems fundamentally equitable that the general law of limitations should apply to all transactions without any special treatment for financial services claims or ombudsmen’s complaints. I wonder whether the judiciary should be advising about this, at least as well as the regulator.
The general issue of promotions will be an interesting double-edged sword for the regulator. I am a commissioner of the regulator that was the first to ban split-level investment trusts at a time when I think the regulator over here was rather slow in being aware of the problems and issues. The very full powers given to the FCA will put it in the limelight to get there in good time and do it right. As I said at the outset, I am certainly not opposed to the power. There has been an obvious need to be able to deal with “wrong” products quickly and effectively. I am still slightly concerned that the framework of the FCA using those powers is pretty broad and I suspect that the FCA itself may want to have a more defined framework for fear of criticism.
Those are the main thoughts behind my amendments in that area. I thank the Minister for his response, which essentially satisfied the points I raised.
Lord Sassoon
My Lords, my noble friend has made the first point that I would make. The noble Lords, Lord Davies of Oldham and Lord Davies of Stamford, talked as if we were debating provisions that related to all listed companies, but my noble friend is completely right that this section does not apply to great global companies such as Vinci and others. Although it relates to an important group of companies, it is related essentially to authorised persons.
The Bill allows regulators to make rules regarding the role of employees in relation to remuneration committees and, in theory, the requirement that remuneration consultants be appointed by shareholders if they think that such rules would advance their objectives. However, I accept that, in practice, it is uncertain that that test would be met, particularly in the latter instance. In any case, other appropriate processes are already in place to consider these questions in the context of wider corporate governance reform—which, again, is precisely the point that my noble friend makes. This is a wider series of issues.
It is important to be reminded that, in January this year, the Department for Business published its response to its consultation on executive remuneration, which considered among others, the possibility of giving employees a say on remuneration. Although I do not want to be drawn into a wider debate—we should focus on financial services—the consultation responses nevertheless illuminate what would be appropriate or, as I would say, inappropriate for financial services businesses alone.
The Government’s view is that, while there will be qualified and enthusiastic employees willing to take on such a role, there are strong arguments against this proposal, including—on this I agree with the noble Lord, Lord Davies of Stamford—that members of the remuneration committee need to be full board members if they are to understand the overall financial strategy and the wider business and economic context which impact on remuneration policy; that introducing external representatives on a single committee risks obscuring directors’ collective responsibility, as well as potentially creating additional tensions, which might reduce the effectiveness of the UK unitary board model; and that the level of responsibility of employee representatives and the possible conflicts of interest they might face would need to be resolved.
As a result of the BIS consultation on executive pay, the Government have decided to proceed with some key reforms, such as the introduction of a binding shareholder vote on remuneration, but the case for requiring companies to include employees on remuneration committees has not been made, and the Government are certainly not going to make or accept it in the narrower context that we are discussing today.
Lord Flight
When I sat on the remuneration committee of a financial services business, we already received substantial directions from the FSA as to what we were supposed to do, what we should do, how much we could put up pay and all sorts of things. I find it somewhat strange, but the direction is there and functioning already.
Lord Sassoon
Again, my noble friend is ahead of me and I shall not make that point—I am addressing some very narrow and specific matters—but he is completely right that we could debate whether the interventions already being made are appropriate. He may say that that they are excessive; I would say, “Well, that is for the FSA and there are important issues”. But, yes, the FSA is very active in this area, specifically on remuneration consultants.
The suggestion that remuneration consultants be appointed by shareholders was looked at in the consultation but it was not widely supported. I am sorry that the noble Lord, Lord Davies of Stamford, did not spot it, but the proposal has been the subject not only of debate in this House in the past but of the recent consultation. It was not widely supported because of the costs associated with the appointment process and issues to be resolved about the remit and the flexibility of the proposal to accommodate new work. The benefits of the requirement would be uncertain.
However, a majority of respondents to the consultation said that more transparency over the use of remuneration consultants would be beneficial. Suggestions of areas for more transparency included appointment processes, advice provided, fees paid and management of conflicts of interests. The Department for Business is looking at ways in which it can improve transparency in the use of remuneration consultants by companies.
I am grateful to the noble Lord for raising these important issues, which are being taken forward in a wider context. The FCA will have all the powers that it needs to act in this area, as it does already—and as my noble friend pointed out—the FSA. I hope that, on the basis of that information, the noble Lord will feel able to withdraw his amendment.
Financial Services Bill
Lord Flight Excerpts(12 years, 4 months ago)
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Lord Flight
My Lords, I support all three of these amendments. I declare an interest as a director and founder-member of Metro Bank.
Part of the total objective for the PRA of a safer banking system and banking stability is a need for more competition in the UK. One of the main sources of our problems has been a cartel. Whenever there are cartels bad habits tend to creep in. There is a history behind the cartel coming in, going back to Walter Bagehot in wanting to consolidate banks for safety, but there needs to be a balance. The PRA cannot achieve its major objectives without staunchly advocating greater competition and helping it to come about.
From my experience, it was agony going through a year and a half with the FSA getting the licence for Metro Bank. The sums of money that we had to spend were not quite as great as the noble Baroness reported but they were very substantial. The FSA kept changing its mind. The proposals for capital were out of all proportion to the risk of the bank. At the time, I wrote to the Minister reporting on the experience. Strangely, I do not think that there was ill intent by the FSA. It was very much about individuals wishing to protect their own position and not wanting to be attacked in some way in the media for having been too lenient on licensing a new operation. Memories go back to the early 1970s, when banking licences were given out too easily, and that was a major cause of the secondary banking crisis in 1974. However, it is absolutely right that a more competitive environment in banking should be a key factor which the PRA supports.
On international competitiveness, I have understood recently that the Government’s main objective is that they feel that this is somehow related to light-touch regulation that has got into trouble. I do not see that at all. It seems to me just silly for the UK to shoot itself in the foot with regard to an important industry that employs a lot of people, earns a lot of invisible earnings and so on. I would have thought that, in terms of regulating, it would be normal to consider the effect on international competitiveness. What was wrong with light-touch regulation—I remember it well—was the doctrine: “You don't need to regulate large institutions too much because they can look after themselves”. The weakness of that doctrine was that, if they got it wrong, as subsequently transpired, the problems for the whole system were that much greater. I think that was what was wrong and it has little or nothing to do with the competitiveness of the UK’s international banking services.
I do not accept at all the argument that a brief to keep watch on international competitiveness relates to inadequate or inappropriate regulation. Taking the point to absurdity, to ignore a debate about particular measures, which were clearly going to be highly damaging to the UK industry, would just be silly.
Viscount Trenchard
My Lords, my noble friend Lord Flight is, of course, completely correct in his assertion that the proposed new regulatory framework makes far too little mention of the need to preserve competitiveness of the marketplace, not just competitiveness from the point of view of the consumer but the very competitiveness of the marketplace for practitioners to participate in. For that reason, financial services companies from all over the world have come into London and that has helped to provide more consumer choice, and it will continue to do so in the future, as well as providing the Exchequer with a very large proportion of its annual revenue. It is a huge pity, as my noble friend has pointed out, that the Treasury mistakenly believes that preservation of international competitiveness implies approval of inappropriate or inadequate regulation.
All three amendments have some merit but of the three I tend to prefer the amendment proposed by my noble friend Lord Hodgson because it gives a duty to the PRA to have regard to competition. I would have preferred that the PRA had an objective to protect the competitiveness of the marketplace as well but I realise that there are some valid arguments against that. To have a duty—“duty” is a strong word—to have regard to competition is the preferred of the three amendments put forward. The points in my noble friend’s amendment are all to do with minimising adverse effects, or avoiding restrictions or unnecessary regulatory barriers to entry; they are all negatives rather than positives. I would prefer this issue to be expressed in a more positive manner. I have worked for a Japanese-owned financial institution; I am not sure whether this is a UK institution under proposed new paragraph (d) in my noble friend’s amendment. It is, of course, a UK-incorporated plc. Could my noble friend clarify what “UK institutions and companies” means? It is very important for London that the level playing field for all participants is preserved and I hope that the amendment refers to UK incorporated or UK resident financial institutions and companies.
My noble friend’s amendment also makes it very clear how necessary it is to have collaboration and co-operation between the PRA and the FCA. Proposed new paragraphs (b) and (c) impact on matters that are of great concern to the FCA. I hope that these matters will be properly covered in the memorandum of understanding to be drawn up between the PRA and the FCA.
Lord Flight
Lord Flight
My Lords, the focus of the insurance objective is rightly on policyholder protection. I do not really understand why the drafting includes those who “may become policyholders”. If they do become policyholders, they will surely be covered automatically. If they do not become policyholders, they will not be covered. I am not aware of any other area of financial services where there is any focus on future potential customers. I have a very simple question: why does this include those who “may become policyholders”? What is the logic, if any, behind this inclusion?
Baroness Drake
My Lords, I shall speak to Amendment 141 in my name. The PRA is the prudential regulator of the insurance companies. It has an insurance objective, which will include a requirement to contribute to securing an appropriate degree of protection for policyholders, understandably reflecting the correlation in the insurance sector between the management of risk and the consumer outcome, especially in with-profits policies. The PRA has no explicit consumer protection remit. The FCA does.
The Treasury has, as far as I can see, recognised the need for the PRA to seek advice from the FCA in achieving the balance between the interest of the policyholder and the prudential strength of the company when it comes to with-profits policies. While I understand that the responsibility for that balance should remain with the PRA, it is intended that these matters will be covered by a memorandum of understanding between the PRA and the FCA. However, that memorandum of understanding has to be compatible with the PRA’s view of how to advance its prudential objective. That is where I remain concerned, because this leaves the PRA with a very wide discretion as to what is an appropriate degree of protection for with-profits policyholders.
Unless I am misinterpreting the government amendment in this group, which I will have to wait to hear, the effect of that amendment is to strengthen or give even greater clarity to the fact that it is the PRA which holds the ultimate authority for determining that balance between the prudential strength of the company and the interest of the policyholder. Given that, I believe that it would be desirable if these matters were not left to a memorandum of understanding alone, but that the Bill should guide the approach of the PRA with respect to the regulation of with-profits policies by providing a set of principles which this amendment seeks to set out. Perhaps I may set out my reasons.
The PRA’s focus will be on the prudential regulation of firms, and the stability of the financial system. It will not have the culture to proactively protect consumers who hold with-profits policies, and yet the regulatory framework of with-profits policies has been subject to sustained criticism from the Treasury Select Committee, observers, academics—large numbers of people. However, with-profits policies are still a significant consumer issue. There are around 25 million policies, worth about £330 billion. These policies typically state that the policyholder will share in the profits from the fund, which are distributed to the policyholder in the form of bonuses. The policyholder’s contract normally states that they receive 90% of the profits from the fund, and the shareholders receive 10%.
Lord Sassoon
My Lords, I do not believe that to be the case but it might be helpful if I write to the noble Baroness, copying in the Committee, with a fuller explanation of how that will be taken care of.
Lord Flight
I thank the Minister for answering what in essence was a question. In my view, with-profits policies have been and continue to be useful instruments for the man in the street, and I now understand the reason for the phrasing as it is. I beg leave to withdraw the amendment.
Lord De Mauley
My Lords, I will speak to the government amendments in this group. Amendment 128BJ specifies that the PRA board must set and publish the strategy in relation to its objectives, having consulted the Bank of England. It must review the strategy annually. The Government have come to the view that it would be helpful to define more clearly in the legislation how the relationship between the PRA and the rest of the Bank group will work in practice.
The amendment makes it clear that the PRA board will set the PRA’s strategy and will be accountable for the success or failure of that strategy. It also requires the PRA board to consult the Bank about the strategy. That will help to ensure that the PRA’s supervisory approach is co-ordinated with the wider financial stability strategy of the Bank. The PRA must publish its strategy. That will help to ensure that Parliament, the financial services industry and the wider public are clear about the PRA’s direction of travel and priorities. That will assist with calling the PRA to account for the way that it carries out its regulatory and supervisory responsibilities.
Government Amendment 147A makes it clear that the PRA may not delegate responsibility for setting the strategy, which is clearly appropriate. Government Amendment 147B makes express that the Bank should approve the PRA’s budget. In practice, the PRA board will draw up the budget, looking at the strategic priorities for the year ahead, and propose this to the Bank. If variations to the budget are required during the course of the year, that will also require the approval of the Bank. This arrangement will ensure that the PRA must account fully for any budgetary increases. Of course, its expenditure will also be audited by the National Audit Office under the provisions already in the Bill. This will provide strong accountability for costs incurred—costs which, as noble Lords have pointed out during previous debates, are ultimately borne by industry.
It would be appropriate if I respond to the other amendments in this group when the noble Lords who tabled them have spoken to them, so, for the moment, I beg to move.
Lord Flight
My Lords, I rise to speak to Amendment 144K, which is intended to ensure that the non-executive members of the PRA board have relevant experience and expertise. In particular, the board should have the benefit of members who have expertise in the sectors regulated by the PRA.
As others have already said, the insurance industry has been something of an orphaned relative. Indeed, I think that the Governor of the Bank of England is on record as saying that the arrangements do not entirely match his wishes. I believe that the Government’s intention is that this should be the case. It is clearly desirable, however, that the PRA should have appropriate representatives from that industry with the right experience, and, indeed, they should be equipped to contribute if the life industry balance sheets get into a position where there needs to be a temporary suspension of the rules, should equity markets plunge dangerously.
Lord Sharkey
My Lords, I rise briefly to support Amendment 144K, in the name of my noble friend Lord Flight, and even more briefly to support Amendment 144L, in my name, which covers some of the same ground but is more focused on the need for the PRA board to have non-executive members with relevant experience and expertise in the insurance sector. I am sure that neither of these amendments should be at all controversial. It would be very hard to argue that the PRA non-executive members need not have among them people of experience and expertise across the regulated sectors, but I think that it would be wrong to argue that this provision is not needed in the Bill. There is no reason for this to be left simply to the discretion of the Bank and the PRA and every reason why they should have an obligation to act in the way that both amendments suggest.
Amendment 144L in my name focuses on insurance because I am concerned that the PRA—as a subsidiary of the Bank, and with a special financial stability purpose and a number of Bank officials on the board—will be much more explicitly focused on the banks. It is also true, I think, that the Bank of England has no history of regulating insurance. The FSA currently does this, in succession, I think, to the DTI. In order to make sure that the PRA also effectively and properly focuses on the insurance sector it seems right that it should have, among its non-executive members, people with the appropriate experience and expertise in that sector. That is what my amendment and the amendment of my noble friend propose.
Lord Flight
My Lords, I support the noble Baroness’s amendment and will also speak to my own Amendment 129B, which goes slightly further. As well as calling for practitioner panels, my amendment argues that there should be PRA consumer panels,
“and where appropriate consumers falling within the scope of the insurance objective”.
It is a mistake to leave the decision as to whether to have panels simply to the PRA, rather than being a requirement in the Bill. This is a fair point; it is appropriate to provide proper safeguards for regulated persons and for consumers. Although it is at a slight tangent, the Treasury Select Committee has made valid points about the tendency to too much arbitrariness on the part of the Bank of England, and the structure. I can see no reason why appropriate panels should not be provided for.
Further—the noble Baroness also raised this point—where the PRA disagrees with the representations made to it by such panels, as under the FSA, I cannot see why it should not be required to have the courtesy to explain why that is the case.
Baroness Hayter of Kentish Town
My Lords, in a way these amendments ask for quite simple things. First, the PRA must have arrangements in place to consult consumers or their representatives and report annually on these arrangements. Secondly, the PRA should consider any representations from the FCA’s practitioner or consumer panels. Thirdly, practitioner representatives should similarly be hardwired into the PRA’s working practices. We welcome Amendment 130ZAA in the name of the noble Lord, Lord Northbrook. It is key to have practitioners involved, but for their expertise, not as representatives. On our side we are content that no new panels need to be created either for practitioners or for consumers, provided that the PRA is committed to enter into dialogue with the FCA panels and respond to other relevant submissions.
However, the need for the amendments in our name and that of the noble Lord, Lord Sharkey, are more important perhaps, given the paper released on Monday. I do not know whether that is the same one referred to by the noble Baroness, Lady Noakes, but I think not. This one is entitled The PRA’s Approach to Consultation. This is a slightly different concern from the one she has, but to have a whole paper on consultation in which the word “consumers” is not mentioned seems a particularly alarming reflection of its approach.
The probing amendment in our name—Amendment 130ZZB, which proposes an annual report of the arrangements, rather than the content, of consultation activities—now becomes rather more of a real than a probing amendment. We have grave doubts as to how a paper on the PRA’s consultation could omit any reference to consumers, concentrating only on regulated firms. That is not even-handed or very sensible.
In response to the query from the noble Baroness, Lady Noakes, I will just say why consumers do have an interest in the role of the PRA. This is not of course simply about the prudential issues but about some of those raised by my noble friend Lady Drake earlier. Consumers have many interests in issues that are the responsibility of the PRA, particularly, as the noble Baroness mentioned, with-profits policies but also leveraged ratios and even bank charging policy, about which we have heard things from the putative head of the PRA. It would be strange for the PRA not to hear input from consumer representatives on these matters and simply for it to respond to the panel when it takes a different view. Unless the Bill is amended as suggested, consumers will be excluded from the PRA’s decisions on prudential matters. The PRA will lead on regulation of with-profits policies, but there is no requirement on it to consider representations from anyone representing the consumer interest on that. There are a number of issues relating to with-profits policies, orphan estates and others, which they do have an interest in.
My noble friend Lady Drake talked earlier about £330 billion, I think, being under management in with-profits funds. That is 25 million policyholders, and it is essential that the interests of these policyholders are properly considered, which can only be achieved by working with consumer groups and not simply seeking the views from the FCA. It is the same issue with mortgages, where prudential requirements can have huge implications for consumers. Decisions about the stability of the market potentially restrict the availability of mortgages to a large number of people who, up until that moment, had been servicing their mortgages without any problem. It is vital that the application of any prudential controls treats all customers fairly. The existing consumer panel has been involved in the regulation of insurance and prudential issues in relation to the mortgage market review, and I understand that its advice has been acknowledged as particularly valuable. All we are asking is that consumers get a hearing, which does not seem too much to ask, but also that the expertise of practitioners similarly gets an appropriate hearing.
Lord Flight
Lord Flight
My Lords, I address Amendments 130B and 144B. I am not entirely clear why these have been grouped together as they cover very different territories.
Amendment 130B reverts to points which I endeavoured to stress much earlier on in the process of this Bill: at the end of the day it is the consumer who pays the costs of regulation; the new twin-peak arrangements are likely to be inherently more expensive because they double up in certain areas; there is no shared overhead cost and there is not that much in the legislation which is at least there as a discipline to keep costs of compliance to a minimum. Amendment 130B seeks simply to write into the Bill that the PRA and FCA should use their resources efficiently and economically towards minimising the cost and burden of compliance on individuals.
Amendment 144B is in very different territory. The Bill provides for the FCA to have product intervention powers, which in the main I accept is a sensible proposal, because without those intervention powers time drags on before faulty products get addressed. In the mean time, consumers get hurt. However, it seems to me that everyone should be learning from that process. Therefore the amendment provides that the FCA should report annually on the use of these powers and on how it has complied with its statement of policy, including an evaluation of the outcomes of the regulatory actions and whatever intervention powers have been used.
Lord Hodgson of Astley Abbotts
My Lords, I have Amendments 131, 132, 133, 134 and 135 in this group. I certainly support Amendment 130B moved by my noble friend Lord Flight but my amendments go rather further and are rather more prescriptive in their approach. They relate to the attitude, approach and culture of the regulator, which we have been discussing. There has been a lot of hollow laughter about culture in the banking system, which I understand, but the financial services industry covers much more than the banks—it covers the IFA community, the insurance community and Lloyds. I think that in recent years the regulator has moved from a reasonably open, even-handed relationship with its regulated firms to one of much greater risk aversion. Of course, I understand that safeguarding client money and avoiding financial crime are very important indeed, but the regulator seems to have forgotten many chunks of the introduction to FiSMA, which sets out other objectives, requirements and issues that it has to consider in carrying out its regulation. Nowhere has this shift in culture been seen more than in the relationships with the smaller and medium-sized firms. Very often these are firms where innovation and some of the most exciting developments are taking place.
Specifically, I should like to draw to the Minister’s attention three or four things which I hope we can agree are being practised in an undesirable way at present and which are regulatory commercial approaches that henceforward we should try to avoid in the structure.
The first is Section 166 inquiries—the expert person investigations. These were designed to be used rarely but there are now 840 outstanding. A rough estimate of the cost of a Section 166 inquiry in professional fees for the regulated firm is £100,000, although it could be £200,000. Therefore, we are talking of between £84 million and £150 million of costs, and that is without the cost in terms of the management time spent providing the information needed for the professional firm carrying out the inquiry on behalf of the FSA.
This is sub-contracting regulation. There is really no restraint at all on the FSA in undertaking these inquiries. Such an investigation costs it nothing; it simply has to engage a professional firm to carry it out and away it goes. That is without the Section 404 thematic reviews, and without TC4, which are the run-off requirements when a firm is closing down. Of course, closing down a firm requires some very difficult judgments to be made about what you will be able to realise from the assets, the time over which you will be able to realise them and the consequent costs incurred during that period. If you make a series of extremely negative and conservative estimates, then of course you can put a firm in a very difficult position and make it almost impossible for it to carry on.
Last but not least is the position of the SIF—significant influence function—committee. I should like to give a real-life example of this, which I want to use to underpin the detail of my amendments. I have recently resigned as the chairman of a regulated firm. In April 2011 we took on from another regulated firm a new finance director, who came with good references. In July, he was told by the SIF committee that he was not able to take up the role of finance director. I went to the FSA and asked why. It said it could not tell me as there was an investigation and it was confidential. I asked the FSA if it could tell him what he had done. It said it could not do that either as it was confidential. That was June or July 2011. He is still waiting to hear the outcome a year later. He cannot find out what he has been accused of and is in a Kafkaesque situation. This is the sort of culture and risk-averse nature of the situation we now find ourselves in. My amendments are designed to prevent this being carried over into the new structure.
In the regulatory principles to be applied by both regulators in new Section 3B on page 28, I seek to add “operational rules” after “burden or restriction” because it is the unofficial stuff that can be made extremely expensive and difficult. It should cover firms as well as people. In particular, in Amendment 134, after “proportionate” I want to add “reasonable and fair”.
I have just given in some detail—and I apologise for going back to it—the example of the SIF committee. I can see how the regulator could argue that, if you have a person who has been involved in a firm which is under investigation, preventing him operating might be proportionate but to hold him in limbo for 13 months cannot be reasonable or fair. It offends the principles of natural justice.
I hope very much that my noble friend, when he comes to wind up and reply to this important set of amendments, can give me some assurance as to how we are going to make sure that the culture going forward is more even-handed and better than it has been over the past couple of years. It is absolutely vital that the future regulatory architecture enables financial services firms to play an effective role in the economy. To enable this role to be fulfilled, the regulatory regime needs to take an approach that considers whether interventions are proportionate, reasonable or fair.
My set of amendments would address a number of concerns. There would be assessment of business-specific risks—for example, the insurance sector presents very different risks from those of banks and has a very different business model. If the regulators are required to consider whether their approach is reasonable and fair, they should ensure that consideration is given to whether it is appropriate to apply regulations drafted with banks in mind to other industries in the financial services sector, including insurance. Then there is the question of the culture. My noble friend has said many times that the Government wish to avoid the stability of the grave. A requirement to have regard to what is reasonable and fair will help to ensure the regulators take a more measured approach. For example, the PRA has signalled a desire to make greater used of skilled persons and external auditors in its approach to supervision. While you have to recognise that these are important regulatory tools, it is imperative that they are used appropriately and in relation to those firms which represent a significant risk to the PRA’s objectives. This set of amendments is designed to help these considerations.
Lord Sassoon
My Lords, I appreciate that the processes of challenge, whether it is by the Upper Tribunal or under the rules of natural justice, are very much back stops and expensive and difficult for firms. That does not mean that large firms have not challenged the FSA and in some cases been successful over the years. I am not sure that it would be any cheaper and easier if such requirements were written into the Bill.
It just remains for me to ask my noble friend Lord Flight to withdraw his amendment.
Lord Flight
I thank my noble friend for his response. With regard to my Amendment 130B, I hope that, by the time we get to the end of the process, he may have some more effective thoughts as to how to ensure that costs are managed economically. I observe that, since the FiSMA, a great deal of forest wood has been cut down, a great deal has been added and little achieved for the consumer as a result. It is a difficult nut to crack, but, in the mean time, I beg leave to withdraw the amendment.
Lord Flight
“(d) that the exercise of their functions in relation to persons regulated by both the PRA and the FCA is coordinated with a view to avoiding the making of duplicative requests and the imposition of inconsistent requirements on such persons.”
Lord Flight
My Lords, Amendment 140 and Amendments 140B, 140C and 140D are really about the same territory of the co-operation and collaboration between the PRA and the FCA. Amendment 140 is very concerned to focus on the actual, practical dealing with firms in everyday business; it seeks to avoid the making of,
“duplicate requests and the imposition of inconsistent requirements on such persons”.
Those in the industry will be moving from regulation by one body; virtually everyone regulated by the PRA will be regulated by the FCA as well. There is an inevitable tendency for duplication. As we will come to later on, some of that is not necessary. This amendment calls for an addition to Clause 5, which puts in the Bill the objective of avoiding such duplication.
Amendments 140, 140B, 140C and 140D are essentially about the memorandums of co-operation between the two bodies. With regard to Amendment 140B, there are certain exemptions which could significantly limit the territories in which co-operation is required. The amendment seeks to require that additional guidance be given which makes clear the extent to which these exemptions must be used to disapply the duty to co-operate.
Amendment 140C relates to the MoU, which is required to be reviewed regularly and published. However, there is no requirement in the Bill for the PRA and FCA to consult on the changes from year to year and this amendment provides that such consultation should take place. New Section 3E(8)(b) allows technical or operational issues relating to co-operation between the two authorities to be left out of the MoU, but I cannot see any particularly good reason why this is so. Again, this could have a material impact on firms, where important things end up being omitted. Amendment 140D redrafts new subsections here so that they only cover items where publication would be against the public interest, and removes the references to technical and operational issues as being able to be left out.
Lord Hodgson of Astley Abbotts
I have added my name to Amendment 140, moved by my noble friend Lord Flight. I underline the importance of co-ordination and think some means of measuring the effectiveness of the co-ordination mechanisms and processes between the FCA and the PRA should be established. Some annual review would bring significant benefits, and changes could then be incorporated in the MoU that exists between the two bodies, and would help control costs.
As I am sure other noble Lords have, I have had briefings from London First and the Council of Mortgage Lenders stressing the importance of this co-ordination and the need for these two bodies to work closely together. One swallow does not make a summer, but a very large firm rang me up to say that their chief executive was having to have a get-to-know-you session with the FCA and the PRA, talking about the generality of the firm, but they refused to co-ordinate the meeting. The FCA said, “Come down here and we will see you one time but then come down a second time to see the PRA”. He is going to have to make two visits to these organisations. It is a swallow and a cost, but also denotes an attitude, which is the very attitude that I think has to some extent poisoned the present relationships. In order to work in a cost-effective and business-friendly way, the regulators have got to understand that these firms have to operate and cannot just be at the beck and call of the regulator. They have commercial lives to live and the chief executives of these big companies are busy men. It is not beyond the wit of man, and common politeness, for the regulators to be able to agree a common diary approach for what is a getting-to-know-you arrangement, not an inquiry about something relating to their own particular functions. I very much underline what my noble friend’s amendment says. There is an awful lot of work to do if we are not to set off down the wrong road in this very sensitive and potentially extremely costly area.
Lord Flight
My Lords, empires will be empires. The comments of my noble friend Lord Hodgson were pertinent; the early signs of co-ordination and co-operation are not particularly encouraging and, when I have encountered members of the PRA team, they have given the impression that they think that it is the superior body. The Government might keep an eye on this territory before the Bill is finally enacted because I do not think that what is in it is strong enough to counter those natural tendencies. I beg leave to withdraw the amendment.
Financial Services Bill
Lord Flight Excerpts(12 years, 4 months ago)
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Lord Tunnicliffe
My Lords, I hope to set a precedent whereby the commitment of our Benches is not necessarily proportionate to the length of the speech. I support the amendment in the names of the noble Lord, Lord Sharkey, and the noble Baroness, Lady Kramer. Social enterprises are businesses that trade to tackle social problems and improve communities, people’s life chances or the environment. They make their money from selling goods and services on the open market and reinvest their profits back into the business of the local community. When they profit, society profits. We believe that Amendment 118AZA would contribute to their formation and therefore we support it.
On our Amendment 128AA, in the names of the noble Lord, Lord Eatwell, and the noble Baroness, Lady Hayter, we believe that given the consensus in at least part of this Chamber that social investment is a good thing, it would be appropriate for the FCA to have a social investment panel that would sit alongside the small business and market practitioners and consumer panels. The FCA would have a duty to consult. The panel would represent the interests of organisations that specialise wholly or mainly in social finance or investment. Today’s debate has shown that if we can persuade government to go into this area it will be complex and will need an appropriate panel to help to develop the regulations around it.
Lord Flight
My Lords, I support the common sense of these amendments. However, charities are regulated by the Charity Commission. Although one hopes that all these social endeavours are extremely honest and properly run, it is important to be clear about what charges are involved, and that the people organising them are fit and proper people. There is a very real issue to address here. It would be fine to say, “Here is a green light. Be an investor like a sophisticated investor”, but behind this territory lie quite big issues concerning good conduct.
Lord Sassoon
My Lords, we have already, quite reasonably, spent considerable amounts of time discussing issues of social finance and social investment. I want to reiterate, at the start of my response, that I do share the aims of those who wish to nurture the social investment sector and see it grow. I am pleased that there are plans for some of the noble Lords who are interested in these matters to have a discussion with the Bill team over the recess. I am happy to encourage that to happen. There are a couple of other ways to address this issue, which I will refer to as I proceed. So I hope that the Committee will bear with me for a moment or two. I will explain why I think that Amendment 118AZA and Amendment 121A are not appropriate; but there is another channel as well as further discussions between me and the Bill team where it might be possible to make some progress during the summer on practical steps. So I ask noble Lords to bear with me for a couple of minutes.
I am, of course, aware that my noble friend Lady Kramer had a meeting with the FSA on this matter two weeks ago, which she was good enough to tell me about. Those discussions informed Amendment 118AZA. I completely agree that if we are to help social investment grow we must make it possible for social investment vehicles, and in particular smaller schemes, to market themselves. I take her point about costs. In parenthesis, when my noble friend Lord Hodgson of Astley Abbotts talks about the costs being high, they are high. I do not challenge the numbers of my noble friend Lady Kramer but when my noble friend Lord Hodgson of Astley Abbotts talks about the prospectus directive and half a million pounds, we are in the territory of listed investments, which are rather beyond the sorts of investment fund we want to target. I am sure he wants to target them initially, but I accept the costs are high.
The effect of this amendment and why I cannot support it is that it would have the effect of making all financial promotions that relate to social investment exempt from all the requirements placed on firms and investment schemes, about how they can market their products and investments. I agree with my noble friend Lord Flight that we need to be careful. An essential component of a successful financial services sector, as came up in the discussion of the previous group, is that of trust. We already know what a huge job there is for the sector to rebuild trust. We do not want to undermine trust in the social investment space, because an advertisement or a financial promotion might well be the first point at which matters go wrong if a consumer buys a product or service on false or misleading information. So we do have to make sure that the marketing of financial services is regulated; that financial promotions are clear, fair, and not misleading, whether they are related to social investment or to any other product. In particular, we want to make sure that unscrupulous providers do not see some wide exemption in this area as a loophole—my noble friend is nodding in agreement. We must ensure that there is not a loophole to exploit consumers by offering products around claims of social purpose and getting around the rules. We need to be careful about that, because that will undermine the sector.
Financial Services Bill
Lord Flight Excerpts(12 years, 5 months ago)
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Lord Flight
My Lords, the noble Lord, Lord Borrie, pointed out that this chapter addresses the transfer of the regulation of consumer and small business finance from the Office of Fair Trading to the new FCA. My two amendments, Amendments 118D and 147K, address a specific point: the suggestion that the regulation of claims management companies might be transferred from the Ministry of Justice to the FCA, on the grounds that this area has attracted quite a lot of complaint.
I also wanted to make the point that, as the Minister will be aware, the industry is slightly concerned that the re-drafting of all the arrangements that presently operate through the CCA regime to come under financial regulation and to end up in an FCA rulebook is a pretty monumental task. It is questionable whether that can all be accomplished with due care to become operative by April 2014. Therefore, might it be wise and/or possible for at least some of the CCA activities to be able to continue beyond April 2014, allowing sufficient time for consultation and for rewriting everything into what is required as a new format? Apart from anything else, there is some £50 billion worth of lending finance to very small businesses, which are substantially one-man operations and represent a few million businesses. It is really quite an important commercial area, and it is important that things do not get through by mistake in the re-drafting that could cause problems.
Lord Stevenson of Balmacara
My Lords, my noble friend Lord Borrie kindly drew the Committee’s attention to my position as chair of the Consumer Credit Counselling Service and I declare my interest again. I would also like to thank him very much for his kind remarks about the work of the charity, which does so much for people who have unmanageable debt.
This is a wide-ranging group of amendments in the sense of issues that have been raised. I will focus on two areas: the claims management area and the debt management space. Claims management companies have increased in number and have come to the attention of the public, and the industries in which they operate, much more in recent years. You have only to turn on the TV or listen to the radio to be bombarded with advertisements from claims management companies. E-mail traffic is also increasing.
There are apparently more than 3,200 authorised firms operating today. Of course, many in the claims management industry act responsibly. The part of the industry that does not adhere to best practice breaches guidelines on cold calling, text messaging and e-mails. Some will take up-front fees and/or fail to disclose properly the amount of compensation that a consumer will pay if their claim is successful. Through high-pressure sales they will sign up people who have no possibility of making a successful claim on the basis that they can get you thousands of pounds in compensation.
That sort of activity is prohibited under existing regulation, but unless it is effectively policed it comes to nothing. However, large numbers of those in the industry do not adhere to best practice and a few could even be described as rogues. In a recent debate on this subject in your Lordships’ House, the noble Lord, Lord Kennedy, said that the Government need to take a long, hard look at the industry, look at existing provisions and make a number of changes to beef-up existing regulation and ensure that existing provisions are used effectively in an industry that needs effective policing.
In those circumstances, it is also fair to pick up a point made by the noble Lord, Lord Flight, that the current arrangements with the Ministry of Justice acting as both the sponsoring department and the regulator appear to have broken down. It would be good if the Minister could report on what progress has been made on this list of helpful suggestions.
My noble friend Lord Borrie drew attention to the debt management sector and in particular to the 2007 Act. There are nothing like as many private sector debt management firms in the UK, as much of the debt advice is undertaken by charitable bodies such as Citizens Advice and my own body the CCCS, which offer a free service of high quality. Collectively, commercial firms administer some 200,000 debt management plans and about 50,000 IVAs. The trade body, DEMSA, estimates that this is some 40% of all the debt management plans currently in operation.
DEMSA states that its goal is to promote best practice and protect the interests of clients and the lenders to which they owe money, but in its review of the sector in 2010 already referred to, the OFT found instances of non-compliance among DEMSA member firms, albeit DEMSA members received a clean bill of health compared to the rest of the sector, and action was taken on a number of firms.
On the publication of its report on debt management in March 2012, the chair of the BIS Select Committee, Adrian Bailey MP, said:
“During these difficult economic times, increasing numbers of people up and down the country—not least some of the most vulnerable members of our society—are relying on the provision of consumer debt management services and payday loans to make ends meet. And yet this industry remains opaque and poorly regulated. Despite a Government consultation that ended almost a year ago little has been done to remedy the situation. The Government must take swift and decisive action to prevent firms from abusing the needs of such a vulnerable customer base”.
The committee’s main recommendations are worth repeating. The Government must work to phase out up-front fees: the provision of guidance on this point by the OFT is inadequate. The Government should introduce the necessary regulations to ensure companies publish the cost of their debt advice and their outcomes if an agreement cannot be reached during discussions with the industry. The Government should establish effective auditing of debt management companies’ client accounts. The report concludes that greater transparency in the commercial debt advice market would benefit consumers hugely and that voluntary codes of practice are highly unlikely to achieve this aim. The Government must be prepared to regulate if consumers are to receive the protection and the level of information they require.
It seems clear from all this that we have reached the stage in these two sectors whereby strong and effective regulation is required. We also think it is time that the Government should take advantage of the opportunity of the Financial Services Bill to make the new regulatory bodies responsible for this currently unregulated part of the market which affects so many vulnerable customers.
Lord Flight
My Lords, I believe that the FSA has been looking in some detail at how to regulate platforms, and has been doing so for quite a while because it is difficult territory. It is either about to or just has come forward with its proposals.
Lord Lucas
My Lords, I very much support what the noble Lord, Lord Sharkey, has said in this area. My Amendment 117B in this group picks up a couple of aspects of it. The first aspect is,
“the role of regulation in enabling innovative business models to compete with established businesses”.
By regulating this area so heavily we have created a structure where it can be extremely difficult for people to be innovative. The noble Lord, Lord Sharkey, drew an obvious example of that when he talked about the regulations that independent financial advisers have to work under. If IFAs are allowed to talk about ordinary money products but not allowed to talk about peer-to-peer lending products then, by not regulating them and not bringing them under the umbrella of regulation, we are making it difficult for these new entrants to compete. We are creating a barrier to innovation.
This particular innovation is not just fluff or amusement. It promises, if it gets going in a substantial way, to alleviate some of the pressure on the national financial system: you get away from borrowing short and lending long, and away from the £85,000 guarantee, and you put those risks back on the lender. It is also a structure that may prove to be extremely useful in local lending in areas where the lenders can identify that the borrowers are part, in some way or another, of the same community and can, in that way, develop substitutions for pay-day lending and other more expensive and onerous arrangements. So there are real opportunities here to improve the financial system as a whole. The FCA really ought to have regard to the way in which regulation produces barriers for entry in the way that the noble Lord, Lord Sharkey, has described.
But it is not just without government that these barriers appear; they are also within government. One of the principal barriers to the expansion of peer-to-peer lending is the tax arrangements, that you cannot offset your losses on bad debts against the interest you earn on the good ones. Banks can but peer-to-peer lenders cannot. Among the reasons why the Treasury, which is refusing to regulate, will not extend tax concessions is that these businesses are not regulated. So the Treasury itself is causing the problem that is crippling the development of this business.
It is all very well to run a business which is restricted to borrowers of the highest quality, which is effectively what it is at the moment. All the peer-to-peer lenders that I am aware of have pretty low bad debt ratios. That is because they do not lend to risky borrowers, because there is no offset for the losses. The net return to their investors if they did start making loans with, say, an average default rate of 5% would start to become extremely low because there would be no relief for the 5% of losses and they would be paying full income tax on their 12% of income. It starts to make very little sense, so none of the peer-to-peer lenders have gone into that territory. But lending to areas of the community where there is a risk of default, such as young businesses, is exactly the sort of area where this Government are trying to push the banks with so little success, and where businesses such as the Funding Circle would love to go if the Government would make it possible.
As I say, the reasons for not going there are entirely due to the Treasury, and the reasons why the Treasury cannot grant the concessions are also down to the Treasury. It really should be open to the FCA to try to break that circle and persuade the Treasury to face one direction at a time and to promote something which is in everyone’s interests, particularly the Treasury’s. Nor would I just confine our thinking to peer-to-peer lending, which is what is there at the moment. Other peer-to-peer ideas are around. Peer-to-peer investment in start-ups already qualifies. There is an FSA-registered business called Seedrs, in which I take an interest. There are proposals for peer-to-peer investment management. That goes back to an earlier amendment in terms of trying to reduce the return that stays in the pockets of investment managers by disintermediating that business.
There are certainly proposals for doing this in the field of annuities. The opportunity is obvious: old people want income and young people want capital. If you can produce a mechanism where the two can exchange that, you are looking at something where you can cut out a very large amount of cost in the middle, where you could produce for people who are trying to settle their pension fund annuity at the moment a decent rate on which to do it, and where you could provide for young people who need capital a decent rate at which to have it.
The difficulty with doing that is the forest of regulation we have put in place to tie down the existing old-style businesses in that area. The opportunity for and the benefits of innovation in that area seem obvious. So we must have an FCA which understands not just not-regulating but also how regulating constructively will enable businesses to compete where, if they are left unregulated, they may not even be able to exist.
Financial Services Bill
Lord Flight Excerpts(12 years, 5 months ago)
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Lord Flight
“(9) The FCA shall work with the Department of Education to secure the provision of teaching on financial literacy at both primary and secondary level.”
Lord Flight
My Lords, everyone will be aware that the F:SMA included a key brief to the FSA to advance financial education. My observation is that pfeg and some of the other charities have done a reasonable job, and that certain banks such as RBS provide reasonable courses, but that still in our schools financial education is extremely mixed. If people have not had financial education at school, it is unrealistic to think that they will get it as adults when they need it. It is an absolute prerequisite of life today that children growing up should become what I will call financially literate. We all have to look after ourselves so much.
This amendment is not exactly what I would wish. I would like financial education to be part of the required curriculum in schools and I have asked a question on that matter in the past. However, I have put forward this probing amendment to see whether the Government have to offer rather more than we have at present in terms of making sure that there is universal financial education in our secondary schools.
Baroness Liddell of Coatdyke
My Lords, I have felt passionately about financial education for a long number of years and I support the probing amendment in the name of the noble Lord, Lord Flight. I first became interested in the issue in the late 1990s in the aftermath of the personal pensions mis-selling débâcle when many highly educated and sophisticated people were mis-sold products, largely because of the impenetrable nature of the language in the retail product being presented to them and, harking back to some of the issues raised in the previous debate, the less-than- adequate performance of some independent financial advisers.
Since then my concern has become even greater as we have seen more mis-selling scandals, such as payment protection insurance and inappropriate hedging instruments for small businesses against interest rate movements. Added to that, there is constant pressure on people to get involved in financial instruments at very great cost—everything from store cards through to payday loans. There should be a fundamental understanding on the part of people that when they take out something like a payday loan, it is not a printing error when the rate of interest is in four figures. It is there deliberately as a means of making money.
This issue comes up regularly. FSMA looked at it. Every time there is a debate on financial services, financial literacy is raised. It has become motherhood and apple pie. However, a point will come when we start to take this seriously. I was lucky enough to go to a school in an area that had a mutual bank, the Airdrie Savings Bank, which continues to exist as the last surviving mutual savings bank. It provided certain financial education in schools. I have to say that there was probably a subplot because I still have the little silver bank and I still retain a passbook for the Airdrie Savings Bank. I have no doubt that the Royal Bank of Scotland did exactly the same when it did its work in schools. That is laudable, but at the end of the day the issues are now too great to leave it to charitable and well meaning organisations. There is a need now, for the well-being of the citizenry as well as the well-being of our financial services sector, to put financial literacy firmly on the curriculum, and I would hope not just here in England but in Scotland as well. I support the amendment in the name of the noble Lord, Lord Flight.
Lord Flight
My Lords, at present it is effectively paid for via the charges of the FSA, which then go in a charitable form to pfeg and others and which is inadequate. However, one could turn it the other way round—one could do it how one wants. With schools teaching English literature, that is part of their budget. In my view, schools should be obliged to teach financial literacy and that should be part of their budget as well.
Lord Peston
My Lords, I am very sympathetic to the amendment and to what has been said by my noble friends. Unlike them, I am much less optimistic about what can be achieved, if anything. First, I will give the personal side. When I was at school, I was indebted, and have been indebted for the rest of my life, to my teachers for the guidance they gave me on the subjects that were taught in school. My love of English literature and my love of mathematics are two very good examples. However, if someone had said “Now we are going to have a class in finance”, I cannot believe that it would have been other than a turn-off. It would not have been what I went to school for.
Times have changed. I agree with that. However, the other thing is that is amazingly difficult to explain to people even the most elementary examples of financial literacy. To give one example, which is one of my bête noire, I come from a family of gamblers. I know that gambling is a mug’s game because to be a successful gambler, there are only two possibilities. Either one is corrupt and has some inside information or one is claiming—with the bookmaker creaming 10% off the top—that one is 10% cleverer than anybody else around, and there is absolutely no reason to believe that. When I have tried to explain that elementary proposition in financial literacy, I have found it impossible to persuade anybody at all. That is my personal experience. It does not mean that we should not try, but it does mean that there is a genuine question mark over what we can achieve. I am not saying that we should not try, but I am pessimistic.
I turn to the technical side of financial literacy. Perhaps noble Lords have read a brilliant speech given by Andrew Harvey of the Bank of England in 2009. It is on the Bank of England website. My strong advice to noble Lords is to look it up under “Speeches” rather than “Publications”. I wasted a good hour knowing that it was there but unable to find it. It is a brilliant analysis of the behaviour of financial intermediaries—which is after all the essence of financial literacy—and it is based on network analysis, which is a rather esoteric part of mathematics. I will read one paragraph from Andrew Harvey’s lecture, which I strongly recommend.
Lord McFall of Alcluith
My Lords, I agree not with the pious nature of the amendment of the noble Lord, Lord Flight, but with the realism of my noble friend Lord Peston. I chaired a workplace retirement income commission last year for the National Association of Pension Funds. We have seen a flight from defined benefit schemes to defined contribution schemes. As a result, we invited a Harvard professor to examine and explain the defined contribution scheme. He told us that he was unable to understand his own defined contribution scheme, never mind anyone else’s. Therefore, while financial education may be good, it is not the whole show.
Lord Flight
My Lords, although I acknowledge the issue, I do not believe it is that difficult. I observe that my own parents learnt basic accounting some 90 years ago at ordinary grammar schools in London as part of the general certificate. That stood them in pretty good stead. Even in my time, when I was doing basic economics, what I learnt was pretty fundamental to understanding what equity was, what debt was, and so forth. The courses that are up and running are pretty effective—for example in my own school, of which I have been a governor for many years—although I do not say that they are perfect. One of the problems is that since the Second World War, money has almost been thought of as dirty within the educational world. This is something to shy away from. One of the crucial things is for the schools themselves to have staff who can be taught to teach and be enthusiastic about the subject.
Lord Stevenson of Balmacara
My Lords, we support this amendment in the name of the noble Lord, Lord Flight, although in saying that, like a number of noble Lords, we worry that it does not go far enough in simply calling for the FCA to work with the Department for Education. Surely all children and young people should have access to a planned and coherent programme of personal finance education so that they leave school with the skills and confidence to manage their money effectively. Knowing how to manage money and be a savvy consumer is a vital life skill in an increasingly complex world. Education is about giving young people the skills and knowledge they need to get on in life, which is why we should get behind a campaign, so that every child should not only learn the three Rs at school, but also learn about pensions, savings, borrowing and mortgages.
As we have heard, personal financial education is covered in the primary curriculum at present, but it is only there as part of the non-statutory framework for PSHE—personal, social, health and economic education. There are, of course, opportunities with a number of subjects across the curriculum to learn about financial matters, including citizenship—compulsory for all 11 to 16 year-olds—mathematics, business studies, careers, and enterprise education. However, we think this important life skill should be made compulsory, as the previous Government were indeed planning to do in the last Session of the preceding Parliament. Sadly, there has been no legislative progress for the past two years.
As the Minister will be aware, an e-petition calling for financial education to be a compulsory part of the curriculum got more than 100,000 signatures last year and led to a Westminster Hall debate, which is worth reading in Hansard. Many Members of your Lordships’ House will know of Martin Lewis of the website moneysavingexpert.com, who has been campaigning on this issue for several years now, and was indeed the man behind the petition. He has recently corresponded with the Prime Minister, and the most recent exchange was an open letter to the Sun, which provoked a response which I would like to share with your Lordships’ House.
The Prime Minister writes to “dear Martin” and thanks him for the letter. He goes on to say,
“It is true that young people should have access to good quality personal finance education, so that they leave school with the knowledge and confidence to manage their money effectively”.
He goes on:
“The PSHE non-statutory programmes of study include elements aimed at ensuring that, by the time they leave school, pupils should be able to manage their money, understand and explain financial risk and reward and identify how finance will play an important part in their lives and in achieving their aspirations”.
This goes some way toward answering some of the points made by my noble friend Lord Peston. The Prime Minister goes on to say:
“This economic wellbeing and financial capability strand of PSHE was only introduced in September 2008 and Ofsted reported in 2010 that schools had not yet got to grips with this”.
We understand some of the reasons for that now. We are aware that some aspects of PSHE are patchy and, as you say, there are some schools that are not able to access good resources. However, the letter concludes:
“We believe it is important that schools are given the freedom and space to provide a truly rounded education, including important things such as finance education”.
However, Martin Lewis’s response to the letter says it all. He thanks the Prime Minister for his comments, but he says that,
“financial education must be deemed a core skill. It’s the cheapest way, long term, to prevent millions being screwed by scandals such as PPI, bank charges and endowments, to help people keep energy costs down and tackle our debt epidemic”.
The letter finishes:
“So far, your government’s only commitment has been Schools Minister Nick Gibb saying: ‘It'll be looked at in the curriculum review.’ That's good, but please ensure this isn't political double-speak for being filed in the bin”.
We believe that every child deserves to be supported in the development of the behaviours, attitudes and skills which will allow them to effectively manage their finances in order to fulfil their potential. However, it must be part of the core curriculum, and it must be compulsory. The recent Impact Review of Financial Education for Young People conducted by MAS, confirmed that attitudes to money are formed early. All the experts in this area agree that financial education has to begin as early on in a young person’s school career as possible and should continue in a progressive way year on year.
We agree with the amendment of the noble Lord, Lord Flight, but regret that it does not go far enough, simply calling for the FCA to work with the Department for Education. As Martin Lewis said, that sounds to me a little like political doublespeak for filing it in the bin.
As the Minister will be aware, a Private Member’s Bill was introduced recently in the Commons, which would require financial literacy to be included in the national curriculum. So the Government have the luxury of a choice here. They can take the low road and accept the amendment from the noble Lord, Lord Flight, or the Minister could take the high road and indicate today the Government’s support for the Private Member’s Bill, which would get us to where we all surely want to be on this motherhood-and-apple-pie issue.
Lord De Mauley
My Lords, I think I addressed it, although I did not express it in those terms. I said that the department is reviewing PSHE education, including whether any aspect of it should become statutory. That was intended to be my response. The noble Lord knows the Government’s approach to Private Member’s Bills.
Lord Flight
My Lords, as I said, this was intended, largely, as a probing amendment. I am glad that MAS is continuing with its role. I am strongly of the view that financial literacy should be part of the core curriculum. The teaching of it at present is mixed and, in general, I do not think it is adequate. We have had a useful discussion of the subject and I beg leave to withdraw the amendment.
Baroness Hayter of Kentish Town
My Lords, Amendment 104BA stands in my name and that of my noble friend Lord Eatwell. Much will change in the OFT, partly as a result of the Public Bodies Act, the forthcoming Enterprise Regulation and Reform Bill, and this Bill, with responsibility for consumer credit moving from the OFT to the FCA.
This amendment is not so much about that but about the all-important competition role of the OFT, until that, in due course, moves to the CMA. That includes competition references and market studies, as well as super-complaints and promoting competition. Meanwhile, as we know, and welcome, the FCA has also taken on a new remit to promote competition in financial services.
On 14 June in another place, Mark Hoban for the Government welcomed the fact that the Office of Fair Trading and the Financial Conduct Authority will take forward the ICB recommendations to improve transparency across all retail banking products. If the OFT retains the right to conduct market studies in relation to financial service markets, the ABI is concerned about the risk of duplication and/or the lack of co-ordination between the FCA and the OFT. Therefore, the ABI feels that the OFT should be subject to a statutory duty to cooperate and to produce an MoU. It would certainly be the preference of the ABI for the FCA normally to take the lead on competition matters, and for the OFT to undertake market studies only in exceptional circumstances.
Meanwhile, the consumer world, not dissimilarly, would like the relationship between the FCA and the OFT changed from that set out in the Bill. The consumer world would like the FCA to have the same powers as a number of other sectoral regulators to make competition referrals themselves—that is, the equivalent of Section 131 powers. I am attracted to that but have not tabled an amendment specifically on that at this stage, in the hope that this amendment will give the Minister the chance to explain why he has not replicated such an enabling power within the present Bill. Without such a power, the FCA will still have to refer cases to the OFT for market analysis before a referral to the Competition Commission can take place. It sounds—and I guess it will be—a bit slow. It also adds additional, possibly unnecessary, hurdles. The Joint Committee agreed. It said:
“The Government should review its decision on the FCA’s competition powers. The FCA should be given concurrent powers alongside the OFT to make market investigation references to the CC. The FCA will need greater competition powers to achieve its recommended objective than is currently set out in the draft Bill.”
We know from the debate in the other place that the Government, however, prefer the FCA to continue to have to make a referral to the OFT, which would allow the FCA to draw on the expertise of the OFT. However, the Government have agreed that they will review whether the FCA should have specific competition powers in five years’ time.
It is hard to see why a new authority, set up with a specific and new remit to promote competition, should not have the requisite powers. But perhaps we will hear the rationale when the Minister replies. Meanwhile, the OFT is itself keen to establish greater clarity for interested parties on how the OFT—and subsequently the CMA—and the FCA will work together, and the OFT is very happy for this issue to be raised today. The OFT judges it important for effective debate on the Bill that there is an understanding of how the OFT and FCA will work together.
There is, of course, also the matter—a smaller matter, perhaps—of the handover of consumer credit responsibility from the OFT to the FCA, and various transitional issues. The handling of these should no doubt also be included in any MoU.
The current OFT acknowledges that a key issue will be the publishing of a memorandum of understanding setting out the respective roles of the OFT and the FCA, their responsibilities and how they will work together. Indeed, I understand that the OFT has already begun working with the FSA on a draft MoU and is keen to establish greater clarity for those two parties and for those of us looking from the outside.
I am aware, although my eyesight is not that good, that the Minister has a file entitled, “say no to everything”. I hope in this case that he might drop that and just agree that an MoU may be without that remit. I beg to move.
Lord Flight
My Lords, my Amendment 173D covers essentially the same point, but is in that part of the Bill that deals with the practical operation of the competition objective for the FCA. There is clearly a risk of duplication or lack of co-ordination between the OFT and the FCA, so Amendment 173D proposes a legally binding MoU setting out how the two bodies will co-operate together and who will do what. It should be made clear that the FCA would normally take the lead on competition matters in financial services and the OFT would undertake market studies in exceptional circumstances. The competition objective for the FSA is very well worded, very clear and extremely appropriate. Consumers need a healthily competitive market. I am still of the view that the PRA should have a competition objective. It is the lack of competition that led to a cartel in banking. Whenever you get a cartel you get bad habits, so, in my book, a major aspect of having a much healthier banking system is having more competition.
Lord De Mauley
My Lords, Amendments 104BA and 173D both relate to co-ordination between the FCA and the OFT. Amendment 104BA would require the FCA to co-ordinate with the OFT and to prepare and maintain a memorandum of understanding to be laid before Parliament and published as it sees fit. Amendment 173D, in my noble friend’s name, is similar, but the duty to co-ordinate, and to establish an MoU, relates solely to the promotion of competition. Amendment 173D would also require the MoU to make it clear that the OFT will conduct a market study into a financial services market within the regulatory remit of the FCA only in exceptional circumstances.
Before turning to the question of the need for statutory provision for co-ordination between the FCA and the OFT, it might help if I explain the approach taken elsewhere in the Bill. The Bill provides for a properly focused regulatory system in which the individual regulators have clear roles and responsibilities and the right tools to deliver them. It is right, therefore, for the Bill to provide explicitly for co-ordination and MoUs between the key players in the system for regulating financial services—the Bank of England, the FCA, the PRA, the Financial Ombudsman Service, the Financial Services Compensation Scheme and the Treasury—so that they can work together effectively without the boundaries between their roles and responsibilities getting blurred, and of course the legislation sets out a procedure for laying these documents before Parliament.
Clearly, the FCA will need to work closely with the OFT and, in due course, the Competition and Markets Authority. In fact, the FSA already has an MoU with the OFT on a non-statutory basis and the FSA is already working with the OFT on putting in place a memorandum with the FCA.
To address the need for particularly swift and effective co-ordination in cases where a large number of consumers have suffered detriment, such as the mis-selling of payment protection insurance, the FSA has put in place additional formal mechanisms for co-ordination such as the Coordination Committee of the FSA, the OFT, the FSCS and the FOS. Statutory duties to co-ordinate and maintain MoUs are not needed to underpin that co-operation. That already happens and is effective.
On the specific issue of competition, which Amendment 173D addresses, the FCA, as the lead regulator for financial services, clearly will need to work closely with the OFT, as the central competition authority. Of course, the regulators will have to co-ordinate their work so that their own resources are used effectively and duplication is avoided. Although they will need to take into account their respective regulatory objectives and priorities, powers, expertise and resources, I contend that we should allow the regulators, based on careful consideration, to develop an effective protocol for working with each other in order to promote competition.
Lord Barnett
My Lords, the amendment stands also in the name of my noble friend Lord Peston. It is fairly self-evident, referring to,
“the need to inform and educate consumers”—
which I assume everybody is in favour of—
“with special emphasis on the unavoidability of some risk”.
Life is full of risk, certainly in the financial area— I hope that everybody accepts that. New Section 1C(1) states:
“The consumer protection objective is: securing an appropriate degree of protection for consumers”.
If the Minister is unable to accept our amendment, I hope that he can explain what,
“appropriate degree of protection for consumers”,
the Government have in mind. It is unclear to me what is “appropriate” in this case. I hope that,
“emphasis on the unavoidability of some risk”,
can be considered seriously. When my noble friend talked a little earlier about his experience in school, he said that he did not think that he would not have been terribly interested if anybody had taught him about financial affairs, but I think that risk would be fairly simple to explain even to most teenagers at school. In those circumstances, this amendment seems reasonable to me and I hope that the Minister will be able to accept it. I beg to move.
Lord Flight
My Lords, it strikes me that the Bill slightly buries “buyer beware”, which was in FiSMA, and that we are creeping towards a culture where a lot of people think that if they lose money on any investment they are entitled to compensation. I do not wish to be overly harsh but it is fundamental, as the noble Lord said, that people understand risk and graduations of risk. That is backed by financial education.
Lord Borrie
My Lords, in agreeing with my noble friends Lord Barnett and Lord Peston in their amendment, I agree also with what the noble Lord, Lord Flight, has just said. He did not used the famous Latin phrase “caveat emptor”, perhaps because we are not supposed to use Latin any more—that is the case in the courts; it may be not so here. If it is convenient to the Committee, I shall speak to Amendment 106, which is grouped with my noble friends’ amendment.
The Bill states that the Financial Conduct Authority, in assessing the degree of consumer protection that is desirable,
“must have regard to … the needs that consumers may have for the timely provision of information and advice that is accurate and fit for purpose”.
The noble Baroness, Lady Oppenheim-Barnes, has kindly joined me in Amendment 106, because, while we agree about information and advice having to be accurate, we are not happy about the phrase “fit for purpose” and would prefer it to be replaced by “intelligible”.
“Fit for purpose” is a vague and uncertain phrase. As the consumer organisation Which? has said in briefing to me and no doubt to others, it is a woolly phrase and invites the question: whose purpose? It has become fashionable to use the phrase “fit for purpose” for all sorts of reasons, and despite its perfectly respectable origins in Section 14 of the Sale of Goods Act and indeed previous common law, it is now used to such a wide extent in all sorts of circumstances that it would be better replaced in the Bill with “intelligible”.
Finance Bill
Lord Flight Excerpts(12 years, 5 months ago)
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Lord Flight
My Lords, I will say a little about small business and the EIS. The Minister stressed the importance of small businesses in his speech, and I think everybody across all shades of party opinion knows that small business can provide extra employment and boost the economy, and that the proportion of GDP and employment it represents continues to grow.
The EIS has been a considerable success and raised some £12 billion of high-risk equity for small businesses. It was interesting that the French Government sent a delegation over to the UK to look at why the EIS had worked so much better in the UK than the French scheme had in France, even though, on the face of it, the French scheme looked to be more generous. I also make the point that equity is just as important as debt—small businesses cannot, and should not, view bank borrowing as a substitute for equity. As a buffer for survival, equity is absolutely necessary.
At this point, I declare an interest, which is duly in the register, as chairman of the EIS Association, the not-for-profit trade body representing the various professionals involved in promoting and creating EIS offerings. My colleagues from the EIS Association have had an extremely constructive dialogue with HMRC and I pay tribute to the good will and constructive actions of particular individuals in trying to address some of the issues that need addressing, which the Finance Bill does to some extent. I was extremely pleased that the Government listened to the proposals to widen the coverage of the EIS and deal with the follow-on situation of small companies that had survived and grown a bit but needed some more equity capital. It was a pity that the Government were obliged to delay getting EU state aid clearance, as I do not see that these sorts of measures are any of the business of the EU. I am very pleased that the Government did listen and have addressed that.
I am therefore a little disappointed in respect of two big areas in the Finance Bill. The first is the limiting of loss relief to £50,000, or 25% of annual income, which changes the risk-reward nature of EIS investment. In a way, the Government have given with one hand, by widening the parameters, but taken back with the other hand with that measure. Given that small company investment is extremely high-risk, what the loss is going to be with small companies that fail is a material consideration. I know there is some amelioration of that in that losses can be spread over two years for tax purposes, but I feel that this was slightly a political measure and not really thought through in terms of its impact. For all those who invested under EISs in the past on the basis of loss relief, it is also retrospective in that it is being changed after they took the decision to invest based on the then risk/reward parameters.
A minor point is that the list of qualifying investments has been looked at from the negative side but not from the positive side. I cannot see why nursing homes and hotels are not qualifying investments. As the record shows, neither is an area where people make instant profits and both are socially useful. There is a case for reviewing the rules on a positive side.
The second point is perhaps the most material. The EISA has had constructive discussions with the Treasury for some time on measures to stop what I think we and the Government have viewed as abuse of the EIS, where the basic objectives, which we all understand, are being rather used for tax schemes and getting around the rules. Everybody in the industry broadly understands what those abuses are and is pretty constructive about dealing with them. This has led to the new rules in the Finance Bill that create Section 178A of the Income Tax Act 2007. It introduces new disqualifying arrangements which apply to VCTs and the new SEISs as well as EISs. These include test conditions A and B, and if either is met the arrangement is disqualified. I shall read condition A because I get very upset that the drafting of a law in this area can be so entirely opaque:
“Condition A … is that as a result of the money raised by the relevant issue being employed for the purpose of the relevant business activity, the whole or the majority of the amount raised is, in the course of the arrangements, paid to or for the benefit of a party or parties to the arrangements or a person or persons connected with such a party”.
I am afraid it is extremely opaque. I think I know what it is getting at: that where an EIS-qualifying company is to some extent fronting for a larger company that is underwriting its business risk, it is clearly not cricket. I wish that things such as that could be drafted in a way that is a little clearer and more straightforward.
The second condition, condition B, outlaws where a part of business venture, not otherwise qualifying, would qualify. For example, if, say, old people’s homes do not qualify, you separate out a restaurant in the old people’s home which would qualify. Candidly, I cannot particularly see the harm in that if it is employing people and providing a service. It would again be helpful if what the condition means were clear, but I question whether it is of much economic use.
The even bigger issue is that the new arrangements include a process for advanced assurance guidelines by HMRC. This is a form of pre-clearance. In the light of those very opaque conditions A and B, it is almost necessary in order for people to know whether an EIS proposition is okay. It is therefore helpful, but my first point is that it will require HMRC to be adequately resourced to provide and assess these pre-clearances. If not, there will be delays in the funding that small business badly needs.
I believe the initial draft of the Revenue’s guidance notes have, for some reason, been fairly widely circulated, which was not intended. As the notes stand, they are capable of being interpreted in an extremely unhelpful way. Most people know the issues that these guidelines are getting at but, on the face of it, the wording could unintentionally disqualify a range of businesses, especially developing, building, owning and operating solar, wind and other energy projects benefiting from ROCs. Typical characteristics of such investments are: that the majority of the investment comes from one or other EIS fund or VCT; where the business is a start-up; the customer servicing and maintenance function has to be outsourced initially because the business cannot afford to do it itself; and if there are any major engineering or other capital costs, they need to be outsourced to a third party until the business is large enough to be able to afford them. The guidelines include these four characteristics as disqualifying the business for an advanced clearance guideline under something called VCM21035. I cannot believe that it is the Government’s intention to disqualify, in particular, start-ups. It does not mean that these investments are automatically disqualified for EIS relief, but they are disqualified for this new advanced clearance. Of course, the new advanced clearance will, in practice, become an effective prerequisite in that no one is going to invest in an EIS proposition unless it has an advanced clearance under the new arrangements. The guidelines do not say, but could usefully do so, that—notwithstanding the specific guidelines—if the promoters believe the business is not abusive they should explain when they apply for advanced clearance. I think that is particularly relevant to the point I just made about start-up companies in the solar industry.
I also understand that the objectives of most of the fairly extensive clauses in the guidance notes go quite a lot further than what is in the Bill, which I do not think is necessarily intended. The guidance would be much more practical and helpful if it gave illustrations of the things that it seeks to disqualify. As the guidance stands, it would be much more practical for EIS funds to invest in follow-on situations and to avoid start-up seed capital. Again, this is entirely at odds with the objective of the new SEISs.
I hope the guidance notes will be reviewed and refined. At present, they will cause too much uncertainty and lead to a reduction in the flow of EIS funds to perfectly reasonable propositions. The essence of the point is that VCM21035 sets out where HMRC will decline to give advance assurance. At present, as I have just said, this is well beyond the new disqualifying principles within the Act. It also gives HMRC too much discretion to pick and choose whether or not companies get advance clearance. I am sure it is not the Government’s intention to disqualify start-ups from being largely funded by VCTs and EIS funds, nor to disqualify companies which in their early stage need a certain amount of outsourcing.
Finally, another issue that delays the flow of EIS funding is MiFID. Advisers need to be ever more protective if they are to promote EISs to their clients. It is not just a question of their clients signing to say they are a sophisticated investor; the adviser needs to write a paper saying why he considers the client to be a suitable investor for something as high-risk as the EIS. The bottom line is that, other than the most sophisticated advisers, most give up and say, “Well, we’re really not attached to this area. It is too difficult and too risky”. To the extent to which we can have any flexibility under MiFID, it is necessary to make it easier for intermediaries and financial advisers to be able to promote EIS investments.
Financial Services Bill
Lord Flight Excerpts(12 years, 5 months ago)
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Lord Flight
My Lords, it strikes me that this amendment points an important finger at a number of territories. In some ways the mismatch concerns me less; there are always likely to be mismatch problems. For starters, I was disappointed that the previous Government, as it were, gave away power in the territory of financial regulation to Europe. Substantial things are happening: we have MiFID 2; the banking supervision proposals; and, following on from those, the recent proposals arising from greater European economic and financial union. First, I would like to know that the UK parties batting for the UK are doing a good job and have raised all the issues. Secondly, I agree with the noble Baroness, Lady Noakes. I am not certain whether this is a Treasury or a PRA matter but the PRA at least has the lead for the regulators in negotiating with the EU bodies. I should like to know how the Bank of England thinks it has done in dealing with the issues and protecting British interests.
The MiFID 2 proposals are coming up and I think that they could be extremely damaging to the UK if they went through as presently proposed. A lot of work needs to be done for them to be workable. If there were no public review or airing of what has been going on and the issues, it would perhaps be—in a fast-changing territory—somewhat undesirable. However, I am not quite sure what the right mechanism is for achieving what I seek to achieve.
Lord Liddle
My Lords, I rise briefly to support my noble friend Lady Hayter’s amendment. She has drawn attention to a crucial issue for the United Kingdom. The fact is that we benefit greatly from the existence of the European single financial market. I believe that one of the reasons why so many overseas banks base themselves in London is that we are part of a single regulated market. There are grave dangers for us in going down the road of separating ourselves from that single market.
It is important that we keep very closely in touch with European developments at all times. It is a very fast-moving scene. As we understand the results of the last European Council, banking supervision within the eurozone will be put under the European Central Bank by the end of this year. I noted with interest the Governor’s comment, as reported in the Financial Times at any rate, that this would make it easier for the Bank of England to deal with regulatory issues because there would be, as it were, a single telephone number to ring in the European Central Bank. It is also the case that the UK has a critically important influence in the European Systemic Risk Board. It is vital that we play a crucial role in that board, of which the Governor of the Bank of England is the deputy chair.
Financial Services Bill
Lord Flight Excerpts(12 years, 5 months ago)
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Lord Flight
“( ) An order under subsection (2) may only exclude or modify procedural requirements under FSMA 2000 where the Committee believe that this is necessary due to the urgency of the situation, and where this occurs the order must include an explanation of the reasons for excluding or modifying the procedural requirements of FSMA 2000.”
Lord Stewartby
My Lords, I would like to add a word to what the noble Lord, Lord Peston, has said, in particular to ask my noble friend Lord Flight about the frequency with which this situation is likely to happen. Would it be an exceptionally rare event, because that may affect the way in which one approaches it?
Lord Flight
My Lords, I was simply making the point that if this power is used, and as a check against its improper use, there should be the requirement to explain why.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, I will see if I can help a bit here. Amendment 47A seeks to prohibit the modification or exclusion of procedural requirements—that is, the requirement to consult—except for reasons of urgency. The reasons for the exclusion or the modification would also need to be included in the order. I should briefly explain why the Treasury has the ability to switch off or modify procedural requirements—the requirement to consult—which apply to action taken by the PRA and FCA on a tool-by-tool basis.
As the Government made clear in their February 2011 consultation document, in the case of some macroprudential tools, directions from the FPC will be very specific, requiring no discretion at all on the part of the regulator to implement them. Noble Lords asked for examples. In these cases—for instance, where the FPC is simply changing the level of a particular lever—consultation or cost-benefit analysis undertaken by the regulator would have little value and would introduce unnecessary delay into the process.
The Government believe that in these cases the FPC’s policy statement for the tool and its explanation of how the action is compatible with its objectives will provide much more valuable information about the action and its impact than any consultation by the regulators. However, I reassure the Committee that the Government do not expect to modify or exclude procedural requirements for most tools.
The Government will in due course publish a consultation document with proposals for the composition of the FPC’s initial toolkit, which will set out whether procedural requirements will be amended for any tools. In that case, there will be complete transparency regarding whether there has been any proposal by the Government to cut out the normal full consultation processes, and, if so, the reason will be clear. On the other hand, taking the question of urgent cases, if a delay in implementing an FPC direction could pose a risk to financial stability, both the PRA and the FCA already have, under their existing powers, the ability to waive consultation requirements in order to take action urgently.
Therefore, I hope I can assure my noble friend that on the one hand it will not be, in his words, at all common for consultation not to take place and it will be transparently set out; on the other hand, the power in new Section 9H(2) will not be needed in cases of urgency because that is already covered. On the basis of that explanation, I ask my noble friend to withdraw his amendment.
Lord Flight
My Lords, I think I am happy that the fundamental point is covered, and what the Minister has just stated effectively puts that on the record. I beg leave to withdraw the amendment.
Financial Services Bill
Lord Flight Excerpts(12 years, 5 months ago)
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Lord Flight
“(c) does not harm the competitive position of the United Kingdom in the markets for the provision of domestic and international financial services.”
Lord Flight
My Lords, I am extremely happy with the domestic competitive objective of the FCA, where it is straightforward that a healthy competitive market is clearly in the interests of consumers. My amendment relates to international competitiveness. I well appreciate that the Treasury is sensitive to that being linked to the concept of easy and relaxed regulation which is being partly blamed for the problems that have occurred. This is why my amendment is in a negative form, reading “does not harm” competition rather than “actively promotes international competitiveness”.
In the context of this Bill the FCA is perceived primarily as looking after the interests of consumers, but it continues from the FSA to regulate in a wide range of territories. The balance sheets of life insurance companies and overall banking supervision go to the Bank of England. Left with the FCA is the investment management industry, retail and institutional. I should declare my interests, as in the register, in a number of investment management companies. What makes that industry stay and succeed in the UK is a mixture of a competitive tax regime, good regulation and a good supply of able people. I cast my mind back 30 years. On a largely fiscal issue I pleaded with the Treasury to enable the UK to compete with Luxembourg, but this did not happen for 20 years and more. As a result a huge investment management industry grew up in Luxembourg which London could easily have had. For institutional business in the various areas which the FCA regulates, it is important that it is at least mindful not to create situations that make the UK less competitive than it need be. There is a warning for the investment management industry that partly for fiscal reasons there has been an exodus from the UK over the past year or so by about 30% of the hedge fund industry and of other more straightforward investment management operations.
This is a practical matter. There is nothing to be ashamed of in having a requirement that what the FCA does should not harm the competitive position of the UK in the world at large. I beg to move.
Baroness Noakes
My Lords, I have two Amendments in this group, Amendment 104, which is in my name, and Amendment 139A, which stands in my name and in the names of the noble Lord, Lord McFall of Alcluith, and the noble Baronesses, Lady Cohen and Lady Kramer. Therefore, Amendment 139A has a pretty solid set of supporters. I shall come to that amendment in due course.
In different ways, both these amendments and the others in this group address the position of the UK’s financial services sector. This is a difficult time to be defending the financial services sector in the UK because it is far easier to be in attack mode, as we have seen in both Houses of Parliament and in the media. I thought long and hard about whether it would be appropriate to speak to these amendments at this time, but whatever the current difficulties, which are huge for the banking sector and individual institutions within it—I remind the Committee that I am a director of the Royal Bank of Scotland—we need to be dispassionate about this legislation. We cannot solve all the problems of the sector in this Bill and, thankfully, another Bill will be coming along soon if we need to respond in legislative terms to the latest issues. However, this Bill could, inadvertently or otherwise, damage the broader financial services sector, which is and has been a major contributor to the UK economy. We have a duty to ensure that when this Bill leaves your Lordships’ House we have taken a balanced view of the risks and threats to the UK and have responded in a measured way.
I will start with Amendment 104A. It is very similar to Amendment 101A which my noble friend Lord Flight has already moved. My noble friend’s amendment places lack of harm to the competitiveness of the UK’s financial services sector as a general duty in new Section 1B. My Amendment 104A adds to subsection (5) of new Section 1B a “have regard” item in respect of the international competitiveness of the financial services sector. My amendment merely reinstates the law as it currently applies to the FSA and makes the FCA have regard to the desirability of maintaining the international competitiveness of the UK.
My concern has been that the loss of the FSA’s specific duty to have regard to international competitiveness may be taken as a green light to have no regard whatever to the issue. That would be a mistake for the UK. I do not need to remind noble Lords of the size of the financial services sector. It amounts to very much more than the global banks and it is important for employment, tax revenues and its contribution to GDP.
At Second Reading my noble friend said that the Government’s view was that having high standards of regulation was all that was necessary to establish,
“the attractiveness and competitiveness of London”.—[Official Report, 11/6/12; col. 1262.]
I hope that he meant more than London because the financial services sector is important to many parts of the UK and is not confined to London. More importantly, high standards of regulation can never be enough on their own. We can have the highest possible standards, but they could be operated in such a way that they actually drive business away. There is a very real danger that in response to the financial crisis and more recent revelations the regulatory pendulum will swing to a place which, to use the phrase of my right honourable friend the Chancellor, achieves the “stability of the graveyard”. If there is no reference in this legislation to the wider context of the financial services sector, there is a very big risk that it will be ignored entirely, and that is a risk which I suggest that we ought not to take with this legislation.
I should say that I tabled Amendment 104A in respect of the FCA but did not table a similar amendment in respect of the PRA. At that point, my primary focus was on the fact that the FCA’s objectives are very consumer-focused. That is clear from the Bill and is also clear from what Mr Wheatley, the chief executive designate, has said in public. However, the FCA has a very broad scope in wholesale financial markets, including the recognised exchanges, where issues go way beyond consumer protection in a narrow sense. Wholesale markets are important, both internationally and as part of the infrastructure which supports the financing of British business. There may be other ways of ensuring that the FCA does not forget the wider picture, but my amendment is just one way of achieving it.
I should probably have tabled a similar amendment in respect of the PRA. The two bodies have different functions but they both have the capacity to do harm or good to our financial services sector. I am therefore supportive of Amendment 129 tabled by my noble friend Lord Flight.
Both the PRA and the FCA should have something about the success of the financial services sector hardwired into their framework, so I have also tabled Amendment 139A, which was suggested by the London Stock Exchange. Amendment 139A is slightly different. It amends the regulatory principles, which will apply to both the FCA and the PRA through new Section 3B of FiSMA. Under subsection (1)(b) of new Section 3B, the regulatory principles include the principle of proportionality—that is, that burdens should be proportionate to costs. I am sure that we will look at this in more detail later in our Committee, but for present purposes my amendment states that in considering benefits and burdens, the regulators should consider,
“the capacity of the financial sector to contribute to the growth of the United Kingdom economy in the medium or long term”.
The point is that regulators need to think about the impacts of their regulatory actions in the broader context of the financial services sector and its impact on the UK economy. There could be direct impacts, as in the direct contribution of the sector to GDP or employment; or there could be indirect impacts; for example, through the ability of the financial services sector to support the real economy.
I am not wedded to the precise formulation of this amendment, or indeed the other amendment in my name, but I would simply note that it is drawn from wording that applies to the way in which the FPC is required to go about its business as set out in new Section 9C(4) under Clause 2 of the Bill.
When my noble friend the Minister wrote to noble Lords after Second Reading on the issue of proportionality, he urged us to examine the FSA’s compatibility statements, which are used to evaluate proportionality. My noble friend misses the point, which is that the FSA currently has the “have regard” obligation in respect of international competitiveness and so of course it includes the financial sector’s position in the compatibility statements. If we take the “have regard” out of the legislation or indeed any other similar reference to the wider context, it will follow, as night follows day, that such issues will drop out of the compatibility statements. We cannot assume that these issues will remain anywhere in the minds of the regulators.
The substance of these amendments is crucially important and much more important than the exact form of the amendments in this group. I hope that my noble friend will give them serious consideration.
Lord Sassoon
I completely agree, which is why we only very recently brought forward proposals including mandatory shareholder votes on board pay. There is, and will continue to be, a big agenda here on which this Government have been working very actively but which the European Parliament proposal would, I suggest, work against. That is why we are fighting hard in Europe, as we do on all matters, to get a result that is more desirable for the health of our industry.
I will just say a few words about Amendment 139A, which is another very important one. It would require both the PRA and FCA to consider the impact on the financial sector’s ability to contribute to the UK economy in the medium or long term, having regard to the principle of proportionality. The PRA and FCA must consider whether their actions are proportionate. That will act as a check on the FCA acting in a way that is excessively burdensome, which would prevent a subsequent negative impact on economic growth if there was not a greater benefit from taking the action. Similarly, if the PRA is being proportionate, it would be difficult to envisage a situation where the firms that it supervises could be required to be too safe or too sound.
I have listened to the valid points made by my noble friends Lady Noakes and Lady Kramer, and the noble Baroness, Lady Cohen of Pimlico, and I understand their concerns. It is essential that the UK financial services sector is not excessively constrained in its ability to contribute to economic growth. As I said at the beginning, in advance of Report, I will consider whether a more explicit consideration of the wider economic impact of the actions of the regulators should be included in the Bill. I should stress that in making changes there must be nothing that would seriously encroach on the regulators’ ability to take the action that may be necessary in furtherance of their objectives. Particularly in the light of that assurance I ask my noble friend to withdraw his amendment.
Lord Flight
For the sake of clarity I thought the point that I was making regarding the FCA was that domestic competition is what matters for the consumer. The international institutional aspects which the FCA regulates are quite substantial.
The area that has been the real problem in the PRA and which has brought disgrace on the UK has been the banking sector, which has been largely the result of a cartel. That cartel was the result of regulation. Following Barings, it was made clear that the lender of last resort facilities were available only for banks judged otherwise too big to fail. Lots of lesser banks, such as Hambros, found that they were uncompetitive, so they closed and went away. We were left with a cartel, and when you have a cartel bad things always happen. In terms of the PRA’s ability to regulate and oversee the banking system satisfactorily, it is blindingly obvious that the UK needs a great deal more competition. It is not the sole cure of everything but it is very necessary.
The Government have taken the point and there is no point in putting the amendment to a vote. I hope that they will take note particularly of the need for greater competition in the banking industry as part of the vehicle by which the PRA can regulate better. I beg leave to withdraw the amendment.
Lord Flight
My Lords, I shall speak briefly to Amendments 108A and 117A, which essentially cover the same territory. They seek legislation which explicitly encourages the FCA to extend consumer access to financial services that meet their needs.
To that end, it is desirable that the FCA should assess the impact on markets and consumers when making regulatory decisions. For example—we have yet to see the result—the RDR reforms, though from many aspects fully justified, run the risk of having the reverse effect of reducing substantially the access to financial services and products for the great majority of people. In the absence of a requirement there is the risk that the FCA will always be steered towards risk-averse regulation, preferring to see markets restricted for large groups of consumers in order to avoid any individual consumer getting sub-optimal products.
The issue also arises in the context of the Government’s welcome initiative to encourage the development of simple financial products. If it is to succeed, it will need a regulator which is working with the grain of that policy rather than in the other direction, and which has a clear brief to act in a way to help extend consumer access to financial services that meet their needs, and not the reverse.
Baroness Kramer
My Lords, Amendments 102, 118 and 121 are very dear to my heart. They are perhaps some of the most important amendments to the Bill that have been brought forward. I have been interested in financial services for deprived communities for more than 20 years, partly from living in Chicago and seeing the impact that community development banking had on the revival and regeneration of Chicago’s south side. It was an area once written off because it was both black and impoverished and, in the end, it was only action by the banking regulator, under legislation, that drove forward change which was, and continues to be, dramatic.
The noble Lord, Lord McFall, who is not in his place today, will remember the visits that the Treasury Select Committee made to community banks in the United States in 2006—I take some credit for nagging the committee into making some of those visits—which made clear how much we are missing in this country. Both individuals and small and new businesses in the United States have a degree of access to financial services and credit that we cannot rely on in the UK.
The changes in the United States came through a piece of civil rights legislation, the Community Reinvestment Act. This amendment is not a copy of that Act, but it attempts to repeat its achievements. The data that the Act forced banks to publish exposed vacuums in lending across the United States and, to no one’s surprise, they matched very much with the boundaries of deprived communities and—I hope that we would not see the same thing here—the boundaries of communities of ethnic minorities. The regulator then stepped in and required those banks to meet the target of serving those communities, or to fund someone else who would, before allowing them to engage in mergers and acquisitions. It was an extremely effective strategy and continues to be so to this day.
The amendment is also a read-over from the banking reform White Paper, because it would allow the regulator to play a significant role that is described in paragraph 4.4 of that White Paper as,
“a more diverse banking sector”.
Surely the areas where banks are failing to play a role should be at the top of the list for new and diverse participants.
On our previous day in Committee, I said that the role of the regulator nowhere seems to touch on a responsibility to make sure that financial services are available all across our complex communities. Competition is focused on making sure that there is multiplicity of products, not that there is coverage of the full range of demand. Surely if we wish all our citizens to be able to participate in the economic growth of the country and want small businesses to become established, to grow and to build our economic future, we have to pay attention to that access and coverage issue as well. The requirements set out in these amendments get us to that point.
Eurozone
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Lord Sassoon
My Lords, I thought I might have been asked a question about a UK referendum, instead of which I get a question about whether the German people will be consulted. I think I will leave that to German politicians to answer.
Lord Flight
My Lords, does the Minister agree that a crucial ingredient in a successful fiscal and monetary union is transfer payments between the more prosperous to the less prosperous, as occurs within the US and even within the UK?
Lord Sassoon
Indeed, that is part of the remorseless logic of what an economic and fiscal union normally brings with it.