Financial Services Bill

Debate between Lord Hodgson of Astley Abbotts and Lord Flight

Monday 26th November 2012 Lords Chamber

[Lord Flight]

My Lords, Amendment 97A seeks to require each of the two regulators to establish an independent committee to determine whether to publish a warning notice relating to any individual whom it plans to discipline and to whom that individual may then make representations. The RDC, as we know, has no statutory basis so cannot usefully be referred to, hence the formulation of the last paragraph of my Amendment 97A. This amendment does not preclude a regulator publishing a warning notice against an individual for market abuse or for acting without individual approval when required, matters which I think are different in nature and would distract from the key principle at stake if they were not thus excluded.

It seems to me that government Amendments 97ZA and 97ZB achieve that which I sought to argue for both in Committee and today—that is, a fair process of taking a decision and a fair process of deciding to publish. Via a somewhat tortuous route, the Government seem to have it exactly right for the FCA. The RDC will be the body taking the fair tribunal and then taking the decision on the warning notice. What is still lacking is what will happen at the PRA. There is no indication whether it is considering using the RDC or having any sort of sensible judicial body. If it does, then it will apparently be bound by Amendments 97ZA and 97ZB, if enacted. I would therefore hope that the Minister can give the House some comfort that the PRA is intending to mirror broadly the intended arrangements for the FCA; Amendments 97ZA and 97ZB seem to achieve what is wanted for both regulators. It is appropriate that for both regulatory bodies there should be a fair due process, both out of principle and fairness; we should not forget the other stakeholders, the pension funds that hold the shares of institutions that may be badly damaged by the reputational damage of a warning notice.

[Lord Hodgson of Astley Abbotts]

My Lords, I wonder if my noble friend could deal with one aspect of his explanation of government Amendment 94A. It may be that I misunderstood what he said. Is this to be a general removal of power—that is, a backstop—or is it going to be available in individual cases? It is not clear from his explanation whether it will be gone for ever or if an individual case could say to the Treasury, “We are going to be unfairly treated. Please step in”. At the moment, the former is a very blunt instrument and a lot of eggs could be broken before you get back to a more satisfactory situation if you felt that the regulator was using the power unwisely, unfairly and disproportionately. Could he explain the point when he comes to wind up the debate?

Financial Services Bill

Debate between Lord Hodgson of Astley Abbotts and Lord Flight

Monday 12th November 2012 Lords Chamber

[Lord Hodgson of Astley Abbotts]

My Lords, my name is on this amendment, and I briefly rise to support my noble friend. The key phrase in his remarks was “responsible behaviour by providers” and the key phrase in the comments by my noble friend Lady Noakes was “nervousness among providers”. This comes about because this is an industry where there is huge opportunity for ex post judgments. What appears extremely fair and reasonable at one point can, with the effluxion of time, without any malfeasance on either side, come to be seen as having been perhaps not a very suitable way to provide information, products or whatever. We have to be very careful that we do not shut off opportunities for the moderately wealthy or the less than moderately wealthy to get access to proper advice. In doing this, we will need to address the sorts of issues raised by my noble friend.

It is now made worse by the activities of claims management companies that jump on the bandwagon. It is instructive that each firm that is complained against is charged £850 by the Financial Ombudsman Service, irrespective of whether the claim is found to be genuine. This is not a completely free exercise because it will end up on the shoulders of the consumers, or customers, because of the circularity of the way that these firms have to operate. The combination of products with a very long life, a volatile financial services system and a predatory claims management system will lead, unless the regulator has the proper balance in his requirements, to withdrawal of advice, products and services to a large number of our fellow citizens.

[Lord Flight]

My Lords, I have lent my name also to this amendment. I am seriously concerned at a contrarian impact from quite a lot of what is in this Bill. There will be less and less product and advice for ordinary people. I have already made the point with regard to RDR. The FSA itself has decided that VCTs and EIS are not suitable unless people are sophisticated investors. In the end, mostly ordinary folk will just be left with cash deposits for their savings. Anyone who has studied economics must expect that at some stage in the not-too-distant future there will be a period of very high inflation as a result of QE so people will be severely damaged if they hold all their investments in cash long term. I am not sure whether the balanced approach is correct, but if you want providers to continue to provide other than to the more sophisticated part of the population, if you make the risks and penalties in so doing sufficiently high, the common-sense commercial judgment is to say that we are not interested in being in that part of the market. It is important and makes sense to think of a balance between the two.

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[Lord Hodgson of Astley Abbotts]

My Lords, my Amendment 31 is sandwiched between the two government amendments in this group. I think it is important not to look a gift horse in the mouth. Amendment 26, which adds to the consumer protection objectives, and Amendment 45, which adds to the regulatory principles, are a substantial improvement. The situation is certainly a great deal better than it was when we were in Committee and we had to rely on proposed new Section 137R, which is entitled “General supplementary powers”. Therefore, I am most grateful to my noble friend, the Bill team and the Government for the thought that they have given to this matter.

I shall speak briefly to Amendment 31. I recognise what my noble friend Lord Newby has said—that the Government have got it. By “got it”, I mean they understand the importance of creating a regime which, while recognising the need for proper consumer protection, will provide an appropriate regulatory structure, which in turn will not impede the proper and measured development of social investment. I hope that the Government will keep up the pressure and continue to stress this policy clearly and strongly to a wider audience. The wider audience has two major parts to it. The first is the regulator, which my noble friend referred to.

The Financial Services Authority very kindly arranged for me to meet two of its staff between Committee stage and now. They were interested, considerate, and keen to learn. However, without being in any way critical, they were a long way down the learning curve as far as social investment was concerned. When I discussed with them what their other responsibilities were, which included RDR, I was worried as to how they would be able to give sufficient time to the work that will be needed to provide and develop a proper regulatory framework for the issue of social investment. We have heard already this afternoon about the size and complexity of RDR and one is worried that social investment will be squeezed as a result. I hope that when my noble friend responds to my brief remarks he will feel able to stress again the importance that the Government place on the FCA in future and the FSA now in devoting the necessary time to the intellectual heavy lifting required to establish the right regulatory framework. This is not just a UK-centric issue; we have the thought leadership on social investment here in the UK, and some of the most innovative ideas have been pioneered here and are now being copied around the world. There is a real opportunity for the UK to lead the way in creating a new asset class, and we must not let it slip by allowing the regulator to put the issue into the “too difficult” tray.

The other audience that I hope the Government can spend some time persuading is that of the professions. If the Government want the social investment market to grow, there are many professional groups that have the power to help or hinder—inter alia, financial advisers, bankers, accountants, lawyers, auditors and investment managers. Each of these groups will have their individual concerns, the intellectual heavy-lifting required to devise rules and procedure for the new activity and the inevitable risks in anything new. The argument will run among some in each of those groups that we could stand back until it is clear that the social investment market will take off. In part, this reluctance to move forward is one reason why it is not taking off.

There are plenty of examples of how the attitudes in the professions have impeded this development. We came across a charity that wanted to make an investment of between £50,000 and £75,000 in activities in Nepal. It was told that if it was going to do that it would have to take a due diligence programme, which would have cost about £25,000. The result was that instead of making an investment, it gave a grant. It is those sorts of attitudes that one has to tackle—and it requires a fresh type of thinking. That example will not be dealt with by my amendment, but my amendment was designed to help to create an atmosphere in which social investment can become a mainstream rather than peripheral activity. That is why my preference has always been to have the words “social investment” in the Bill.

As I have said many times in the Chamber, I have been involved in the private equity industry for most of my career. It is worth remembering that all these concerns, worries and questions arose 30 years ago as private equity investment got under way, with doubts about interim valuations, suitability and investor protections. We overcame the doubters then to the great benefit of the UK and, in doing so, made the UK a world leader in private equity—and we can do the same with social investment, if the Government are prepared to make their support and encouragement clear. Nevertheless, I recognise that the social investment movement is at a very early stage. There are great hopes for it, but it is still a very fragile flower. That is why my amendment, while mentioning social investment directly, is entirely permissive; it does not require the regulator to do anything now.

It would be helpful if my noble friend the Minister could confirm that, in relation to the consumer protection objective, the Government recognise the different expectations that the social investors may have; that in relation to the competition objective, they recognise the importance of community finance provision to the financially excluded; and that in relation to the regulatory principles, they recognises the different natures and objectives of social investment businesses. I would be most grateful if he could do this when he comes to reply. Notwithstanding that, I again reiterate my thanks to the Government for the improvements that they have made.

[Lord Flight]

My Lords, it seems to me that social investment is clearly a territory that should be confined only to more sophisticated investors. It is unrealistic to imagine that unsophisticated retail investors will really understand investing in a project that might return them 10% or 20%, or they might lose all their money—or it might really be a charitable gift. I would be extremely concerned if social investment was something that was being made widely available to unsophisticated investors. In terms of the list of the products that the FSA or FCA might decide to keep away from unsophisticated investors, it ranks much higher than a VCT, for example, in terms of understandable risk.

Financial Services Bill

Debate between Lord Hodgson of Astley Abbotts and Lord Flight

Monday 12th November 2012 Lords Chamber

[Lord Flight]

My Lords, during the Committee stage of this Bill I made the point that it would surely be appropriate for the life industry to be represented on the PRA board, against the background that the PRA fairly openly was admitting that it did not have much interest in the life industry. It was really concerned with its banking duties. But in the event of severe bear markets in equities, life companies can get into a situation where it is desirable for the solvency rules to be suspended in the short term so as not to have a downward spiral effect on asset values. This amendment simply proposes that there should be at least two non-executive members with experience of the insurance business on the board of the PRA. The Government certainly took the point in principle that the industry should be regulated. This is designed to put modest bones on that. I beg to move.

[Lord Hodgson of Astley Abbotts]

I will briefly support my noble friend’s amendment. There has been quite a lot of talk about how the Bill is oriented towards banking and that particular sector of the financial services industry. The insurance industry—particularly the life insurance industry, which marches to the beat of several different types of drum, one of which, in respect of solvency, my noble friend referred to—needs to make sure that its voice can be heard, because it is such a critical part of our savings industry. While one does not wish to be too prescriptive in the way these bodies are made up, I am sure that some reassurance to the life insurance industry that its particular expertise and particular needs will not be overlooked would be welcome and desirable.

Financial Services Bill

Debate between Lord Hodgson of Astley Abbotts and Lord Flight

Monday 15th October 2012 Lords Chamber

[Lord Hodgson of Astley Abbotts]

My Lords, the noble Baroness’s amendment has much to commend it. I picked up two points in her comments. On the question of, to use her words, eroding confidence in the regulator, that confidence is already being eroded at present because of the way in which the regulator is behaving, and her proposal would go some way towards ensuring that that was put right. She and I can agree, because we have already agreed on the importance of transparency, that this would achieve not only transparency but, particularly, accurate transparency, and that someone would not be condemned without having had a proper chance to put their side of the case. Like my noble friend Lord Deben, I think that there are some tweaks to be made to the terms of office and so on, but as a concept this has much to commend it.

[Lord Flight]

My Lords, all that I was really calling for previously was for the RDC to be embodied in statute to provide this role. The amendment proposed by the noble Baroness, Lady Hayter, offers something rather better because it is a duly organised and independent body that would provide the safeguard of justice. That, it seems to me, is what we all want.

Financial Services Bill

Debate between Lord Hodgson of Astley Abbotts and Lord Flight

Wednesday 25th July 2012 Lords Chamber

[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.

--- Later in debate ---

[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.

Financial Services Bill

Debate between Lord Hodgson of Astley Abbotts and Lord Flight

Tuesday 26th June 2012 Lords Chamber

[Lord Flight]

My Lords, my two amendments follow those in the name of the noble Lord, Lord McFall, and are essentially probing. They up the stakes from having six members appointed by the Chancellor of the Exchequer to having eight and require that all members of the FPC are,

“sufficiently independent of the Bank of England”.

To me, the issue is this: the FPC will be crucial. Its job is to detect things going wrong in the financial system and to direct institutions to put things right if they are in trouble. My view is that if the FPC is just part of the Bank of England, it runs the risk of being overdominated by what I will call the Bank of England establishment. It is important that FPC members are independent and, if they can be persuaded, may be people with central bank experience from other economies, who are the sort of people who will be good at the job for which they are chosen.

That gives rise to another issue which I have only just appreciated. The wording is slightly ambiguous. The implication is that members of the FPC must be directors of the Bank of England, members of the court. That seems to be slightly questionable. I am not sure that all members of the Monetary Policy Committee are members of the court. The FPC is parallel to the MPC in its role, and it would not be satisfactory if the Court of the Bank of England got to such a size that it was unwieldy. I question, therefore, and think it might be worth considering, whether there should be the requirement that FPC members are directors of the Bank of England. That does not seem to add anything.

However, the main point is to achieve a body of people that delivers the job it is there to do. It is not directly relevant, but I am mindful that the one banking system that entirely escaped all the troubles of 2007-09 was that of the Lebanon. The governor of the Central Bank of Lebanon, who is a very wise old bird and has seen many things before, spotted the trouble coming in terms of mortgage instruments and kept the banks of the Lebanon out of it all in good time. We want an FPC that, whatever the next problem is that faces us, will be capable of steering in that sort of direction. The wider the experience it has, the better.

[Lord Hodgson of Astley Abbotts]

My Lords, I do not wish to upset the noble Lord, Lord McFall, or my noble friend Lord Flight, but I urge my noble friend to resist these amendments. If we look at the objectives of the Financial Policy Committee, it needs to be a pretty focused, pretty small body. Having 14 people, or 12 people, depending on which of those amendments one is addressing, seems not to lead to the operational focus and directness that this particular policy committee will need. Having four external members will give a perfectly adequate external perspective; more would be more likely to confuse than to illuminate.