Financial Services Bill

Lord McFall of Alcluith Excerpts

Wednesday 18th July 2012 Lords Chamber

[Lord Northbrook]

I support the amendment of my noble friend Lord Flight. Financial literacy is not sufficiently taught in schools. Perhaps the Department for Education could encourage the BBC, which is very weak in the area of discussing business, let alone business education, to ask Robert Peston to do a programme on it.

[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.

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[Lord De Mauley]

My Lords, I think that I have said that the FCA has regard to it, but I cannot go much further than I have.

[Lord McFall of Alcluith]

Is this not just part of the muddled thinking that took place at the beginning of this whole process when the word “consumer” was changed and the name became the FCA? Consumer protection lies with the FCA, whether the Minister sees it or not. Given the muddled thinking, and given that the Money Advice Service—which, by the way, was lacerated a few months ago when it went to the Treasury Select Committee—is not a consumer protection body, we need a little rethink. The Minister should take the pills and come back, and then we can get some clarity.

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Moved by

[Lord McFall of Alcluith]

105: Clause 5, page 16, line 38, after “of” insert “ability, disability and vulnerability generally”

[Lord McFall of Alcluith]

My Lords, I shall speak also to Amendment 136. Amendment 105 inserts the terms “ability, disability and vulnerability” of consumers into new Section 1C which is entitled: “The consumer protection objective”, as the noble Lord said. Given that only one body—the FCA—is referred to within this section, it cannot be deduced otherwise than that the FCA has a consumer protection objective. That issue has to be cleared up.

The noble Lord, Lord May, made a very good point about the duty of care. The duty of care issue has been sidestepped by the Government. The Minister referred the noble Lord, Lord May, to subsection 2(e), which states that,

“those providing regulated financial services should be expected to provide consumers with a level of care”.

Being expected to provide consumers with a level of care is a world apart from a duty of care. That issue has to be debated further.

I mentioned the terms ability, disability and vulnerability because they are crucial to consumer protection. I shall deal first with the ability to understand. Noble Lords have mentioned that we have seen examples of products being shrouded in complexity. I well remember that back in 2002 I looked into split-capital investment trusts. These products were being sold on a retail basis to individuals, and nobody could understand them. Indeed, I got the architect of the splits in to the committee and asked him a question. Believe it or not, his name was “Dotty” Thomas. I said, “Dotty, did you understand what you were producing?”, and Dotty said, “No, I didn’t understand”. An unmarried 35 year- old woman came to see me. She had put £40,000 away for the care of her mother. Within three months, that £40,000 became less than £400. When looking at consumers and duties of care, it is important that we understand the issues and how products are being sold, even down to the mundane level. We are talking about ability here. Let us take two credit cards, both with an APR of 8%. Given the algorithms involved—we needed to recruit a professor of mathematics from Cambridge—two cards with the same APR can have a 75% difference in payment. Who is on the losing end with complex products? It is the consumer, so the issue of ability is very important.

The industry keeps telling us that innovation is at the heart of financial services and that if you stop innovation, you stop creativity. Most weeks, I go up and down to Glasgow on a plane. If the pilot said to me when I got on, “Mr McFall, would you like to have an innovative flight to Glasgow today where the plane goes upside down?”, I would say, “No. Give us it simple. Get me there”. That is what consumers want from financial products: simplicity and what is written on the can about what they get out for every pound that they put in. We do not have that. Paul Volker made the point a while ago in a speech in London in which he said that over the past 40 years there has been only one innovative product in the financial services industry: the ATM. Everything else, you can forget. So when they tell us that we have innovative products, I suggest caution.

The noble Baroness, Lady Liddell of Coatdyke, mentioned the mis-selling of personal pension plans when she was a Minister. The compensation scheme cost over £12 billion. The money put aside for payment protection insurance, which I was asked by the industry to negotiate with consumers just a couple of months ago, is £8 billion. The LIBOR scandal, according to the FT last Saturday, will cost about £20 billion. If we add 20, 12 and eight, we get £40 billion. Let us look at some of the countries that had a GDP of less than £40 billion in 2011: Luxembourg, Cyprus, Ghana and Uruguay are just four I have picked out. The scale of the problem is enormous. We are living in a world where consumers do not have the ability to understand the complexities—and I include everyone here—so we need to do something about it.

I mentioned earlier that I was asked to chair the Workplace Retirement Income Commission for the National Association of Pension Funds. What people are paying for their pensions is enormous. I note on the Daily Telegraph front page today that fees can halve the value of your pension. When someone puts their money in a pension pot, they do not know what they are going to get out at the end of the day because of the complexity that arises. So the issue of consumer protection and consumers’ ability is central to the debate on the Financial Services Bill. As I mentioned earlier, I challenge anyone to understand the ins and outs of their portable defined contribution pension schemes.

I also mention disability and vulnerability because one of the complaints I got regularly from the good people working in the financial services industry in our banks and building societies on every high street up and down the land was: “John, I am asked to sell the ‘product of the month’ and I am getting pushed by my bosses to do that. If Mrs Quinn, 75 years of age, comes in, I push the same product to her as I push to her grandson James Quinn, who is 26 and starting out in life. I know in my heart that that is the wrong thing to do”. I know a number of people who have resigned from their bank as a result of that, so the vulnerability element is important.

The asymmetry of knowledge between the consumer and the industry is enormous and we need that balance to be reasserted. I have said to the industry, which has many decent people working in it, that regulators and politicians will not solve this problem because we come to it from the side. The ones who will solve the problem are the ones who are in the industry. And if they solve that problem, if they have that self-regulation, then there will be less need for stricter regulation and there will be the rebuilding of trust and confidence in the industry. This proposed new Section 1C is central to the future of the financial services industry. I regret that the term “consumer” was taken out of the name of the body known as the FCA.

So vulnerability, ability and disability are central to the issues which confront the industry. If the industry takes that seriously, with a push from the FCA maybe we will have a better future. There is a long way to go but this proposed new section is crucial in ensuring that we get a better financial services industry. I beg to move.

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[Lord Sassoon]

No, my Lords, I am trying to use duty of care in the precise way in which it is used in FiSMA and the regulations that go with it. There are, of course, all sorts of other considerations that apply, whether it is in the LIBOR market or other markets. However, I am trying to use the term precisely as it relates to this legislation and the regulations under it. If we want to redefine duty of care or anything else as something that it is not, now is not the time to do it. This has been a wide-ranging debate. However, I would like to focus on the amendments themselves, which highlight important issues with much more focus than some elements of the discussion we have just had. The issues concern disability, ability and vulnerability. I fully share the views of the noble Lord, Lord McFall of Alcluith, that the ability of consumers to engage in financial services can be affected by their age, disability or other personal circumstances. These are points that have been made by a number of noble Lords in this debate, albeit that some other points went rather wider.

The first thing to be clear about is that I disagree with the noble Baroness, Lady Liddell of Coatdyke. It would be nice to be in a world in which these issues did not have to be referred to in legislation at all, but that is not the position I take. I believe that they should be reflected in legislation, and indeed they already are in a number of ways. For example, both the FSA and the Money Advice Service, which we have been talking about, have duties under the Equality Act 2010. The FCA and the PRA will be subject to the same requirements, so the Equality Act also bites on them. Also, under the public sector equality duty set out in the Equality Act, both the FCA and the PRA will be required to assess their rules and processes for their impact on protected groups, and take mitigating action where appropriate. In addition, equality law applies to financial services providers so that firms are required to make “reasonable adjustments” to their services for consumers with a disability under the Equality Act, depending on the nature of the product, the barrier and the size of the business. So there is indeed a body of law that goes very much to the points which the noble Lord, Lord McFall, makes.

Then there is the question of monitoring compliance by the industry with equality law. This is not a job for the FCA or the PRA. It is for the Equality and Human Rights Commission, as the regulator responsible, to enforce the law, and it indeed has the powers to do that. These powers include helping individuals with their legal cases and taking legal action against organisations that appear to have broken the law.

Amendment 136 specifically concerns the regulatory principle concerning consumer responsibility to which the PRA and FCA must have regard in discharging their general functions; and through Amendment 105 the noble Lord wishes to ensure that the FCA, in determining what an appropriate degree of consumer protection is, has regard to the way in which certain consumers may need extra help and protection. These issues are reflected in the FCA’s proposed principles-based approach to regulation, which is designed to ensure that firms adapt their approach depending on the needs of the customer. Instead of having myriad detailed rules and requirements that focus on different degrees of vulnerability, disability or other personal circumstances, requirements on firms will focus clearly and unequivocally on the overarching principle that firms need to take account of their customers’ needs and treat them fairly.

This builds on the FSA’s current approach. For example, principle 7 of the FSA’s Principles for Business states:

“A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading”.

In setting penalties for the failings of firms, one key aspect the FSA considers is,

“whether the breach had an effect on particularly vulnerable people, whether intentionally or otherwise”.

There are examples of where the FSA has taken very significant action. I will cite only one, but I am sure the noble Lord is familiar with it. Late in 2011, the FSA fined NHFA—a subsidiary of HSBC—£10.5 million for mis-selling products to elderly customers. The firm sold asset-backed investment products to elderly people wishing to fund their care home costs, but in fact many of them were not expected to live beyond the period for which it was recommended the products were held. I could also cite cases in relation to the Bank of Scotland and Swift 1st Ltd, so the FSA has been on the case.

The principle that a customer with greater needs should be better protected or offered more support and assistance is clearly enshrined in the regime, but it would not be appropriate to take a more detailed approach, for two reasons. First, we would not want the FCA to cut across or duplicate the efforts of the Equality and Human Rights Commission in considering what circumstances might need special care, and how they should be accommodated. The current approach strikes the right balance of setting a high-level framework with requirements directly imposed on firms by the Equality Act and, on the other hand, with discretion for the FCA to impose more detailed requirements as necessary to ensure appropriate consumer protection.

Secondly, I do not think it is right to list all these matters here. Again, it is potentially duplicative, but more importantly it also risks being incomplete. For example, we might legitimately add age, gender or geographical location—issues which I believe have been raised in previous debates on this Bill—to the list already proposed in the amendment, but where would we stop? I believe there are sufficient powers there. We will come on in due course to the new product intervention powers, which are important in this context compared with what the FSA has at present. Although we will no doubt come to them in detail in due course, the product intervention powers in new Sections 137C and 138M, which mean that in extreme cases a product could be banned with immediate effect, are also additional important safeguards to back up the general principles and approach which I have outlined.

I hope that I have made it clear that the Government take these issues extremely seriously. Unfortunately we cannot and should not rely on people doing the right things, which is why we have the various provisions in the equality legislation as well as the provisions for the FCA—provisions that will be tougher on intervention powers than the powers that the FSA currently has. I therefore invite the noble Lord to withdraw his amendment.

[Lord McFall of Alcluith]

My Lords, in withdrawing my amendment I express my disappointment with the Minister’s response. Just to illustrate that individuals in this House are up to date with electronic technology, I can say that I took advantage of looking up the meaning of “objective” in Dictionary.com, because that is in bold at the top of the paragraph we are talking about. “Objective” means,

“something that one’s efforts or actions are intended to attain or accomplish”.

In other words, it is the purpose, the goal or the target of what we are to achieve. I submit that there is nothing more comprehensive than that. Therefore, we do not stray away from the subject; this is very germane to the subject. There is still disappointment in the FCA being expected to attend something rather than having a duty to attend. Tonight, we expect to get to a particular clause before we adjourn at 10 o’clock, but the consequence of not getting that far is that we take it on the next day. In other words, the consequences are not very great. There is a difference between that and a duty.

I submit that the Minister, for whom I have great respect, has muddled thinking on this. I wish that he would look at this again so that we can come back on Report to get clarity. Besides me, quite a number of people cannot understand what the Minister is trying to achieve here. I beg leave to withdraw the amendment.

Amendment 105 withdrawn.