Financial Services Bill

Lord McFall of Alcluith Excerpts

Monday 12th November 2012 Lords Chamber

[Baroness Noakes]

My Lords, I am grateful to the Government for the amendments that they have tabled, commencing with Amendment 32, in regard to the PRA practitioner panel. However, as the noble Baroness, Lady Hayter, said, that is not the solution that the industry wanted and it is a rather narrow solution. Therefore, I have considerable sympathy with what the noble Baroness said in relation to the need for the PRA to listen to a broad spectrum of views, including that of the consumer panel. In particular, I am more attracted to her Amendment 37ZB, which would require the PRA to have some sort of dialogue with each of the panels which are being set up for the FCA: that is, the practitioner panel, the smaller business practitioner panel, the consumer panel and the markets practitioner panel. Each will have their own particular issues which would be usefully communicated to the PRA in certain circumstances.

Notwithstanding the fact that there will now be a practitioner panel for the PRA, I continue to have concerns that the PRA’s concept of consultation is a narrow one when it should be a broad one based on regular dialogue and feedback loops with the industry. Therefore, I have very great sympathy with what the noble Baroness, Lady Hayter, has said.

[Lord McFall of Alcluith]

My Lords, I support the amendment and the proposition of the noble Baroness, Lady Noakes. If we look at the history of prudential regulation and consumer interest, we find that prudential regulation has trumped conduct of business for a number of years. I suggest that the PRA will be a more enhanced body than the FCA and therefore will win out all the time. Therefore, what the noble Baroness is saying about a broader range of opinion is extremely important. We need to look at the history of the representation of consumers in the financial services industry over a number of years. I lobbied the FSA for years to get a consumer representative on board. It came back to me very excited one day and said, “We have someone on board”. However, one out of 12 or one out of 13 is inadequate. It is very important that we redress the asymmetry of knowledge that is at the centre of selling because we have to restore trust and confidence in the industry, and to do that we have to balance the needs of the industry with those of the consumer. Therefore, I could not agree more with the need to have broader representation. That would put the status of the PRA at one with that of the FCA so that they served the interests of the industry and the consumer.

[Lord Newby]

My Lords, the Government obviously recognise that consumers have an interest in the outcome of the PRA’s actions and decisions. In particular, consumers will be beneficiaries of a safer and more stable financial system. However, the PRA will not focus on consumer protection as an end in itself. That will be the job of the FCA.

New Section 3D in the Bill requires the PRA and the FCA to co-ordinate their functions in areas of common regulatory interest where one may have relevant expertise or a material adverse impact on the objectives of the other. This means that while it is right that the PRA must focus on its safety and soundness objective, where its actions may impact adversely on consumer protection it will need to listen to the FCA, which obviously has the lead consumer protection objective. As the regulator with expertise and analytical capacity in relation to consumer protection, it is right that the FCA should consider stakeholder perspectives, including the views of the consumer panel, come to a balanced view and then communicate this view to the PRA. I do not think that it would be sensible to require the PRA, which will not have detailed expertise in general consumer issues, to consider separate consumer representations and potentially develop an alternative rival consumer view about the best way to deliver consumer protection.

For these reasons, I cannot support the amendment. I hope the noble Baroness will be satisfied that the system will enable all consumer concerns to be represented to the PRA, but that that will be done through the principal channel of the consumer panel that the FCA is to establish.

Financial Services Bill

Lord McFall of Alcluith Excerpts

Tuesday 6th November 2012 Lords Chamber

[Lord McFall of Alcluith]

My Lords, I agree with my noble friend on this issue. Anyone with experience of the Court of the Bank of England would say that its impact has been less than useful over past years. Given the powers that we have given to this Governor for an eight-year period, it is important that the sentiments expressed in the other place as regards accountability are satisfied, because, paradoxically, if that is not the case, it will make the role of the Governor even more political and members of the court will come under pressure.

I had personal knowledge of this during the height of the financial crisis. My concern at that time was to ensure both the political and the financial stability of the situation. It is therefore important that that is adhered to. There needs to be, as the Treasury Committee said, proper records of the court’s proceedings. If transparency is not available, the accountability element will not be pursued. The Government are making a big mistake by establishing what is, in effect—although some people may disagree—a multinational corporation with one person at its head, with little corporate governance best practice.

There needs to be a stage at which the Government can listen to Parliament on this, make the Bank truly accountable to Parliament and ensure the best outcome for the country. We have the Financial Policy Committee and the Prudential Regulation Authority, but there is no doubt that there will be conflicts of interest there. There will be one individual responsible, while the Government and Parliament are spectators and bit players. That should not be the case, and the Government really need to think very clearly and seriously about this issue.

[Baroness Noakes]

My Lords, as a former member of the court, I feel slightly under attack this afternoon, but I was long gone before the financial crisis. In the context of the previous amendment, my noble friend Lord Flight pointed out that the important way to express accountability is on an ongoing basis, not at the point of appointment. The most important thing, going forward, is whether or not the new oversight committee will do its job and who will make sure that it is held to account. It seems to me that it should be the Treasury Select Committee in another place and it is not something for which we need to legislate. The Treasury Select Committee is well apprised of the need to ensure that there are proper accountability mechanisms to act as a counterweight against significant additional powers for the Governor of the Bank of England; and that there are proper checks and balances within the Bank of England and then from the Bank to Parliament.

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[Lord McFall of Alcluith]

I support my noble friend’s amendment. It is important to emphasise oversight because we are setting up a more complex body than the one we had before; we are going from a tripartite body to a quadripartite body. There are many interstitial areas and oversight is even more important in those areas.

As I mentioned earlier, there will be many conflicts between the FPC and the PRA. On the relationship between the Prudential Regulatory Authority and the Financial Conduct Authority, will prudential regulation trump conduct of business, which has happened in the past? Will the FCA feel inferior to the PRA as the FSA felt inferior to the Bank of England?

As to the culture, we can have all the rules we like but, within a plethora of rules, there can be a monoculture which reports to the top and a diverse range of opinions do not get listened to. There are many lessons to be learnt there. An oversight committee is very important in order to look at that and ensure that the Bank of England is indeed exercising the best corporate governance and best practice.

[Lord Hodgson of Astley Abbotts]

My Lords, like my noble friend Lady Noakes I have some difficulty in understanding the thrust of these amendments. I see the issue of the nomenclature, which may be unfortunate, but I have to say, as a director of a company, that keeping under review and overseeing are almost one in the same. I do not see the difference between those two functions. It is absolutely clear that keeping under review and oversight are running on similar tracks.

The dangers behind the noble Lord’s amendments are that we are starting to find a way of dividing responsibilities. We are moving from clear lines of responsibility to a situation where a sub-committee of the board, as appears in the Bill, is starting to dictate the pace of the board itself. That is an unworthy, unnecessary and potentially dangerous development.

Financial Services Bill

Lord McFall of Alcluith Excerpts

Monday 15th October 2012 Lords Chamber

[Lord Kennedy of Southwark]

My Lords, in moving this amendment I am seeking to get a proportionate framework in place that is good for consumers, but which is also good for the financial institutions complained about and the responsible claims management companies that take up complaints on behalf of consumers. That will move us all on from the unsatisfactory situation we find ourselves in at the moment.

A number of CMCs do not adhere to best practice and the consumer has little redress. My amendment would improve that situation for them with the drawing up of claimant representative rules, which are long overdue. Between April 2011 and March 2012, CMCs operating in the PPI sector generated 74% of consumer complaints overall. Of these, the majority related to some 15-20 CMCs. The source for these figures is the Ministry of Justice claims management regulation unit, so they are government figures.

I am very clear that in the mis-selling of PPI, the banks and other financial institutions behaved very badly. It is right that consumers have proper redress and compensation for their loss. I agree with my noble friend Lady Hayter that the banks could have done much more much sooner to deal with these issues.

However, the bombarding of financial institutions with claims from people who have never had any sort of relationship with the financial institution is bad practice. It is a fishing expedition that wastes the time and the money of the institution, and it clogs up the system for people who have a legitimate claim, making them wait even longer for redress.

Why is this done? Because there are huge sums of money to be made in fees. Who has not had an unwanted text message or phone call? While there are regulations already in place and mechanisms to deal with these breaches, we all know that they are not enforced and it is the consumer that suffers. An example of this is the Hinckley and Rugby Building Society, which revealed that 97% of the PPI-related complaints it has received in the three months to September 2012 were from people who are not members of, or have any relationship whatever with, the society. While that figure is lower for banks, there is still a huge number of pointless vexatious claims. Last year 69% of all PPI cases went to the ombudsman via CMCs. A small number of CMCs which are not playing by the rules are making an unfortunate situation even worse. They are not acting in the consumers’ interests. My amendment is an attempt to find a positive way forward, good for consumers, good for the financial institutions and good for the responsible claims management companies.

I hope that the noble Lord can give us a full response so that we can understand where the Government are on this matter. While I have no intention of pressing this to a vote, I hope that the noble Lord will agree to my meeting the relevant Minister outside the Chamber as I want to use this process to improve the lot for consumers, and the time has come for the Government to act.

[Lord McFall of Alcluith]

My Lords, I support my noble friend Lord Kennedy in his proposal, not least because, on my way down on the train today, I received a call from 0843 5600827. They wished to talk to me about my PPI claim of £3,350. Notwithstanding that, I received a text message saying that “time is running out”. I have never taken out a PPI policy.

This is an example of the instability which the industry is suffering at the moment because of this situation. I did chair a committee with consumer and industry representatives two months ago, in order for them to approach the MoJ to try to sort this issue out. Given these demands that have been made on the industry, the £8 billion that has been put aside for PPI mis-selling will surely increase. Let us not forget that we have interest rate swaps. On one of the sub-committees of the Parliamentary Commission on Banking Standards, of which I am a member along with the noble Lord, Lord Lawson, I asked an expert on interest rate swaps about the £8 billion. He said that that mis-selling could dwarf the £8 billion for PPI.

So this issue is current and will have a destabilising effect on the industry for the next few years, and also on consumers’ confidence. I do not think that the Government can escape their responsibilities on that by saying that this is not really a financial services matter, but for the MoJ. It is most certainly having an impact on financial services at the moment. Therefore, as a matter of urgency, the Government should take note of my noble friend Lord Kennedy’s amendment so that they can look at this issue in the cold light of day, outwith this Chamber, and get an adequate and decent solution, both for the industry and for the consumers who are suffering.

[Baroness Kramer]

My Lords, I suspect that everyone in this House has been plagued by the various attempts by the claims industry to get us to pass over all kinds of personal details. That worries me. Anecdotally, I have heard reports of people who responded positively to one of these messages and handed over their credit card details. They then found themselves being charged without realising that they were getting themselves into that situation. We have talked to various institutions, many of which say that half the claims presented to them are from people who have never had any relationship with them whatever. It was entirely a fishing expedition. At a time when we want our banks to focus on appropriate lending to individuals and small businesses, which they are all struggling to do effectively, to have the complete distraction and cost associated with keeping this abusive industry afloat is surely unacceptable to all of us.

Financial Services Bill

Lord McFall of Alcluith Excerpts

Monday 8th October 2012 Lords Chamber

[Lord McFall of Alcluith]

I support my colleague’s comments on this clause. Only last week I received a text saying that there was £2,200 waiting for me to claim as a result of that; I think, therefore, that something needs to be done. In relation to PPI, only six weeks ago both the banks and the consumer organisations had a meeting to sort out the problem with claims management simply because they said that the Ministry of Justice is not fit to look at it at this time. There are big problems here for the Minister; there needs to be consultation. If he gave us an indication today that the department was engaging in that, it would give some reassurance to those who are plagued by claims management companies at the moment.

[Lord Sassoon]

My Lords, my comments on Amendments 147L and 147M will be brief, because we discussed both issues in some depth in earlier sessions of the Committee. Amendment 147L seeks to enable the activities of debt adjusting and debt management to be regulated under the Financial Services and Markets Act. I can reassure the Committee on this point. The effect of Amendment 147L is already achieved by Clause 6, which enables all activities currently regulated by the Office of Fair Trading under the Consumer Credit Act to be transferred to the FCA under FSMA. I hope that is a very clear answer and the direct reassurance for which the noble Lord, Lord Stevenson of Balmacara, was asking.

I will not be quite as brief on Amendment 147M; this continues to be an important area even though we have discussed it before. The amendment seeks to add the services provided by claims management companies to the list of matters that can be regulated under FSMA. I set out in some detail in a past session of the Committee why I do not believe that the activities of claims management companies should be regulated by the FCA. The key point is that claims management companies are not financial services firms. Yes, it is correct that a substantial proportion of their activity at the moment relates to financial services, but—as the noble Baroness, Lady Sherlock, has pointed out—they may move their focus of attention back to, or on to, something quite different in the future. However, that does not alter the fact that they focus on financial services at the moment. It does not alter the fact that they have no place in the scope of a regulator concerned with financial services and only financial services, which is what we are talking about here.

I agree, of course, with the noble Lord, Lord Stevenson of Balmacara, that there are a lot of detrimental practices in the sector that need to be tackled. I reiterate that work that is already under way to strengthen the existing regime for the regulation of claims management companies. Before the summer, I flagged that the claims management unit at the Ministry of Justice was doing work to strengthen the conduct of rules governing the sector. That work is proceeding apace and further steps are being taken. I will take back the noble Baroness’s comment about resources but I have no evidence that this work is being hampered by inadequate resources.

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Moved by

[Lord McFall of Alcluith]

148: Clause 7, page 40, line 8, at end insert—
“( ) a draft of the order has been consulted upon with such persons as the Treasury considers appropriate,”

[Lord McFall of Alcluith]

My Lords, I will be brief and precise on Amendments 148, 149 and 174 which require consultation by the Treasury on draft orders. Clause 7(3) provides for parliamentary control in relation to the proposed orders under Section 22 of the Financial Services and Markets Act 2000 and proposed new sub-paragraph (2) says that no order should be made before Parliament unless approved by resolution of each House. Given the complexity of the Financial Services Bill and the capacity for muddle and wrong-headedness by all Governments over the past years, I think there is a case for enlarging the consultation.

In the 1990s, we were in Opposition in the House of Commons and recommended pre-legislative scrutiny. A number of Ministers took up the concept and it worked. I remember being involved in a three-clause Bill in Scotland that related to raves—clubs where young people found themselves dehydrated and where a number of lives were lost. The main clause in that Bill was Clause 2. We did pre-legislative scrutiny and visited many areas of Scotland. We came back and the then Minister, the noble Lord, Lord Selkirk of Douglas, said that the Government had reflected on the matter and that Clause 2 would be removed and redrafted. The lesson is that politicians can frequently get things wrong. Why do we not get this right by taking a little bit more time and extending the consultation? That is the thrust of this amendment.

[Lord Peston]

My Lords, I am a bit puzzled about the wording in the relevant paragraph. Of course, I agree with what my noble friend says about consultation. However, can the Minister explain why the word “would” appears in line 5 rather than “should”? Even if the Treasury thinks the order would have the described effect, it must certainly believe that it should have the effect. What is the point of the order if it does not achieve what it is trying to achieve? I am a bit puzzled about the word “would”. My noble friend’s amendment would make much more sense if “should” were inserted instead of “would”.

That leads me to my attempt to get my mind around what would actually happen in this case. It is immensely difficult because the provision substitutes material in this Bill for material in legislation that we do not have before us, which is always a problem. However, if we ask ourselves, “When would any of this order-making process occur?”, presumably the answer would be that it would occur when various outside bodies say that this matter is not being regulated, but must be regulated. In other words, what precedes the consultation is the fact that it is not certain at all that the Treasury would take the initiative in this. It is the acting body and is therefore the one that has to act when it comes to producing the orders.

Therefore, the built-in logic behind the entire new paragraph is the consultation process. Indeed, it is also part of the spirit of the age. One can go further and say that not merely is consultation part of the spirit of the age, but that interested bodies would undoubtedly be aware of these orders. Even if the Treasury does not consult them, those bodies will ensure that the Treasury knows what they think because they will get in touch with the Treasury and say either, “What you are doing is a good thing and we would like to support you”, or, “You do not know what you are doing and you ought to do it in a different way”. What my noble friend is putting forward helps the Bill to become much more sensible in practical terms, and it would become a fortiori more sensible if we were allowed to amend the language by inserting “should” for “would”. I think that would make infinitely more sense.

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[Lord Sassoon]

On this occasion, I am quite confident in my use of the English language, even if the noble Lord understands the Bill better. Outside the Chamber we can debate who understands the Bill better. I am quite clear that “would” is the correct word here because it refers to something which is expected to have the effect of extending regulation. I shall not detain the Committee on what we are not discussing, so let us talk about what we are discussing.

Amendment 148 would require the Treasury to consult on the order made under Section 22 where it would result in an unregulated activity becoming regulated. The Government recognise the best practice established in this area by the Department for Business’s code of practice on consultation. I can assure the Committee that the Government will continue to observe the code wherever possible when conducting formal written consultations. However, I do not think that it would be appropriate to write this requirement into this legislation, as it is not written into many other pieces of legislation. Indeed, the Government generally consult on changes to the regulated activities order. I cannot find any case to date where the Government have introduced substantive changes without consultation. Having said that, it may not be appropriate in all cases: for example, if an urgent change needs to be made to bring an activity into prudential regulation that may cause a financial stability risk. For that additional reason, I think it would be wrong to require consultation.

Amendment 149 would require the Treasury to consult on the first Section 22A order and any subsequent orders which amend the scope of PRA regulation or which amend primary legislation. The Section 22A order sets out the scope of PRA regulation. Here, too, the Government agree—and I am happy to restate it—that it is preferable to consult, and indeed the Treasury will be consulting on a draft of the Section 22A order shortly. I do not think it is necessary to write such requirements into legislation.

It is also worth the Committee noting that both of these types of orders would be subject to the affirmative procedure in all cases. Parliament will always have the chance to consider these amendments, and to consider whether the Government have presented suitable evidence—through a consultation in the normal event—of the need for any change. I think that that backstop is an important point here.

I turn now to Amendment 149AB in the name of the noble Lord, Lord Davies of Oldham. He has tabled, I think, only one amendment out of the many hundreds that this Committee has already considered and because I made a concession on it, his batting order is going down from a 100% to a 50% success rate at a stroke. I agree with the noble Lord that orders made by the Treasury that amend Schedule 6 should be subject to the affirmative procedure as they concern changes to the PRA’s and FCA’s threshold conditions, which are the cornerstones of each authority’s regulatory approach. However, we have already provided for this. Clause 46(2), on page 130, includes orders made under Section 55C in the list of orders that should be subject to the affirmative procedure. Therefore it is a simple matter to understand that Amendment 149AB is not needed.

I move to Amendment 174, tabled by the noble Lord, Lord McFall of Alcluith. I will briefly explain the purpose of new Section 141A of FiSMA. It gives the Treasury and the Secretary of State a narrow and technical order-making power to amend legislation that makes reference to the rules of either regulator or to guidance issued by the FCA where the regulator has altered or revoked its rules. This is a sensible approach to ensuring that references to rules and guidance made by the regulator in legislation remain accurate and up to date.

It would not be appropriate to require the Treasury or the Secretary of State to engage in consultations before making amendments to legislation that are a direct consequence of changes to rules or guidance made by the regulator. This would cause unhelpful delays to the process of updating the affected legislation, causing possible confusion and uncertainty for firms and other persons affected. Of course, except in cases of urgency there will already have been consultation on the substantive changes being made to the rules or guidance, as this is required of the regulators.

I hope that with those explanations the noble Lord, Lord McFall, will feel able to withdraw his amendment.

[Lord McFall of Alcluith]

My Lords, it was not my primary aim to promote a deeper understanding of the English language but I did enjoy the exchanges. However, I now beg leave to withdraw the amendment.

Amendment 148 withdrawn.

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[Baroness Kramer]

My Lords, I want to speak very briefly to Amendment 150B in this group. As your Lordships will know, the Bill amends Section 55 of FiSMA. Section 55Q as now in the Bill refers to the,

“Exercise of power in support of overseas regulator”.

I would like the Minister to clarify the definition of “overseas regulator” because neither I nor some of those who are much more sophisticated than me in trying to understand regulation are fully certain whether that definition would include an agency or instrumentality of the European Union such as the three supervisory authorities—the ESMA, the EBA and the EIOPA—which have direct regulatory powers in their own right. All I am asking for at this point is some clarification as to whether these EU agencies or instrumentalities are encompassed in this and if they are not, why not.

[Lord McFall of Alcluith]

I will briefly refer to Amendments 151 and 152. They oblige the regulator to have regard to those associated with a person who has applied for, or has been given, permission. We realise that proposed new Section 55R provides that when considering previous issues the regulator may have regard to the applicants’ relationship. I suggest that this provision should be mandatory rather than discretionary and that relationships should be defined as including family, business or other associations. It would bring more clarity to the interpretation of this clause.

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Moved by

[Lord McFall of Alcluith]

150: Clause 9, page 49, line 9, after “if” insert “after investigation”

[Lord McFall of Alcluith]

My Lords, there are 14 amendments in total here, and I will not be speaking to them all; but if I could characterise them, the three words I would use would be investigation, consultation and reasons for the Financial Conduct Authority. Underpinning that are the concepts of natural justice and the law of judicial review. Given the problems that the FCA has experienced with investigations in the past, both with the Royal Bank of Scotland and the HBOS decision, there are many questions arising from that, not least on the HBOS decision. The FCA needs to be clearer and have more consultation on its relations with financial service companies because the status of the FCA is at stake here. These amendments refer to FCA investigations and providing the reasons and the consultation for them.

[Baroness Hayter of Kentish Town]

My Lords, I rise to speak on the amendments in this group, and in particular on Amendment 165ZA, standing in the name of my noble friend Lord Davies of Oldham, and Amendment 170ZA in my name. As my noble friend Lord McFall has said, these amendments are essentially about transparency, before and after the event, and consultation. They are also about the publication of findings and reasons, including to Parliament.

Amendment 165ZA would require, where a prohibition order is made, that the regulator publish the reasons for this and that the individual appears on the list of people subject to prohibition orders on the Treasury website. This is key. It is not simply to promote good practice by making clear what constitutes the contrary, but also to enable investors and others easily to identify who has been subject to such an order.

My family recently had to check out a hitherto chartered accountant, only to find it impossible to discover from the ICAEW’s website whether he had actually been removed from the register—which, in fact, he had been. The institute finally said it would sell us a list of those who had been so removed, but it should not really be necessary to go through that to discover who has been struck off. We certainly do not want that sort of opacity from the new regulators.

The amendment is really about open access. I assume that it will not divide us across the Committee. On this very proposal, Matthew Hancock—admittedly before he was a Minister, albeit that he was very close to a certain senior one—in the other place said that,

“the principle that prohibition orders on people who are not fit and proper persons should be published is crucial … Prohibition must not only be a sanction for past irresponsible behaviour, but a deterrent for future irresponsible behaviour. That change in behaviour, by ensuring that sanctions are strong enough to change the culture within finance, is … extremely important. It is one of the key lessons from the financial crisis. … the point of prohibition is not only … to stop the actions of those who have … committed acts that make them not fit and proper, but to demonstrate the bounds of behaviour that are deemed responsible and reasonable within authorised firms”.—[Official Report, Commons, Financial Services Bill Committee, 6/3/12; col. 384.]

The then Minister, Mark Hoban, agreed,

“that prohibition is both a punishment and a deterrent, and that the risk of being deprived of one’s livelihood is a deterrent to those who transgress”.—[Official Report, Commons, Financial Services Bill Committee, 6/3/12; col. 387.]

Clearly, publicity is key to that.

Amendment 170ZA in my name requires the FCA to give a copy of its policy on penalties relating to the discipline of sponsors not just to the Treasury but also to Parliament. Clearly, this is about improving parliamentary accountability and scrutiny of the FCA, its reports and how it carries out its functions. It is not enough to leave the FCA or the Treasury to publish statements to the wider public without laying them before the public’s elected representatives in Parliament. Furthermore, we do not want the new regulators simply to become creatures of the Treasury but we want to submit their work also to parliamentary scrutiny.

The amendments in the name of my noble friend Lord McFall of Alcluith are similarly about openness and transparency. They require appropriate consultation by the authorities, proper investigation before action is taken and then explanations provided in due course. We commend these amendments to the Committee. There is also an amendment in this group in the name of the noble Lord, Lord Hodgson, which appears to make good sense. We look forward to the Minister’s response to that.

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[Lord McFall of Alcluith]

I beg leave to withdraw the amendment.

Amendment 150 withdrawn.

Financial Services Bill

Lord McFall of Alcluith Excerpts

Wednesday 25th July 2012 Lords Chamber

Moved by

[Lord McFall of Alcluith]

122: Clause 5, page 21, line 16, leave out “and”

[Lord McFall of Alcluith]

My Lords, I can assure the Minister that this amendment will not increase his blood pressure. We have a common aim here. Quite simply, it is for the FCA to appoint individuals to the smaller business practitioner panel. Given that the membership of the FPC adequately reflects the four constituent parts of the United Kingdom, we wish this to mirror what happens with the FPC. Given that more people work in financial services outwith London than in London, it is important to reinforce that the financial services industry is not London-centric but is a UK financial services industry. It says that in the Bill on page 20 at new Section 1I:

“In this Act ‘the UK financial system’ means the financial system operating in the United Kingdom”.

I feel that it is important to reflect the four constituent parts of the United Kingdom. I beg to move.

[Baroness Hayter of Kentish Town]

My Lords, I support the amendment with, predictably, an interest in ensuring that Wales is well represented on panels. Too often these westerly people are forgotten, especially as they have rather less of a financial sector. The needs of Welsh citizens are perhaps greater, given how poorly served they are in rural areas. The financially excluded, many of whom are found in Wales, are also poorly served by financial services. I thank my Scottish friend, my noble friend Lord McFall, for his concern for my country and, I am sure, for Northern Ireland.

I turn to Amendment 128 in this group, which provides that the panel should represent households using products. That seems to be key, if only to emphasise the importance of the financial services sector to the whole community. In effect, it is a public utility with some of the same obligations on the industry to provide a universal service even in non-profitable areas. It is equally important to ensure that users of the less profitable services are part of the system of regulation or its scrutiny. It is individuals and families who often rely most heavily on the financial services, even if they do not feature on a CEO’s radar.

Perhaps I should fess up at this point that I was vice-chair of the Financial Services Consumer Panel, so I am acutely aware of the absolute necessity of a broad range of experienced views and backgrounds on the panel. The new panel would deal with a range of issues that impact on a wide variety of consumers. That is part of the reason we so need a panel, because consumers are not a homogeneous group. Their needs, capabilities, life experience and expectation, as well as their interaction with the sector, cannot easily be slotted into a “consumers” box and ticked off by the regulator. The panel would need to draw on the policy, research, intelligence and expertise of those people long embedded in the consumer world, who bring with them in-depth knowledge and understanding of consumer behaviour, consumer detriment and—equally important—consumer law, debt management, credit, insolvency, complaint handling, redress, retail sales, the financial world and possibly even Europe. I am particularly pleased that the noble Baroness, Lady Wilcox, who is very experienced in consumer matters, particularly when speaking on redress, is in the Chamber at the moment. However, aside from that expertise, the panel will also need some streetwise input, perhaps from people less exposed to the intricacies of regulatory regimes, Europe, consumer law and research, but who know what the world feels like from less exalted heights than the portals of Canary Wharf.

I now turn to the major issue, which is Amendment 136ZA standing in the names of my noble friend Lord Eatwell and myself. It is about the need to balance the caveat emptor principle—buyer beware—with an equal responsibility on those advising or providing services to consumers to act in the “best interests of clients”. We have heard of the challenge facing consumers in judging whether a company is prudentially secure, or whether the product they are buying is fit for purpose, presents value for money or even covers the risk they assume it will. Added to that, as mentioned earlier today, the very pricing of products, their complexity and people’s lack of understanding of their own risks, let alone the risks inherent in products, makes it very hard for consumers to have the knowledge to take responsibility for the choices they make. The level of risk left with consumers is often unclear. The meaning of “guaranteed” or “tracker” may differ quite substantially from their common-use meaning. Consumers often bear a level of risk unknown to them and seldom explained; they are effectively making choices blindfold.

In an ideal world, of course, we support the responsibility principle. Markets are made to work by consumers shopping around and driving up standards. However, in this market, with those long-term “credence” goods, opaque structures and the asymmetry of information, we need to reintroduce some trust and transparency by balancing consumer duties with provider duties. It is an industry beset with low levels of compliance and high levels of complaints; there are no agreed standards for complex long-term products, so it is hard to expect consumers to adopt a higher degree of responsibility than is already legally acknowledged.

I have concerns, therefore, that by writing consumer responsibility into the Bill, new section 3B(1)(c) appears to “up” the existing situation. In law there are no obligations placed on consumers other than to act honestly. It is not clear what a greater emphasis on consumer responsibility might achieve. Why impose this possibly new principle of consumer responsibility without any countervailing responsibility on the service provider? Amendment 136ZA expresses the need for that balance, at the point where the industry might otherwise grab hold of this wording and say, “See—it was their responsibility and their choice”. The noble Lord, Lord Turner, whose chances of becoming Governor of the Bank of England I might now damage by quoting him approvingly, said yesterday that people,

“doubt banks’ values; and they doubt whether banks have their interests at heart”.

He went on to say that the boards of directors and managers must introduce,

“effective controls against dishonest behaviour”,

in order to change the perception of bankers. This amendment seeks to ensure that providers act in the best interests of clients, which would be just one way of guaranteeing the good behaviour for which the FSA chair awaits. Why should only consumers accept responsibility for their own decisions? Why not regulated firms, and authorised firms? It is as if the Bill’s draftsmen are at pains to ensure that consumers should have only themselves to blame. If this phrase “consumer responsibility” is to mean more than the current legal position, then the Minister needs to explain that to us. If it is only common law, then why include it?

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The Bill contains a wide range of powers to protect the interests of the full range of consumers who might transact with authorised firms. This amendment would blur the boundaries between consumers, firms and the regulator. For that reason, I cannot accept it. On the basis of those explanations, I ask the noble Lord, Lord McFall of Alcluith, to consider withdrawing his amendment.

[Lord McFall of Alcluith]

My Lords, I beg leave to withdraw the amendment.

Amendment 122 withdrawn.

Financial Services Bill

Lord McFall of Alcluith Excerpts

Wednesday 25th July 2012 Lords Chamber

[Lord McFall of Alcluith]

I support the amendment in the name of my noble friend Lady Drake. JK Galbraith said a number of years ago in one of his books that there is nothing about money that the ordinary person of reasonable intelligence and diligence cannot understand. That proposition has been turned on its head by the financial services industry over the past 20 years or so, and now not many of us can understand it. Somebody mentioned CDOs. The noble Lord, Lord Smith of Kelvin, as an accountant, asked me, “Do you know how many pages are in an ordinary CDO, John? There are 350 pages”. Who can understand it? The ordinary person cannot understand it. Worse still, the people making it up cannot understand it. That is why we are in a financial crisis today. The core of this amendment is to rebalance the asymmetric relationship between the industry and the consumer. The Government have paid insufficient attention to that issue and it will come back and haunt the Government and haunt the political classes in the future if we do not pay attention to it and get it right.

I will give an example of my own. In 2005—the year of the general election, which I won in my constituency—I crashed my car, so I decided that I needed another one. I went into my then bank, Barclays, and asked for a loan. Although the counter staff were very courteous and offered me the loan, they also said, “Sir, we advise you to take out PPI—payment protection insurance”. I asked what the payment protection insurance was for. “Well”, they said, “if you become unemployed this could be paid out”. It was the Victoria branch. I pointed over to the Houses of Parliament and said, “Look, I’m in there for the next five years, whether I turn up or not, so my money is secure until the next general election. I do not need PPI. Thank you, sir”. I then received eight letters pointing out the folly of my mistake in not taking PPI. The lesson I learnt from that is that the industry knew that there was a problem. It knew that this was unsuitable for certain consumers, but there were good returns, so it kept on going.

Subsequently, the chairman of one of the major banks spoke to me confidentially, shook his head in amazement and anger and said, “With any product line which is getting a profit of more than 80%, surely someone should have asked the question: ‘Is this a product which is operating in a fair market? Is it doing justice to the people who are buying the product?’”. The answer, he said, was no, but the industry kept going. I was chairman of the Treasury Committee at the time. We referred it to the Competition Commission and then the OFT in 2005 and yet, three years later, the industry was still trying to sell it. I know from talking to some non-executives that executives were even bullying or trying to bully non-executives to maintain the product line—the combined rage of the consumers, the politicians and the regulators meant nothing to them.

This is all about imbalance, asymmetry of knowledge and value for money. The Government need to see this amendment as iconic in terms of that relationship and ensure that, before we get this on to the statute book, the consumer can at least start to get a fair deal.

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[Lord Sassoon]

Does the noble Lord, Lord Peston, agree that the Government came forward with a package of very substantial amendments that have already been discussed in Committee? I refer the noble Lord to the number of government amendments that have already been laid and debated, and to the number of times in Committee when I have indeed said that I will look at things or have made concessions. I do not accept for one minute his statement about the attitude with which I have come to the Committee.

[Lord McFall of Alcluith]

Can I suggest that the noble Lord does not get so het up? There are issues and principles here, and we want to tie them down. Looking at Amendment 117, if I am correct, it is for the FCA to include,

“the ease with which consumers can identify and obtain services which are appropriate to their needs and represent good value for money”.

This goes to the heart of consumer interest. Given the Minister’s position—and let us get rid of the legalese jargon—does he think that this Bill, in this area or elsewhere, ensures that the type of scandals which we have seen going on for years and years without being addressed will be nipped in the bud by the new powers? Will we see the FCA step in straightaway, without prolonged pain for both the industry and consumers? That is what is behind the amendment and the points put by Members.

[Lord Sassoon]

My Lords, all I can usefully say is that while I believe that this amendment is well meant, it is based on a legal construction that the Government do not accept. The FCA has all the powers that it needs and there are some dangers in putting this amendment in. That is what we are discussing.

Financial Services Bill

Lord McFall of Alcluith Excerpts

Wednesday 18th July 2012 Lords Chamber

[Lord Sassoon]

My Lords, this group contains an interesting mix of loosely related amendments, if they are related at all. I shall respond first to the amendments concerning claims management firms.

Amendments 118D and 147K seek to bring claims management companies under the regulation of the FCA. Clearly the regulation of claims management companies must be effective, but there are two reasons why a transfer of CMC regulation to the FCA is not the right course of action. First, the best way to improve regulation of CMCs is to make changes to the current regime, rather than by transferring responsibility for regulation to another body. My noble friend has already questioned whether the transfer of consumer credit responsibilities by April 2014 is achievable. I should say, in parenthesis, that I believe it is achievable, although I appreciate that there is a lot to do. There will be a consultation early in 2013 about how it will operate. However, we are talking here about making another transfer of responsibilities, which I do not believe is necessary or the best way to achieve the objective.

The Ministry of Justice, as we have heard, is the body responsible for regulating the activities of businesses providing claims management services. It carried out a review last year of claims management regulation which concluded that fundamental reform was not needed but identified a number of areas where improvements could be made. A shift in responsibilities now would not address the underlying problems in the conduct of claims management companies and would detract from the concrete steps that the Government are taking to address those problems.

[Lord McFall of Alcluith]

The Minister said that the Ministry of Justice undertook a review that concluded that fundamental reform was not needed. As I mentioned earlier, two months ago I chaired a meeting between the banks and consumer groups on PPI, where £8 billion is at stake. Both groups were very concerned about some rogue claims management companies and asked for an urgent meeting with the Ministry of Justice. Indeed, I hope that they will get a meeting with Ken Clarke as a result. Therefore, on the ground the situation is much different from the one the Minister describes, with the Ministry of Justice saying that fundamental reform is not needed.

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[Lord Tunnicliffe]

My Lords, Amendment 111A is in the names of my noble friends Lord Eatwell and Lady Hayter, and I shall also speak to Amendments 112, 115 and 116; I shall do so briefly.

Competition has an important role to play in the financial services industry. Indeed, as the party leader, my right honourable friend Ed Miliband, has been arguing since his conference speech in the autumn of 2011, if we are to rebuild our economy so that it works in the interests of the many and not the few, we need root and branch reform of our banks. Having greater competition and more players in the market is an important element of the process. Competition, along with choice, transparency, integrity and access, is an integral part of the market working well. On this side of the House we welcome, therefore, the inclusion of a competition objective in the remit of the Financial Conduct Authority.

However, we must continue to emphasise the question “What is competition for?”. It is for the consumer. In a sense, I am disappointed that the noble and learned Lord, Lord Fraser of Carmyllie, did not move his amendment. First, it would have been an opportunity for me to say just how much I disagreed with it. Secondly, it would have been an opportunity for the Minister to say how much he agreed with me. I hope, therefore, that he will emphasise the importance of this clause to the interests of the consumer. The competition objective in the Bill is built around the consumer, so I support the amendment in the name of my noble friend Lord McFall, which requires the FCA to have regard to the factors contained in new Section 1A.

I shall turn to Amendment 111A, and I am very pleased that the noble Lord, Lord Lucas, asked a probing amendment, proving that it is respectable to do so. This is but a probing amendment, in order to understand new Section 1E(1), which states that:

“The competition objective is: promoting effective competition in the interests of consumers in the markets”.

Perhaps it is trying to say “all financial markets”; if the Minister said that was what it meant, that would be great. Clearly it covers a great chunk of financial markets with new subsection (1)(a), “regulated financial services”. However, it needs to add new paragraph (b), because—and I did not know this, until I looked it up this morning—certain recognised investment exchanges are not, apparently, regulated financial markets, because they get an exemption under Section 285(2).

We have added “or market maker” because market makers seem to be taking in the role of investment exchange in some areas. There is a move-over. If those market makers are already covered by new paragraph (a) —“regulated financial services”—I would be content with that assurance. If they are not, I would be grateful if the Minister could sketch out what exemptions there are from this new paragraph. I beg to move.

[Lord McFall of Alcluith]

My Lords, I would like to address briefly a number of the points in Amendments 112, 115 and 116. It is just a simple change: rather than have “may have regard”, put “must have regard”—to, for example,

“the needs of different consumers who use or may use those services, including their need for information that enables them to make informed choices”.

It is this concept of informed choice that is very important. I well remember when we had the scandal of endowment mortgages; we looked at that issue in the other place. The consumers would be presented with two types of mortgages, one which the salesperson said had a small pile of cash at the end of the day, and the other a repayment mortgage. Believe it or not, the one which had a small pile of cash was cheaper than the repayment mortgage. It defied logic, but everybody piled into it, not least because the salespersons were getting 80% of the first year’s contributions from individuals. When we looked at this, the industry said, “This was way in the past”. It was depending on a high level of inflation for its returns. If inflation is 8% then you are going to get your cash pile, but if it is only 2% or 3% then you are in trouble. We are still living with the consequences of those endowment mortgages, with people making claims for them. That was not an informed choice, and it is why it is important to be more definitive in the Bill and insist that the FSA must look at that issue, as well as at,

“the ease with which consumers who obtain those services can change the person from whom they obtain them”.

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[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.

[Lord McFall of Alcluith]

My Lords, I should like to add my support. My name is not on the amendment. A number of months ago I spoke to Giles Andrew, of Zopa, about peer-to-peer lending, and I was very taken by what he said. I think back to the MPC and the American whose name escapes me but who is just departing from the MPC to take up a post at the Peterson Institute in America and his comments about a spare tyre. We lack a spare tyre in the UK in terms of our banking. Whether it is a Labour Government or this Government, none of us has solved the problem of getting lending out. We have a lot to learn in that area. Our top banks are responsible for 450% to 500% of our GDP. We will not make progress on that. This initiative should be looked at. Nothing fundamental will change tonight but it is good that it is on the agenda and I am delighted to be associated with it.

[Baroness Kramer]

My Lords, I am in full agreement with the three previous speakers, who have covered virtually all the territory—which at this hour I will not repeat. However, I should like to add one point. The only argument that I have received from Ministers outlining why this area should not be regulated is that regulation is potentially too heavy-handed and will prevent the sort of growth of a new, young industry. I think that in this House we have rather more faith in the regulator, which has begun to move forward and understand that appropriate and proportionate regulation is a standard that can be achieved. I say that in order to pick up the entity to which the noble Lord, Lord Lucas, referred. Unlike the peer-to-peer lenders which fall outside the current regulatory framework, Seedrs had to be regulated because it is marketing equity investments. It falls into the regulated arena and has had to seek authorisation.

I quote from the blog of the chief executive:

“The authorisation process was long and sometimes painful, but we feel that it was an absolute necessity in order to satisfy both the letter and the spirit of the law. The FSA scrutinised every aspect of our business model and operations, and after over a year of iterative questions and answers, they gave us the go-ahead.

We are proud to be the first platform of our kind to receive FSA authorisation—or, to our knowledge, approval by a major financial regulator anywhere in the world. But more importantly, we are convinced that it was the right thing to do to go down this route, and we now look forward to launching the Seedrs platform as a fully authorised business”.

It is using the authorisation as a marketing mechanism. Having talked to the regulator and then followed through with Seedrs publications, it is clear that both sides have been satisfied with this process. Rather than being too onerous, there is a sense that regulation has been appropriate and that the authorisation has matched the circumstances. If we can achieve that with the equity platform, surely we can achieve that with the lending platform.

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.

--- Later in debate ---

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.

Financial Services Bill

Lord McFall of Alcluith Excerpts

Tuesday 3rd July 2012 Lords Chamber

[Lord Eatwell]

The noble Baroness has made a very interesting point. I have forgotten the precise names, but you have a person who submits the information, and a person who receives it and then has the responsibility of transmitting that received information into the LIBOR setting. That is the person I have in mind.

[Lord McFall of Alcluith]

My Lords, I shall speak to Amendment 43. The four main Financial Policy Committee functions have been outlined in the Bill, but I would like the Minister to consider providing clear regulatory statements for both the FCA and the PRA, given that clarity is essential: there is an outside audience here, so transparency and clarity are very important. For both those bodies, that would be a helpful submission from the FPC.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, we are into another bran-tub—not a pot-pourri this time, but a bran-tub, I note; I am not sure what the distinction is. This is a varied group of amendments about the functions of the FPC.

I say to the noble Lord, Lord Eatwell, and all other noble Lords taking part in Committee that if there are definitional difficulties—we have got into one or two tangles about definitions, construction of difficult clauses and the interrelationship between clauses and subsections —I am very happy for the noble Lord or any other noble Lord to have meetings including the Bill team to try to thrash out some of those difficult issues outside the Committee if that would be helpful. Some of these things might more easily be done away from the constraints and formality of the debate. I lay that offer on the table to all noble Lords who are interested.

I will come back to Amendment 42, but let me start with Amendment 43, which would require the FPC to prepare and publish regulatory statements for the PRA and FCA. One of the most glaring flaws of the tripartite system of regulation was a lack of clarity about who was responsible for what. As we know, the Bill will create regulatory bodies with clear and separate responsibilities. Although the FPC will have the power to direct the FCA and the PRA, that will apply only in the case of actions required to address systemic risk. The Bill makes it clear that the FPC cannot make recommendations or directions that relate to specified persons—that is, individual firms. Decisions on the policy approach of the PRA and the FCA will be made by their respective boards, not the FPC. As such, the amendment would risk blurring those clear responsibilities of the regulators.

Amendment 47, which would provide the FPC with the power to direct the PRA to require the disclosure of leverage ratios, is simply unnecessary. The Government agree that the disclosure of leverage ratios would be beneficial. That is why we supported the Basel III proposals to require its calculation from 1 January 2013 and its disclosure from 1 January 2015. The Government have pushed for full implementation of Basel III.

The interim FPC recommended in November last year that the FSA encourage UK banks to disclose their leveraged ratios from 1 January 2013, and an update on the progress of that recommendation was included in the financial stability report published last week. I will not, but I could quote extensively from that report. It is clear from reading that FSR that the FPC is already using recommendations to address disclosure issues effectively, so I suggest that Amendment 47 is unnecessary.

--- Later in debate ---

[Lord Sassoon]

My Lords, I am not sure whether one can distinguish the world in which we are talking about financial regulation from the real world. This is the real world. It is a world in which these are very important powers that go to the heart of ensuring the financial stability of the UK. This is not a frivolous point. It may appear on the surface to be Alice in Wonderland territory but, if the FPC is to exercise the really significant powers in the system that it is being given or the responsibility for financial stability, it must first have the levers. One of the important constituencies that it will be addressing—and it would be totally remiss of the Government and this Bill to leave it out—would be directions from the FPC to another important regulatory body, of which the Bank is one.

An awful lot of things could be left unsaid which one would assume would somehow happen. This is not one where it would be safe in any way to do so because, if we did not have this power to make recommendations, there could be a significant risk that the FPC would not have the powers—the levers—over critical areas of the supervision and the regulation of the financial infrastructure that underpins so much of our financial system. One only has to look at recent events to see how computer glitches and apparently relatively simple IT problems can have very significant consequences. I suggest that the FPC would have a huge hole in this armoury if it was not able to make recommendations also directed at those who supervise the infrastructure.

[Lord McFall of Alcluith]

On this point, can I remind fellow Peers that I have invited the Governor of the Bank of England along tomorrow morning, so I suggest that they ask him the very important question: “Will he enjoy writing letters to himself in the future?”.

[Viscount Trenchard]

The Minister just said that the FPC is to be a separate committee with strong statutory powers. I find it very hard to reconcile this with its being a committee of the Court of the Bank of England. This is different from the MPC, which is not a committee of the court but is a committee of the Bank. It would be more logical and comprehensible if at least it were acknowledged—as it clearly is—that the FPC is not a committee of the court but a strong semi-separate body. However, the Bill says that it is a committee of the court, in which case it cannot have any powers beyond the powers of the court.

Financial Services Bill

Lord McFall of Alcluith Excerpts

Tuesday 3rd July 2012 Lords Chamber

Moved by

[Lord McFall of Alcluith]

40: Clause 3, page 4, line 21, at end insert—
“(8) The Treasury and the Financial Policy Committee must agree and publish a set of indicators which the Committee will use to measure its performance in meeting the Financial Stability Objective.”

[Lord McFall of Alcluith]

My Lords, this amendment is in my name and that of the noble Baroness, Lady Noakes. The Minister has just said that the FPC is responsible for overall financial stability in the UK. That was a question that exercised us in the Joint Committee on the draft Financial Services Bill, the question being, “How do we work towards establishing financial stability indicators between the FPC and Her Majesty’s Treasury?”. We realise that it would be difficult to set indicators for the FPC and, unlike the MPC, which has a single measured target—namely, the rate of inflation—the FPC does not do that. We think it important that our indicators, particularly for external assessment, should see whether the FPC is doing its job and achieving the government target, unlike the MPC, where it is very easy for people to see that it is dealing with that issue.

We understand that the FPC’s performance will be the focus, but it is important to put forward an amendment to the Bill. The Court of the Bank of England said in its response to the Treasury Committee that it did not want this in legislation, and in a follow-up letter to the Treasury Committee the governor said that there should not be hardwiring of a narrow set of indices in legislation. He wanted flexibility on this issue and a review at regular periods.

We realise that the snapshot element of stability has to mean that we need flexibility on this issue, and that the financial stability report would be an important tool for accountability, just as the inflation report is for the MPC. However, the Government responded to the Treasury Committee that in an annual remit to the FPC they would recommend additional indices if that needed to be fleshed out. Something needs to be in the Bill, and primary legislation is a good place to put that.

The governor set out in his letter to the Treasury Committee a number of indices that we could discuss. I would like this amendment to provoke discussion of a number of those indices—for example, a simple averaged leverage ratio of the major UK banks, the aggregate leverage ratio of the UK banks, the UK long-term real interest rates, the household debt-to-income ratio and the growth of lending in the UK to the non-financial sector, which has been topical now for four or five years without any solution in sight. These indicators are important, but if the Minister thinks that the Monetary Policy Committee and the inflation report, when it is produced to Parliament, are going to cause a bit of heat, in terms of the FPC this will really exercise politicians. We can imagine that certain judgments of the FPC would be unfavourable to a number of politicians who have particular constituency interests, and the FPC would find itself in the eye of the storm. Ahead of time, looking at certain indices and working out, the FPC is extremely important. When a body such as the FPC is given responsibility, it should be allowed to get on with that. I do not want to see it in the eye of the political storm. In order to ensure that that is not the case, we have to get these indices so that we understand what the FPC is about. There is some external assessment so that politicians and others do not just jump on the FPC for a job that it is pursuing as the result of inadequate indicators that have been supplied to it. That is the basis of the amendment. I beg to move.

--- Later in debate ---

[Lord Sassoon]

My Lords, I am sorry if my noble friend thinks that I mischaracterised her argument. My interpretation of the words,

“The Treasury and the Financial Policy Committee must agree … a set of indicators”,

is that effectively the Treasury would have a veto over the set of indicators. What would happen if the Treasury and the FPC did not agree? It states in the amendment that they must agree. They would therefore have to find some common ground and it would be difficult if the Treasury dug its heels in and said, “We believe that this and that should be in the indicators”. Our starting premise here is that the FPC is the expert body and it should be left to define the indicators. As I have tried to indicate to the Committee, the Bank and the FPC are already on the case, providing a high degree of transparency, and there will be a series of draft policy statements available in time for consideration of the passage in the relevant secondary legislation. There will be appropriate scrutiny, but we would be going into pretty dangerous territory if we were to hard-wire the Treasury into the set of indicators that should be for the experts to set. Appropriate parliamentary and public scrutiny is allowed for in the Bill in the way that I have described.

Amendment 73, which would require the financial stability report to include the FPC’s predictions about the likely future state of the UK financial stability, is unnecessary. Subsection (3)(d) of new Section 9T, which appears at the bottom of page 11 of the Bill, already requires the report to include an assessment of the risks to stability that is very similar to the suggestion of the noble Lord, Lord Eatwell, that it includes a “range of … possible scenarios”. Subsection (3)(e) of new Section 9T already requires that the report includes the committee’s view of the outlook for the stability of the UK financial system. The interim FPC has already published three financial stability reports since its establishment. As I am sure the Committee is aware, the most recent report, published just last week, contains a whole chapter devoted to the committee’s outlook and the actions that the FPC felt necessary to tackle risks that it had identified.

I move on to Amendment 74. It is important that we learn from the mistakes of the previous system of regulation. In that system, the Bank was given responsibility for maintaining financial stability but no means of achieving that objective. That is why it is vital to give the FPC effective and proportionate powers to use certain macroprudential tools. However, the use of those tools will need to be monitored carefully. That is why the Bill already requires that the financial stability report includes an assessment of the extent to which the committee’s actions have succeeded in achieving its objectives, including its new secondary objective for economic growth. That is also why the FPC is required to publish and maintain policy statements for each of its macroprudential tools. We expect these statements to include estimates of their impact on both financial stability and growth. As we will discuss in due course, other amendments will require the FPC to produce explanations of how its actions are compatible with its objectives, including the costs and benefits of those actions. I do not therefore think that Amendment 74, which would require the financial stability report to include an assessment of the impact of each of its macroprudential measures on employment and economic growth, is needed.

Lastly, on Amendment 76, the smooth and efficient functioning of financial markets is a key requirement for financial stability. As such, the FPC’s objective to protect and enhance the resilience of the UK financial system extends to the functioning of markets. As I have mentioned, the Bill already requires the FPC to include an assessment of its actions as part of the financial stability report. The amendments that I have made require the FPC to explain how its actions are compatible with its objectives with regard to financial stability and supporting the Government’s economic policy. I therefore regard Amendment 76 as unnecessary because the same ground is already amply covered by the Bill.

I hope that on the basis of those explanations and reassurances noble Lords will withdraw or not move their amendments.

[Lord McFall of Alcluith]

My Lords, this was the gentlest of amendments ever. The genesis of it was the tripartite authority, and how the link between the Bank and the Treasury did not work as well as it could. Here we have an ill-defined term—financial stability—for which there is no definition whatever. On that basis, in getting the balance right between the two institutions, the Joint Committee at the time recommended—and I promoted, because I did not want anything prescriptive—that they should agree indicators. That is a very general term, so that people knew what the Treasury was expecting, and what the Financial Policy Committee was asked, and tasked, to do. That was the genesis of it. If we do not get that balance right we could find, in a few years time, someone saying in this very place—if it still exists—why did they not come to some agreement, so that there was a general consensus on what was happening?

Far from it being dangerous territory, I think it is nothing more than plain common sense. I hope that the Minister will look at this again, particularly when we come back to the Report stage, but I do not intend to move the amendment tonight. I beg leave to withdraw.

Amendment 40 withdrawn.