Small Business, Enterprise and Employment Bill

Debate between Lord Newby and Lord Hodgson of Astley Abbotts

Wednesday 28th January 2015 Grand Committee

[Lord Newby (LD)]

My Lords, these amendments relate to Clause 60, which will enable the adjudicator to levy funds on pub-owning businesses to contribute to the adjudicator’s expenses, with the Secretary of State’s consent. Amendment 90B would change “may” to “must”, making the power a duty. We have had many similar debates on a number of subjects during my time in your Lordships’ House. I remember with affection the noble Lord, Lord Barnett, trying to get us to put “must” into various banking Bills, with no success. As I said then, and as I am sure the noble Lord, Lord Hodgson, realises, “may” in reality often means “must”. I assure him that in this case the amendment is not necessary.

The amendments would together require the adjudicator to impose a levy not only on the pub-owning companies in scope of the code but on any pub-owning company with tied pubs. I hear what the noble Lord says about the code becoming the industry standard for everybody, but that is by no means clear at this point. It is certainly not a requirement of the Bill. To the extent that pubcos not covered by the Bill did not use the code, this amendment would go against the “polluter pays” principle. The Government are clear that funding the adjudicator through a levy on pub-owning businesses covered by the Pubs Code is the right approach. The conduct of the large pub-owning businesses has led to the need for the adjudicator, so it is appropriate that they should cover the costs. This approach is in keeping with the funding of the Groceries Code Adjudicator by the large retailers in scope of the Groceries Code.

It would be unfair for companies such as the family brewers, whose tied tenants would not have the protections of the Pubs Code—at least initially—nor the ability to refer disputes to the adjudicator, to contribute to the levy. The representative body for some of these smaller companies, the Independent Family Brewers of Britain, has committed to continuing the current voluntary arrangements. This includes funding industry dispute resolution services to continue to provide protections for their tied tenants, so the amendment would require them to pay twice. The Government intend to fund the set-up costs of the adjudicator—but, once it has been established, it is only right that the expenses are met by that part of the industry whose conduct has led to the need for the adjudicator. The existing drafting of Clause 60 provides for this.

The amendments would also require the adjudicator to impose a levy every financial year. This would be the case even if, however unlikely, the money was not required that year—a situation which could arise if there was sufficient money left unspent from the previous year. It is therefore right to allow this flexibility for such circumstances. I hope that I have been able to persuade my noble friend that he should not press his amendment.

[Lord Hodgson of Astley Abbotts]

My Lords, my noble friend has brought us back to the extraordinary aspect of the parliamentary draftsmen, where “may” equals “must”. Who else in this country would believe that “may” equals “must”? He is quite right to remind us that this is one of the quirks of parliamentary draftsmanship. If, as he points out, the polluter should pay—and if the code becomes widely used by smaller companies below the 500 limit—all I would like to know is whether there is a possibility that, at that stage, the cost of the code could be extended to cover the people using the code, because that is the “polluter pays” principle that he referred to. I hope that the Government will think about that, but, in the mean time, and particularly given the hour, I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Hodgson of Astley Abbotts]

My Lords, Amendment 93 could be called, in shorthand terms, the “shopping around clause”. My noble friend the Minister may have spoken to this earlier; I hope that she will be able to reassure me in fairly short order that my amendment is no longer needed with the new provisions.

Clause 67, to which this amendment refers, defines inter alia the term “tied pub tenant”. It does so in respect of prospective tenants at subsection(1)(b), which says,

“who is a party to negotiations relating to the prospective tenancy of or licence to occupy premises which are, or on completion of the negotiations are expected to be, a tied pub”.

That is a very loose definition. An individual might make a casual inquiry—even by telephone—about taking on a tied tenancy but may be without any serious intent, at least initially, of eventually signing up. However, the pubco does not know that when the telephone call is received. As such, under this wide definition in the new regime, it will have to go through considerable administrative procedures at some cost at this early stage.

My Amendment 93 would narrow the definition to people who are getting close to signing up and making an arrangement by inserting the words,

“who is party to negotiations which have reached the stage of a provisional trading agreement for the prospective tenancy of a premises which are, or expected to be, a tied pub ahead of any final terms of the agreement being agreed”.

This has the effect of requiring serious administrative effort to be made only once the tenant has shown himself to be of serious intent. It in no way weakens his position; it merely ensures that he is likely finally to take on a tenancy before he qualifies as a tied pub tenant, with all that that implies under the code. I beg to move.

[Lord Newby]

My Lords, I hope that I can reassure my noble friend Lord Hodgson on this point. Evidence from the Government’s consultation in 2013 and correspondence we have received from tenants shows that many such prospective tenants appear to have been given insufficient information, or have even been misinformed, by large pub-owning companies about the pub that they are negotiating to take on. The Pubs Code will ensure that prospective tenants receive the information they need to make a considered decision on whether the deal they are being offered is fair and right for them.

I completely understand the concerns that my noble friend raised. As he said, we clearly need to avoid the situation where any casual enquirer is entitled to all the code’s protections. That would be unnecessary and onerous for the pub companies. At the same time, we need to ensure that prospective tenants receive the information promised by the code early enough in their negotiations with the pub company to influence their decision. That is why we have carefully phrased Clause 67(1)(b) to restrict these rights to those who are,

“a party to negotiations relating to the prospective tenancy”.

If there have been no negotiations, there would be no right to the details. The pub-owning company would not be in breach of the Pubs Code for failing to supply them. We will consult on the code before it is finalised, which will allow us to ensure that we will draw the line in the right place, in a way that takes account of the procedures that different pub companies use to recruit and take on new tied tenants. I hope that that gives my noble friend the reassurance that he seeks.

Small Charitable Donations Bill

Debate between Lord Newby and Lord Hodgson of Astley Abbotts

Tuesday 18th December 2012 Lords Chamber

[Lord Newby]

I would be only too pleased to write to all noble Lords here. Basically, it is the interaction of the general Gift Aid scheme and this particular element of it; but I will write to clarify that point absolutely.

The noble Lord, Lord Hodgson, asked again about the cost and whether HMRC would be proportionate, not heavy-handed, and efficient. He will not be surprised to hear me say that, of course, that is what HMRC plans to be. I hope it will be. My experience, working in HRMC—or Customs and Excise as it was—was that it did a lot of things extremely efficiently, and every now and then it did something which was less than efficient. It was the less-than-efficient examples which tended to get most of the publicity. I know that the relevant section of HMRC understands the point that the noble Lord is making. The Government are not setting up this scheme in order not to hand out the cash. We are setting up the scheme because we are very keen that it is successful and is able to help charities in this way.

The noble Lord asked about foundations and why they are in a position that is different from that of individuals. I am tempted to say, “Because they are not individuals”, but I will happily write to him with some of the background as to their tax treatment, which I absolutely understand is different from that of an individual.

He asked whether a two-year period was necessary, because a charity must already have been through the registration process, including the “fit and proper person” test. The test helps to ensure that charities, community amateur sports clubs and other organisations entitled to charity tax reliefs are not managed or controlled by individuals who might misuse the tax relief. Unfortunately, as I said earlier, fraudsters have been known to exploit charity tax relief, so the “fit and proper person” test exists to prevent that. However, even if a charity appears to be compliant in the first few years, changes in personnel can affect its attitude to compliance, so HMRC will need to continue to have evidence on which to base its assessment of the risk that the charity poses in relation to the scheme. That is why we have gone for a two-year qualification period. We believe that that gives an adequate protection against potential fraud, because people will have had to be up and running, making the thing work. Equally, it is not too long, which was the concern about the original proposals.

The noble Baroness, Lady Barker, asked specifically whether it would be possible under this scheme to collect funds and claim the gift aid from activities in housing association premises. To take a simple example, if the charity is a small local charity linked to a specific housing association and it wants to raise money from a collection in its premises or in a pub or anywhere else, it can do that. Things get more complicated if it is a branch of a large housing association—somewhat like a Catholic church—which wants to pray in aid the community building rules. In that case, because the housing association premises are essentially residential premises, it will not be able to do that, because that is the definition we have put in place.

That demonstrates that tax is complicated. There is no system we could have put in place that would have had any reasonable protection against fraud and which would not have run up against those kinds of complexities—and undoubtedly there will be anomalies. However, with tax, the choice before you is not whether you have anomalies but whether you do something or not. You are bound to have these anomalies. We took the view that putting in place a scheme that enabled charities to have access to £100 million was worth it, even though we knew that there would be some anomalies, because they come with the territory, as it were.

I believe I have answered the point that the noble Baroness, Lady Barker, raised about guidance to users. We are doing that on the various levels that she talked about. We have consulted, and will continue to consult, the standing body that HMRC has for dealing with the charity sector as a whole.

The noble Baroness made the very interesting suggestion of having a website, on which reports and a financial statement would be put. That is a possibility. I suspect that, if we had done that, someone would say that it was grossly unfair to small charities that did not have a website. However, given that we expect everybody in respect of benefits to use electronic communications, and that HMRC increasingly wants taxpayers to use them, it is not an unreasonable suggestion, and I am sure that my colleagues in HMRC will look at it.

The right reverend Prelate asked a couple of questions about simplicity and whether all the requirements were needed. As I said before, we had to take a view, and that view was that this struck the right balance between ease of access to the scheme and protection against possible fraud.

This debate has demonstrated that, if this were not a money Bill, we would be having extremely interesting discussions in Committee and on Report. Sadly, however, this is a money Bill. I therefore hope that I have been able to deal with the points that have been raised—

[Lord Hodgson of Astley Abbotts]

I did not hear the Minister address this directly but do I take it from the commencement date of the Act that Gift Aid under the new scheme will be available in the next financial year, starting 6 April 2013? Will it be in by then?

[Lord Newby]

My Lords, I believe that it will be but, again, if I am mistaken, I will include that in the letter that I have already committed to write to the noble Lord.

We have sought to strike the right balance between effectiveness, accessibility and security, and I believe that we have achieved that. The scheme will deliver an important new stream of revenue to the charity sector. I therefore commend this Bill to the House.

Financial Services Bill

Debate between Lord Newby and Lord Hodgson of Astley Abbotts

Monday 26th November 2012 Lords Chamber

[Lord Newby]

My Lords, I have just discovered that I need to declare an interest in relation to these amendments. I have been looking at the small number of existing CDFs, and I see that one of them is the Church of England Deposit Fund, which I suspect is a significant part of the Church of England’s investment. This almost certainly means that my wife’s pension depends on this fund doing well. So, speaking personally, I have every incentive to ensure that these funds are appropriately regulated. In any event, I was minded to declare an interest.

I shall take the amendments in turn. In his report on the review of the Charities Act 2006, my noble friend recommended that:

“Regulation of Common Investment and Common Deposit Funds should pass from the Charity Commission to the FSA, as the Commission does not have the expertise to regulate what are primarily financial products (albeit only available to charities)”.

He has set out today why he has concerns that the regulatory approach by the PRA or FCA may not be appropriate for these very specific structures. The amendments would require the regulators to set out, as part of their consultation, where they see rules or requirements having a particular impact on CIFs or CDFs, and gives the Treasury the power to disapply requirements that apply to collective investment schemes. I will briefly set out why I think that these amendments are not appropriate or necessary, while agreeing absolutely with the thrust of my noble friend’s sentiments about them.

First, we do not believe that they are appropriate because they pre-empt the decision on whether the regulation of CIFs and CDFs should be transferred to the FSA, and later the new regulators. The Government have not yet responded to my noble friend’s report, and I do not want to use this debate on one of his proposals to pre-empt the full and proper response to the report as a whole which the Government will publish soon. In addition, in his report my noble friend notes that the Treasury,

“is already considering how best to reform the regulation of CIFs and CDFs as part of their work to implement the Alternative Investment Fund Managers Directive (AIFMD), and as part of this are considering possible legislative opportunities”.

That is, of course, correct and the Government will therefore set out their position on this matter when they consult on their approach on implementing the AIFMD early in the new year and respond to my noble friend’s report at that point.

I do not think that these amendments are necessary or appropriate even if the regulation of these funds moves across to the FCA. They are not necessary because the regulator already has to take a proportionate approach, sensitive to the needs and goals of different types of financial institutions and the needs and objectives of different consumers. Earlier on Report we debated and approved two government amendments requiring the FCA to have regard to the differing expectations of different consumers and to the desirability of exercising its functions in a way that recognises the differences in the nature and objectives of different businesses. While we were talking at that point principally about various social investment vehicles, the thoughts and principles which underlay our tabling of those amendments apply equally to these amendments; namely, that this is a specific small sector that needs to be dealt with differently from the rest of regulation and that the FCA needs to know from the start that it is expected to show sensitivity and proportionality in dealing with these different and rather unusual categories. That is what our amendments seek to achieve and we are confident that they will have that effect.

The regulators will have other tools to consider the needs of individual institutions, such as the ones that we are talking about under these amendments. For example, they can issue a waiver from a rule, meaning that a particular firm does not have to comply with a requirement, or issue a modification to a rule that enables the applicant to comply with an amended rule that better fits its own circumstances. All applications for waivers or modifications are considered on their individual merits, and there is no reason why rules that apply appropriately to other, larger and different sorts of funds should necessarily apply to the funds that we are discussing now, because the waiver can be brought into effect. There is therefore no need to give the Treasury the kind of power envisaged by Amendment 116A, which would cut across the independence of the regulator. I hope that I have been able to persuade my noble friend that we are sympathetic to what he is seeking to achieve and that we believe that the amendments we have put into the Bill will achieve the objectives that he is seeking. I hope that, in the light of that, he will feel able to withdraw his amendments.

[Lord Hodgson of Astley Abbotts]

My Lords, I am grateful for that extensive and full reply, and I appreciate its sympathetic tone. I also recognise that we have had two amendments from the Government in Committee and on Report, broadening, and better addressing, the issue of social investment. My concern remains that, in the heavy-hitting consultation on things like the alternative investment fund managers directive, small battalions will get lost. However, the Minister has said that the Treasury and the FCA will be sensitive and proportionate, and I suppose that is as far as we are going to get today. I am grateful for that small step, and we shall be watching to see how sensitive and proportionate they are. In the mean time, I beg leave to withdraw the amendment.

Financial Services Bill

Debate between Lord Newby and Lord Hodgson of Astley Abbotts

Monday 26th November 2012 Lords Chamber

[Lord Hodgson of Astley Abbotts]

I rise briefly to support these amendments. They seem extremely sensible. I do not want to repeat what the noble Lord, Lord Eatwell, has just said. I like the idea of “may”; I like the idea of self-regulation; and I like the chance for the industry to be able to put its house in order. That is clearly very sensible. The only point I would add is that we now have a situation where a substantial proportion of claims coming forward are fraudulent, semi-fraudulent or unjustified. In each case, the firm about whom the complaint is made must pay £850 to have the case investigated. That is a staggering sum of money and it ends up being paid by the consumers. We really need to find a way to short-circuit that, so that where the claims are fraudulent, something can be done to ensure that the claims management companies, rather than the firm, end up with some of the costs—and, indeed, to ensure that the costs are not passed on to the rest of us. There is a good idea here. I hope that the Government will give the amendments a sympathetic hearing.

[Lord Newby]

My Lords, clearly there are serious conduct problems among a minority of claims management companies. Nobody denies that. We are all too well aware that the reaction of the claims industry to the mass mis-selling of payment protection insurance has also brought with it a fall in compliance standards and an increase in poor practices, to some of which the noble Lord, Lord Kennedy, referred. He said that something needs to be done. Something is being done. The claims management regulator is taking forward a programme of reforms which are due to be implemented next year. These include a ban on claims management companies offering financial rewards or similar benefits as an inducement to make a claim; tightening the conduct rules so that the requirements of authorisation are made clearer and protection for consumers is strengthened; and extending the role of the Legal Ombudsman to act as an ombudsman for consumers with complaints about claims management companies, which I think deals with some of the points that were made about the ombudsman.

However, we will continue to require a robust and co-ordinated approach from both the claims management regulator and the FCA in responding to risks of detriment. That starts with the financial services regulator. Lessons have been learnt from PPI. The FCA will have an objective requiring it to intervene earlier to prevent detriment arising and, where mass detriment is occurring, use its powers to establish or agree redress schemes so that affected customers are proactively contacted and compensated. We have seen the FSA already moving much more quickly to agree redress schemes with the major banks in relation to the interest rate hedge mis-selling.

However, where CMCs have a role to play, consumers already seeking redress need to be protected against further detriment. So we will see the claims management regulator stepping up its approach and resources devoted to tackling the underlying problems that exist in the conduct of some CMCs. We have already seen the establishment of a specialist PPI compliance team at the claims management regulator. To ensure that the regulator is sufficiently funded going forward, the MoJ is proposing to increase fees levied on CMCs, particularly those operating in the financial products and services sector.

However, I am not convinced that institutional reform is necessarily the answer. At the moment, it could represent a distraction from the task at hand, particularly given everything else that is happening in changing the financial sector regulatory architecture. It is important to remember that CMCs operate in a number of sectors, not just financial services. In fact, personal injury remains the largest sector. PPI is a very significant sector currently, but the next wave of activity and potential detriment may come from another sector. As I have said before, we do not think that it is appropriate for the FOS to act as a quasi-regulator, as the amendments propose. That would detract from its role as an independent ombudsman. It is simply not what an ombudsman does. That is why it does not matter whether the clause says “must” or “may”. Our objection is not about that; it is that an ombudsman is not the right person to act as a quasi-regulator. The regulators do that. The ombudsman looks at particular claims of mistreatment.

Amendment 101A would simply provide an enabling power. However, it is making a proposal in terms of institutional change which we think is inappropriate. That is not to say that the Government are complacent in any respect about the need to do more in terms of the regulation of CMCs. The range of activities that I have mentioned gives us cause to believe that we will see a very significant increase in the effectiveness of regulation in the period ahead. In the light of that, I hope that the noble Lord will feel able to withdraw his amendment.

Financial Services Bill

Debate between Lord Newby and Lord Hodgson of Astley Abbotts

Monday 12th November 2012 Lords Chamber

[Lord Newby]

My Lords, this group of amendments concerns social investment, a topic that we have already spent considerable time discussing during the various stages of the Bill. It is an important issue, and one that the Government have given considerable thought to, and so it is only right that we return to it at Report.

There is one point that we have made on numerous occasions and that I would like to reiterate before I turn to the detailed amendments. There is no doubt in my mind that the Government are committed to supporting the nascent social investment sector and will stand firmly behind it. However, we must not forget that this is, after all, not something in which consumers engage for purely altruistic reasons. If that were the case, individuals would simply donate or gift their money. That means that we must offer the appropriate protections to consumers entering into a social investment, as we would expect for any other financial transaction. As my noble friend Lady Kramer noted in our discussion on 25 July,

“we have no wish to expose people to scams or to create an opportunity for this to be used as a back door to taking unfair advantage. That is extremely important”.—[Official Report, 25/7/2012; col. 717.]

I could not agree with her more.

I turn to the government amendments in this group. Amendment 26 adds a new “have regard” to the list of matters which the FCA must consider when assessing what constitutes an appropriate degree of consumer protection. In future it will need to consider the different expectations of consumers in relation to different types of financial advice. This is intended to ensure that the regulatory approach takes into account that consumers might have non-financial—for example, social—goals.

Amendment 45 will add a new regulatory principle to proposed new Section 3B which applies to both the PRA and FCA and will require them to have regard to the different nature and objectives of different financial services businesses. This is intended again to make clear that there should not be a one-size-fits-all approach to regulation.

Noble Lords will be aware that these amendments do not refer to social investment specifically. That is because we want them to apply across the board rather than exclusively to social investment. We want the regulator to take a measured and targeted approach to regulating both alternative and existing firms and business models and protecting their consumers, and we do not want this to be limited to social investment alone. For example, there are other innovative sectors that would benefit from this, such as peer-to-peer lending. Incidentally, I can confirm to the House today that the Government will be transferring the regulation of peer-to-peer platforms to the FCA as part of the wider consumer credit transfer in April 2014.

My noble friend Lord Sassoon promised an update on two matters of policy concern that my noble friend Lady Kramer and others have raised on previous occasions. My officials have been working very closely with the Cabinet Office and the FSA over recent weeks and months. On suitability, I hope noble Lords will be pleased to hear that the FSA has confirmed that its assessment is that the existing rules do not restrict advised sales of social investment products. I have therefore agreed with the FSA that it will find a suitable way of communicating this to the industry and to consider whether anything more needs to be done to increase certainty for industry, because I know that that has been a major issue. To decide on the best way forward, the FSA will liaise with industry and other interested parties in the coming months.

On financial promotions, at this point the Government are not proposing to make any changes either through the Bill or through secondary legislation. We are alive to the potential for consumer protection concerns to arise in this area, and the potential for any instances of consumer detriment to have a highly damaging impact on a nascent sector. However, the issue is still being actively debated and is open for consideration as part of the Cabinet Office’s red tape challenge. Interested parties may make representations on the issue until the final panel meeting takes place at the end of the month.

There are also opportunities to explore whether there are any other, non-legislative ways of mitigating costs to social investment offerings of complying with the financial promotions regime, for example working with larger firms which may be able to provide assistance with compliance or approval. I encourage large firms to step up their efforts in this area. Finally, I can confirm that the FSA will provide a named contact to industry and other interested parties on matters relating to social investment. I hope that I have given noble Lords some reassurance that progress is being made in this area.

[Lord Hodgson of Astley Abbotts]

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

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

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

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

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

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

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

Financial Services Bill

Debate between Lord Newby and Lord Hodgson of Astley Abbotts

Monday 12th November 2012 Lords Chamber

[Lord Newby]

My Lords, these amendments again look to amend the proportionality principle to which both regulators are required to have regard when carrying out their general functions. Noble Lords will not be surprised to hear me say that that principle will play an extremely important role in the new regulatory system. It ensures that the regulators must consider whether the burdens they impose will be proportionate to the benefits that are likely to result. I am sure that that principle is universally accepted.

Amendment 42 specifically adds a requirement for the regulators to have regard to being “reasonable and fair”, as well as “proportionate”. Noble Lords will remember that my noble friend Lord Sassoon expressed support for the sentiment behind the amendment at an earlier stage. I am sure that all noble Lords would accept that nobody from this Dispatch Box would be a proponent of a new regulatory system we were creating if for one second we thought that the regulators would act in a way that was unfair or unreasonable.

Does the Bill achieve that objective? We believe that it does. The regulators will not be required to have regard to being fair and reasonable; they will have legal duties to be fair and reasonable; they go further than the amendment proposes. As we explained at an earlier stage, the regulators will have a duty under public law to act reasonably; they are also under a duty to comply with the rules of natural justice, so they will be required to follow procedures and processes that are fair.

My noble friends Lord Hodgson and Lord Flight gave a definition of proportionality. The definition that they gave was narrower than most people’s view of what proportionality means. In certain circumstances, it is a mere mathematical concept, but if I say that I am going to give a proportionate response to something that someone does to me, it is not simply calibrated or adding up figures; I think that it is seen in common parlance as being synonymous with a reasonable and fair response. As I said, the requirement on the regulators under public law to act in that way underpins that thought.

I have considerable sympathy, however, in respect of the threats that London faces as a pre-eminent financial centre. It is not surprising that Hong Kong and Singapore are growing very quickly, given what has happened to the economies in those parts of the world. You would expect growth there, although London is contracting in part because some of the activities that have been undertaken in London are no longer either profitable or, in some cases, credible. When one sees, for example, UBS downsizing significantly in London, it is not doing it because of the regulatory regime; it is doing it for fundamental business purposes, against which these provisions would have no bearing.

Where I agree with my noble friends is that we must ensure that the mindset of regulators in the UK is not negative. It has always been our intention that they would adopt a judgment-based approach; that has been stated on many occasions. That is the key to effect a change of culture in the way that the regulators work. If the amendment would have that impact, the Government might be more sympathetic to it. We simply do not believe that it would. As I said, we believe that the Bill will require the regulators not just to act proportionately but, under their more general duties, to act reasonably and fairly as well. On that basis, I hope that my noble friend will feel able to withdraw the amendment.

[Lord Hodgson of Astley Abbotts]

My noble friend will not be surprised to hear me say that I am extremely disappointed with that response. I thank my noble friend Lord Flight for his helpful comments, in particular, about effective regulation being a two-way street where people communicate issues and problems that they are facing, not in fear that they will have the book thrown at them but because it is in the regulators’ and regulatees’ interests to address problems and find solutions before they become unmanageable.

My noble friend falls back on the legal words that the regulator has to be fair and reasonable and that there is natural justice. I prefer his point about mindset. The fact is that “proportionate, fair and reasonable” imposes a different mindset on the regulator than “proportionate” on its own. He and the Government may have convinced themselves that the threat to London is coming from the natural effluxion of economic activity to the Far East. I think that they are in danger of being sadly mistaken. We have a chance in this Bill to address the problems that have bedevilled us until recently and to set out our stall for a new, judgment-based, regulatory regime, philosophy and approach. By these as by a series of other decisions taken by the Government, we are missing an opportunity which we will greatly regret having not taken in the years ahead. However, the hour is late, and though I am sorely tempted to divide the House just to have my own bit of testosterone, I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Newby]

My Lords, we all accept that the financial services sector is integral to the prosperity of the wider economy. However, we have also seen what happens when light-touch regulation and excessive risk-taking by financial institutions conspire to produce the perfect storm, culminating in the recent financial crisis. The aftermath of this, of course, is still an impediment to growth in the UK. An appropriately regulated financial sector will be key to the economy’s resurgence, and I am confident that the reforms that we are making to the regulatory system in this Bill will ensure this.

However, at Second Reading and in Committee, my noble friend Lord Sassoon listened to concerns from noble Lords on all sides of the House that the regulators would be excessively focused on their remits and would act in a disproportionate way which might constrain the financial services sector from acting to support activity in the wider economy. That is why a commitment was made to return with an amendment that would require the PRA and FCA to consider the wider impact of their actions.

Amendment 44 delivers on this commitment. It requires the FCA and PRA to have regard to the desirability of sustainable growth in the economy of the United Kingdom in the medium or long term. This is a concept with which of course it would be extremely difficult to disagree. Sustainable economy growth is desirable, and it is important that the regulators will now be required to show how they have considered this in carrying out their general functions.

To a certain extent, this gets back to the amendments that we have just debated. The regulators should not be the agents of the industry that they regulate. Regulation itself is not about enhancing the international competitiveness of our domestic financial sector, even if that is an outcome when regulation is proportionate and effective. This amendment recognises the link between an apparently appropriately regulated financial sector and the growth of the wider economy, and requires that the regulators bear it in mind. That is why the amendment I have tabled strikes an appropriate balance: it creates an expectation that the regulators must think carefully about the impact that their regulation may have on the wider economy; this is absolutely right. Seen in the light of the recent financial crisis, it is clear that taking appropriate regulatory action in good time would have served to safeguard sustainable economic growth in the medium to long term. This amendment will ensure that the regulators consider the wider economic impact of their actions. I beg to move.

[Lord Hodgson of Astley Abbotts]

My Lords, despite my disappointment over the last three amendments, I congratulate the Government on having brought forward this amendment. It follows the Government’s sensible decision earlier in the passage of the Bill to give the Financial Policy Committee an explicit objective of growth and employment. This amendment achieves a sensible and pragmatic solution, takes account of the needs of the economy and the priorities of business and the financial sector, and at the same time allows regulators rightly to focus on their important consumer protection and financial stability objectives.

There is a small sting in the tail for the Minister. Given that this is a new requirement for the regulators, I encourage him to ask the FCA to come forward with its vision of how it will interpret its regard to economic growth. The regulator is already up and running in shadow form, with designated leadership teams already starting to set out publicly their approach. It is clearly important that the will of the Government and indeed of Parliament is incorporated in that regulatory planning. I applaud the Government for bringing forward this amendment but would argue that in order to achieve their desired goal of supporting growth, work needs to begin now to set out how the regulators will interpret and implement this new requirement.

--- Later in debate ---

[Lord Hodgson of Astley Abbotts]

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

[Lord Newby]

My Lords, the Government absolutely agree that insurance expertise should be represented on the PRA board. That is why my noble friend Lord De Mauley said when we previously debated this matter that the Bank had committed to that principle and that there would be insurance expertise on the PRA board. However, we believe that it is up to the Bank to ensure that the board has the right balance of skills and experience to enable it to make effective decisions and deliver its objectives in respect of all the firms it regulates. The trouble with the amendment is that if we were to require in the Bill that the board should have insurance expertise, people would rightly ask why the Government had not made similar provision for other sectors such as mutuals and investment banks. We do not think that that is a sensible way to go. However, with the commitment that there will be insurance expertise on the PRA board, I hope that the noble Lord will feel able to withdraw his amendment.

Financial Services Bill

Debate between Lord Newby and Lord Hodgson of Astley Abbotts

Wednesday 24th October 2012 Lords Chamber

[Lord Newby]

My Lords, the noble Lord asks a number of questions. First, why might the Treasury have a role and why is the regulator not doing it already? There may be a number of occasions when the Treasury first gets information from somebody and wants to tell the regulator. There are some occasions when the Treasury might want to prod the regulator into action. I have been critical of occasions when I felt the regulator has not moved as quickly as I would have liked in undertaking investigations. This part of the Bill enables the Treasury to give it a kick if it is needed. The other point, which is a valid point, is that if there is a really serious problem of regulatory failure, this is not the only way in which the Treasury can make sure that an investigation is undertaken. The Treasury can appoint any kind of investigator that it wants. This part of the Bill simply explains how the Treasury operates and the rules which apply if there is a lesser regulatory failure which probably happened some time in the past, where it seems appropriate for the regulator to have a look. I understand the noble Lord’s concerns, but he should not be as worried as he is.

I will respond to the second amendment in this group, which we have not debated at great length. It seeks to add to the grounds on which the regulator may decide to postpone or suspend an investigation if the investigation did not meet the principles by which the investigator must abide. Unlike with the previous amendment, where we agree with what the noble Lord seeks to achieve but do not think that he needs to have his belt and braces, we think that this amendment could have perverse and unexpected effects by enabling the regulator to stop an investigation for any reason it wanted. For example, it could realise that an investigation was going to be very time-consuming and burdensome, perhaps because of the level of detail involved. Under this proposal, it could end an investigation and argue that it was doing so because the investigation breached its principle on economic and efficient use of resource. For those reasons, we cannot support that amendment.

A number of noble Lords, including the noble Lords, Lord Hodgson and Lord Flight, expressed broader concerns about the FSA and the noble Lord, Lord Hodgson, quoted Lex in aid of that. The noble Viscount, Lord Trenchard, and the noble Lord, Lord Peston, said that the FCA should have regard to competitiveness. These are broader issues that go beyond the scope of the amendments, but on the concerns expressed by Lex, I can understand why people are at this stage worrying about whether the balance that the regulators strike between the interests of the firms and those of the consumers of their products is right. We are pretty confident that it will be. The noble Lord, Lord Davies, pointed out that it is important that the regulators are rigorous and balance the interests of the firms and those of their consumers. The way in which the Bill is structured should enable them to do that and we are confident that they have that very much in mind.

Competitiveness has been debated previously and we have already agreed that we will look at this issue, particularly the degree to which the PRA and FCA should have regard to the importance of economic growth. We have said that we will return with further amendments in this area on Report, when we will no doubt have an extremely interesting debate on them. For today, however, I hope that the noble Lord, Lord Hodgson, will decide not to press his amendments.

[Lord Hodgson of Astley Abbotts]

My Lords, I am grateful to my noble friend Lord Newby for that extensive and courteous response. I am grateful to the noble Lord, Lord Flight, and the noble Viscount, Lord Trenchard, for their support. I can accept that this is a part of the Bill where the particular concerns that I have do not weigh as heavily as they did on the regulatory principles on page 28 of the Bill which we debated before we broke for the Summer Recess. I am happy to withdraw my amendment today, but I am not yet convinced that “reasonably and fairly” is not a useful addition in some part of the Bill even if it is not here. I beg leave to withdraw the amendment.

Financial Services Bill

Debate between Lord Newby and Lord Hodgson of Astley Abbotts

Monday 15th October 2012 Lords Chamber

[Lord Hodgson of Astley Abbotts]

My Lords, my Amendment 187CA in this group relates to another aspect of the operation of the Financial Services Compensation Scheme. The current wording by which the scheme operates gives it a lot of discretion in the way that the costs of the scheme are allocated. Section 213(5) of FiSMA states:

“In making any provision of the scheme … the Authority must take account of the desirability of ensuring that the amount of the levies imposed on a particular class of authorised persons reflects, so far as practicable, the amount of the claims made, or likely to be made, in respect of that class of person”.

There are two get-outs.

I make it clear that this is not about restricting the rights of consumers to obtain compensation. It is a critical and essential part of maintaining proper confidence in our financial system that there are proper and appropriate ways for people to claim and get compensation for mis-selling or other malfeasance. However, the amendment is about ensuring that the polluter pays. It has become more difficult in recent years to trace the allocations and levies made by the Financial Services Compensation Scheme to the particular class of persons and businesses to which they have been applied. Often, there appears to be a shifting of the pea around the plate, with a disproportionate share landing on those perhaps least able to complain. I hope that my noble friend will listen to the amendment with sympathy. The funding system must reflect the differences in risk and instability posed to the public and to the wider economy by firms and the financial products they offer.

I make it absolutely clear that my amendment does not enforce an unacceptable level of correlation. The words “as far as practicable” will remain, and will therefore provide the scheme with a degree of flexibility—a get-out, if you like. However, the additional words, “take account of the desirability of ensuring”, are too woolly. They lead to situations where people feel that the scheme is not operating fairly. Therefore, I would like to see those words replaced by the single word, “ensure”, as a means of ensuring that the Financial Services Compensation Scheme penalises the polluter and not the wider financial community.

[Lord Newby]

My Lords, Amendment 187AB, moved by the noble Baroness, Lady Hayter, would require the Government to notify other EU member states that the limits on compensation payments to charities in the event of a loss of their bank deposits should be reviewed. The noble Lord, Lord Peston, asked what on earth this had to do with the EU. I suspect that he, like me, had not heard of the deposit guarantee scheme directive, which is an extremely valuable piece of legislation. It means that across the EU there is a maximum harmonised limit of compensation per depositor in the case of banks or other financial institutions going bust. It makes sure that across the EU there is a common framework for paying out when organisations get into financial difficulties.

Child Trust Funds (Amendment No. 3) Regulations 2010

Debate between Lord Newby and Lord Hodgson of Astley Abbotts

Monday 19th July 2010 Lords Chamber

[Lord Hodgson of Astley Abbotts]

I support my noble friend. Clearly, we have urgent savings to make, and £500 million is no trifling sum—and there is really no alternative. If I have a problem with what we are discussing today, it is along the lines of the direction of travel, as my noble friend Lord Naseby said. I shall come back to that in a minute.

Before I get to the substance of my remarks, I declare an interest. I am chairman of a firm that provides compliance training and administrative support to independent financial advisers. Therefore, I have an involvement in the savings industry. The firm is regulated by the Financial Services Authority and I am an authorised person.

The economic devastation wreaked on our country as a whole and left behind by the previous Labour Government is well documented, and I do not propose to plough this familiar ground. Perhaps the only astonishing thing—a theme that ran through the comments of the noble Lord, Lord Davies—is that somehow the Labour Party continues to deny its involvement and responsibility. Its approach is along the lines of, “It was nothing to do with us, guv—it was all down to those Americans and their subprime mortgages”. While the subprime mortgage market may have been the spark, our economy was tinder dry, and that is down to the previous Labour Government.

If that aspect has been well documented, less well documented are the parallel ravages of the previous Labour Government on the savings and financial well- being of private individuals. In 12 short years, the Labour Government effectively brought to an end every single final salary private sector pension scheme. It is true that this would have been a difficult time for private sector pension schemes. Increasing longevity would have caused difficulties to their operation. The increased lifespan is devoutly to be looked for and welcomed on an individual basis, but it represents a nightmare for a pension fund trustee. So there would have been problems—but the Labour Government delivered three hammer blows. First, there was the tax on pension funds; the Chancellor clearly believed that it was a goose that would continue to lay golden eggs. Secondly, there was the introduction of a pensions regulator with varying and often capricious powers. We saw the impact on management companies of the different valuations that could be applied to pension fund deficits, with the regulator nearly always taking the most extreme deficit. Last but not least, the previous Government created a perfect storm for pension funds, with low interest rates, which meant that the discount rate applied to the liability was low and therefore liabilities were high, and there was a collapse in asset values, which meant that the assets held for their discharge were reduced. There was an increasingly large deficit, so any sensible board of directors closed the scheme to new entrants, then ceased further accruals, then moved from 60ths to 80ths—and so on. This was a major plank for our savings culture, which was removed in 12 short years by the Labour Government, unless you were in a public sector scheme, where inflation-proofed pensions remained the norm. But that is for another day.

No less important was the attitude of the Government towards spending, which created a change in social attitudes to debt and to saving. If the Chancellor of the Exchequer—later the Prime Minister—claims that he has abolished boom and bust, it is not surprising that change follows. Credit card debt soared while long-term savings plans were cashed in, in a way that was almost certainly bound to earn the person who had taken them out a less than adequate return.

The consequence was the collapse of the savings ratio. When the Labour Government came to power in 1997 the ratio was 10 per cent of disposable income; by 2007 it was 2 per cent. So when the noble Lord, Lord Davies, puts down a Prayer about fostering a savings culture, he will understand why, in the light of that record, I have a sense of slightly hollow laughter. The noble Lord talks about a black hole opening up for 18 year-olds. It is opening up not because of the removal of the child trust fund but because of 10 years of incompetent economic stewardship by his Government.

Where I agree with the noble Lord is that we cannot allow this situation to continue—if we do so, our fellow citizens are going to face a difficult old age. What to do? Saving, in my view, is about creating the right habits and explaining that, because of the magic of compound interest, putting small sums aside regularly over time can create large sums over 20, 30 or 40 years. We see this in mortgage repayments. A payment each month pays off the interest but also some of the principal, so that at the end of the term the mortgage has been paid and the house belongs to the mortgage holder. Of course people are aware of the direct debit and of when interest rates rise, but that becomes part of the landscape. We need to seek to achieve this on a much wider basis.

In two places the Labour Government did some sensible things. The first was that they launched and maintained the ISA programme, a sensible way of increasing annual savings by individuals. The second was the concept of a child trust fund. The unique reference number referred to by my noble friend Lord Naseby stimulated parents to do something for the financial future of their child. Evidence from industry, as my noble friend said, suggests encouraging trends in the way that parents and families started to contribute as a result of this stimulus, and there was an increase in the number of children having regular long-term savings plans.

As I said, I agree that the country cannot afford to make a contribution to each child’s trust fund. Is it right, however, to wind down the structure that has given rise to this increasingly successful savings policy? Surely £5 million a year for administration is a low cost in comparison to the potential social benefits. If in future we continue to send to the parents of every child their unique reference number, it can do no harm. It may well stimulate some parents, who otherwise would have done nothing, to start saving for their children. One day Conservative policies will have revived the financial health of the nation, and maybe at that point it will seem to be a useful way of encouraging savings and initial payments will be resumed. It would be a pity if at that time we had to recreate the administrative back-up that we may shortly be going to demolish.

I hope that my noble friend will think carefully about this final step before statutory proposals are brought forward in the autumn. I entirely support the need to make immediate savings but we must not, in the old phrase, spoil the ship for a ha’p’orth of tar. Creating a savings culture is critical to our country’s future prosperity, and child trust funds could provide a useful element of that.

[Lord Newby]

My Lords, over the coming months and years a series of public expenditure cuts will no doubt come forward that will make people on these Benches feel extremely uncomfortable,. This, however, is not one of them. We opposed the introduction of child trust funds at the start, before there was a financial crisis, for a number of reasons that in my view have not been seriously undermined by the experience of the child trust fund programme.

First, we were very sceptical of the programme because we felt that it was poor value for money. We felt that the principal beneficiaries of it would be middle-class parents and middle-class families who saved every last penny they could tax free, and that the poor—because they were poor—would not be able to add to the programme. As the noble Lord, Lord Liddle, said, poor children will undoubtedly end up with a nest egg aged 18, but middle-class children will end up with a big nest egg aged 18 because their parents will have taken advantage of very significant tax breaks. This view has been borne out by the take-up of child trust funds in constituencies. In the poorest constituencies, 40 per cent of parents have not even exercised their option on where the trust fund should go, far less put any money in it. Therefore, our view was that the scheme was not such a wonderful measure in reducing wealth inequalities—far from it, as the wealthy were the principal beneficiaries.

Secondly, it always seemed to us implausible that this scheme would somehow inculcate a savings culture among young people as young people were not saving. The Government were saving on their behalf and in a minority of cases their parents were also saving on their behalf. Why would that inculcate a savings culture in a 10, 12 or 15 year-old? Many children will simply be unaware of the scheme as they are not putting anything into it; they are passive beneficiaries of it. Therefore, I do not believe that it inculcates a savings culture, nor do I see how, in itself, it helps improve financial literacy.

The third issue we have with this flows from that. I am a great supporter of thrift. When I was a boy, my parents practised it and encouraged me to practise it. However, the thing about thrift is that you save up and forgo something now so that when you get the benefit of it at a later date, you value it because you know that it has cost you something in terms of consumption forgone. The problem with this scheme is that there is no link between the contribution and the benefit which you achieve aged 18. Noble Lords have said that 18 year-olds will use a nest egg they are given for all kinds of worthy purposes and that it will be used to help their education. On an earlier occasion, a noble Lord from the Labour Front Bench suggested that 18 year-olds might use this nest egg to put down a deposit on a house. I do not know whether my experience of 18 year-olds is totally different from that of other noble Lords who have spoken but, frankly, I do not believe that the mentality of most 18 year-olds—poor or affluent—is to take a nest egg to which they have not contributed and use it for long-term savings and benefits. To me, that goes against the grain of human nature and nothing that I have seen in my experience of 18 year-olds suggests that human nature has suddenly changed.

The strongest argument for child trust funds is that it must be in the interests of society for parents to save funds so that their children can be helped when they have more requirements. At the moment, parents can save £5,100 tax free in an ISA, which can then be transferred to their children at age 18, or whenever, to benefit them. If the money is transferred in that way, I suspect that the relationship between the parents who have saved the money and their children will mean that it is more likely to be used for a positive purpose. The tax free ISA limit of £5,100 is far beyond the savings capability of a family on a median income. It offers plenty of scope for parents who have a desire to save for their children to do so already. There may be an argument for marketing ISAs which may eventually be used to provide a nest egg for children, but the benefit in terms of taxation is already there in ISAs, and the child trust fund, almost by definition, can be of additional benefit only to parents who have enough money to put not only into an ISA but into a child trust fund. That is not the cohort of parents who the proponents of child trust funds—