Financial Services Bill

Lord Phillips of Sudbury Excerpts

Monday 26th November 2012 Lords Chamber

[Lord Flight]

My Lords, I raised the issue of the 15-year longstop in Committee. The Minister gave me some comfort that the Treasury was looking at this.

I have always thought it unreasonable in principle that financial advisers should be picked on as a group not subject to the statute of limitations. A second-hand car dealer is subject to the statute of limitations, as are all sorts of other people who might sell people other products. It is particularly important right now because with RDR, there will be a large number of smaller financial advisers going out of business and wanting to close down their businesses. As long as the statute of limitations does not apply, those businesses have an open-ended possible liability.

A survey was done a while back by the Association of Professional Financial Advisers, which found that 75% of consumers thought there should be a limit applying to financial advisers. Interestingly, as many as 23% felt that all liabilities should cease once someone ceased to be a client of an adviser.

I am hopeful that the Minister may have something a little more explicit to tell the House today but my strong request is that this matter should be addressed now. If it is, it will make what is going to happen next year in terms of the impact of RDR a great deal more manageable. I beg to move.

[Lord Phillips of Sudbury]

Can I now intervene, as I intended to, before the noble Lord, Lord Flight, sits down?

[Baroness Garden of Frognal]

It has nothing to do with sitting down.

[Lord Phillips of Sudbury]

I thank my noble friend. I withdraw the sedentary remark. The noble Lord is experienced in these affairs, so can he assure the House that the situation will not arise where somebody with no financial sophistication whatever enters into arrangements with one of the agents about whom he is talking—for example, in respect of a pension—only to find 15 years later that there has been a gross failure of propriety?

[Lord Flight]

I do not entirely understand the circumstances that the noble Lord envisages. Someone may have been advised to take out a pension with one of the life companies through their financial adviser. It is possible that the individual’s circumstances, the law or the economic circumstances will change and that, with hindsight, the individual might have taken out a different sort of pension. At the end of the day, the life company is the provider of the pension and it is that company with which the individual will be dealing in their retirement. I think that a 15-year period is fair for a financial adviser, as it is for any other occupation in which an individual is engaged.

[Lord Phillips of Sudbury]

Very often a person taking out a pension, in particular, is wholly dependent upon the advice of the financial adviser.

[Baroness Garden of Frognal]

I remind my noble friend that on Report one may speak only once to any amendment.

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[Lord Hodgson of Astley Abbotts]

My Lords, I shall speak also to Amendments 84B and 116A. This issue has arisen since we went through this part of the Bill in Committee. I seek some ministerial reassurance. It concerns common investment funds and common deposit funds. These provide means by which charities—particularly smaller charities—can access financial expertise that they could not do on their own, in essence by entering into some form of pooling arrangement. The advantage, therefore, is that they can hire a more sophisticated and expert manager than they might be able to do on their own because they are small and, by pooling, they can also possibly obtain reduced fees.

I declare an interest as chairman of the Armed Forces Charities Advisory Committee, which is a common investment fund with some £200 million under management and acts for several hundred small, individual service charities from the Army, the Navy and the Air Force. In part, I am the author of my own misfortune because the investment activities of these groups are undertaken by FSA-regulated firms but the actual vehicles are regulated by the Charity Commission. In my review of the Charities Act, I recommended that they should be transferred to the Financial Services Authority, because they are clearly investment vehicles and, although the Charity Commission is a splendid body of men and women, it is not equipped to undertake financial regulation. I have concerns about the future of those groups in our brave new world.

Briefly, common deposit funds are often seen as money market funds, but they are not, because they are not unitised. Each depositor has an aligned deposit for the individual charity. They do not pay out all the interest; they can therefore accumulate modest reserves over time. The amendment enables them to lend at longer maturities; they do not have to lend it all at very short maturities. In consequence, because they always have a leaner operating structure, they can offer better rates of interest to their participating charities. For example, at the end of September 2012, the average common deposit fund interest rate was 1.075%, compared to general availability of 0.627%. That is an improvement of about 0.5%, which is obviously valuable to charities in these days of very low interest rates. They are widely used; there are 160,000 registered charities, but there were 44,000 depositors in those funds at the end of September, and 93% of them have less than £100,000 as the deposit.

What is the problem? The problem is that it is a very small group indeed. There are only four deposit funds and no more will be created. The reassurance I seek from my noble friend is that the FCA will be sympathetic to that group amid all the other pressures that it will face after it becomes empowered. Will it be prepared to consider innovation even-handedly, or will one size fits all be the default option? If it were to impose one size fits all, which would probably be to treat them as money market funds, the funds would have to unitise. They would have to pay out all their reserves and therefore not be able to offer the improved interest rates that they can now.

These three amendments are an attempt to fly some air cover over common investment funds and common deposit funds. The amendments apply to both CIFs and CDFs. They would require the FCA or the PRA to consult on any rule which applies to CIFs and CDFs, to have regard to any representations made and to carry out an impact assessment considering the differences between CIFs, CDFs and CISs. Amendment 116A gives the Treasury the power to exempt CIFs and CDFs from any relevant provisions made under FiSMA 2000. The effect of inserting a consultation clause at the bottom of page 102 is to oblige the FCA to consider the particular features of those two instruments and to empower the Treasury to exempt them from rules that the FCA and the PRA may wish to make under the alternative investment fund managers directive, where it is willing to do so.

As I said, they are modest amendments for a small group of funds, but they are designed to protect them because they are performing a very useful service. I regard how they are in fact treated in the brave new world as a true test of all the FCA’s fine words about facilitating innovation. I look for my noble friend’s reassurance on that, and I beg to move.

[Lord Phillips of Sudbury]

My Lords, I support, dot and comma, everything that the noble Lord, Lord Hodgson, said. The three amendments in this group are couched in prudent terms that give discretion to the FCA to recognise the fact that, to use the adage, one size does not fit all. If there is in this world one great gulf, it is between some of the more sophisticated, City-type deposit funds and, at the other side of the sea, those of charities. The discretion is confined expressly to charities, or funds, I should say, established under the Charities Act 1960, the Charities Act 1993 or the Charities Act 2011, which, in my view, provides the necessary reassurance that this cannot be a horse that runs wild. I hope, therefore, that the Government will feel free to accept this group of amendments.

[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.

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[Lord Peston]

My Lords, Report is a very late stage of a Bill. I must confess that one of the benefits of my noble friend’s amendment is that I realise yet again that I do not understand a vital section of the Bill. Before elaborating on that, I will say that I entirely agree with the noble Viscount, Lord Trenchard, that competitiveness in this area, as in virtually every other area, is of the essence. If we are interested in protecting the consumer, the best way of doing that is with competition between the suppliers of whatever is being supplied.

My noble friend’s amendment is about co-ordination of the FCA and the competition authorities. My difficulty—and I am sure that I am at fault, and not the drafters of the Bill—is that this whole section of the Bill does not seem to be specifically about the relationship between, in this case, the regulator and the competition authorities, or about the provision of financial services. I am puzzled, and so the Minister replying from the Front Bench could help me a great deal if he explains why subsection (5), lines 33-35, refers to,

“the supply or acquisition of any goods or services in the United Kingdom or a part of the United Kingdom”.

In other words, it looks as if this is a directive to I do not know who, to do with competition throughout the economy. It does not say “through the acquisition of financial services”, let alone my noble friend’s additionally vital point: financial services and banking services. I therefore make a plea for clarification of what this is about.

The central question is that although we favour competition, the one area we do not favour is competition between the regulators and the competition authorities. If there is one area where competition would not be appropriate, it is that one. They need to get their act together and decide who does what. What bothers me is that, even within the context of my noble friend’s amendment, it is not clear what the memorandum of understanding would have as its basic principle. Wearing my economics hat, I am inclined to say that when it comes to competition the dominant authority should be the competition authority. I am not sure whether my noble friend took that view, or whether he left it as an open question, but it is certainly something on which we need to take a view.

I can find no other way of interpreting the Bill, because it is all about advice to the regulator. My reading of the Bill is that the role of the competition authority is to warn the regulator that what you are doing may distort, limit and damage competition generally. In other words, the lead body in this is the competition authority. I put these as statements, but they are meant to be put interrogatively. In order to understand this section of the Bill, I would like to know the answers to my questions. Who is to take the lead on this? Who has most responsibility to promote competition, and who must therefore take heed of the other if what they are doing will damage competition?

I am sorry that this is all a bit convoluted, but I am not to blame for that. What is to blame is that this Bill is a mess, as my noble friend Lord Barnett and I keep pointing out. It was drafted too quickly, it has not been thought through, and there is no better example of that than this section.

[Lord Phillips of Sudbury]

My Lords, I understand why this amendment has been brought forward. My concern is that the FCA has three operational objectives under new Section 1B(3) to be inserted into FiSMA; namely, consumer protection, integrity and competition. I am not entirely satisfied that Amendment 86A necessarily protects the integrity objective. I have been concerned throughout the Bill that, as between these three objectives, integrity is the absolute necessity of any financial market and has been woefully lacking in recent years. If the Minister has a view on whether Amendment 86A respects the integrity objective, I am sure that the House will be grateful to know the Government’s view. Otherwise, I am concerned on that basis.