Taxation: Tax Havens
Lord Phillips of Sudbury Excerpts(11 years, 7 months ago)
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Lord Phillips of Sudbury
My Lords, does my noble friend agree that the root of the problem, beyond discussion and consensus, is a grotesque disparity between the tax authorities and the taxpayers in this country? It is not David and Goliath but David without a sling and Goliath. Unless we do something about that disparity between the numbers and quality of advisers available to unscrupulous taxpayers, on the one hand, and those available to HMRC, on the other, we can forget about the rest.
Lord Newby
Absolutely, my Lords. That is why the Government agreed to put another £900 million during the lifetime of this Parliament into this kind of activity and why we announced in the Autumn Statement that we would add to that another £77 million, which we reckon will bring in £2 billion. The other important thing, in addition to this equalisation of technical expertise, if you like, is that consumers should continue to shine a spotlight on companies that may not be paying the amount of tax that most people would think is reasonable.
Financial Services Bill
Lord Phillips of Sudbury Excerpts(11 years, 9 months ago)
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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?
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.
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.
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.
Financial Services Bill
Lord Phillips of Sudbury Excerpts(11 years, 9 months ago)
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Baroness Hayter of Kentish Town
My Lords, this amendment stands in the name of my noble friend Lord Eatwell and myself. It relates to passporting and, in particular, where a UK-authorised bank works in another EEA member state. Our concern, as we raised in Committee, is about adequate protection for consumers in those EEA states. This amendment would require the relevant authority, be it the FCA or the PRA, to require banks to make clear, prominent warnings to consumers where their deposits are not covered by the Financial Services Compensation Scheme. It is fairly obvious that it is vital that consumers know precisely and clearly whether their deposits would be covered by this compensation scheme and the extent of such coverage.
In Committee, the Minister assured us that it was sufficient for such a requirement to be in the regulator’s rule book. We have considered this further and we would beg to differ. It is such an important area of consumer protection and really important for the confidence in our banks that we must ensure that every depositor knows the security of their deposit. Furthermore, given that we saw a range of views in Committee on where and how such warnings to customers should appear, it is important that consumers themselves are consulted on this so that the most effective method of communication is used. I beg to move.
Lord Phillips of Sudbury
My Lords, I am generally sympathetic to Amendment 77AA, but what would the consequences be of a breach of its provisions?
Financial Services Bill
Lord Phillips of Sudbury Excerpts(11 years, 9 months ago)
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Lord Peston
My Lords, I rise to support both of these amendments in the names of my noble friends. I think that my noble friend Lady Hayter is right to place all of this in the context of the experience of the past few years. The general proposition on which our discussion must be based is that, if the financial services sector misbehaves, we all suffer—not merely those who buy financial products directly, but everybody in the country. I use the word misbehave advisedly. Systemic risk and systemic events do not appear as if by black magic but result from the way that people who work in the financial sector conduct their business.
Why do they occur? They occur because of the way that people in the sector do things. The solution to the problems must be found partly through regulation, as the Bill recognises. On the one hand, we must bring in regulation to deal with some aspects of this matter. On the other hand, improved behaviour by the enterprises operating in financial services is not merely required but urgently required, as I think my noble friend said. Until recent events emerged I, for one, was not aware of the lack of professionalism and the seeming total unconcern with ethical standards on the part of people in the sector. Whenever I reflect on it, I still find it astonishing that apparently decent people behaved like a bunch of crooks, not to put too fine a point on it. They did not mis-sell products by chance; they deliberately mis-sold them.
Clearly, something must be done. My noble friends are right to see the Bill as the ideal vehicle for doing something, and for tabling amendments to it that would actually achieve something. The object is not to damage the sector, as it is a very important one that earns a lot of money for our economy, but to make it fitter for purpose, if I may use a cliché. My noble friend Lady Hayter is entirely right when she says that as a minimum—I underline “minimum”—there must be a code of conduct which is mandatory and enforceable. I was not clear whether she had in mind all sorts of penalties rather than just the most draconian of all of saying, “You cannot work in this sector again”. Perhaps she will clarify that when she sums up.
I hope that the Government understand all this. Certainly the public understand these problems. I also hope that the Government do not play their usual card and tell us that these amendments are not necessary because buried somewhere in some bit of fine print is an inferior version of what they do. In my judgment these amendments are necessary and the sooner we get them on the statute book, the better.
Lord Phillips of Sudbury
My Lords, I have amendments in the next group and so will keep most of my comments on this aspect of the Bill until then.
I wholeheartedly endorse what the noble Baroness, Lady Hayter, said in moving this amendment and, indeed, what the noble Lord, Lord Peston, has just said. The problem for all of us, most particularly my noble friend the Minister, is to try to contrive a state of affairs for the future which is fundamentally different from that which has prevailed hitherto. I think everybody in the House agrees that we cannot go on as we have done. The City of London, which has been the jewel in our economic crown, is now so tarnished and undermined by its own conduct that its future is far from certain. I have been involved in the City of London since 1964. It has strayed so far from its own mottoes of “My word is my bond” and “May God direct us” as to become almost laughable—indeed, “tragic” is a better word.
Lord Phillips of Sudbury
My Lords, I have two amendments in this group, Amendment 26D and Amendment 27A. As I said during debate on the last group of amendments, this part of the Bill is extremely difficult and I make no pretence that what the Government and indeed the parliamentary draftsmen are contending with here is other than the greatest test of their skill.
None the less, I think that they have got the balance wrong. Noble Lords will know by now that there are three objectives that must be satisfied as far as possible under the Bill: the consumer protection objective, the competition objective, and what is called the integrity objective. My two amendments are designed to buttress the last of those three: the integrity objective. I suggest to your Lordships that of those three objectives, integrity must surely come first. It is frankly no use if the competitive aggression of the City of London remains the highest on the planet, bar perhaps Wall Street, if the standards of integrity are wanting. The same is true of consumer protection.
However, the Bill gives priority to competition over consumer protection and integrity. I dare say my noble friend the Minister will deny that, but I leave that to your Lordships to judge. Having set out those three objectives, proposed new Section 1B(4) to the FiSMA on page 20 then says the following:
“The FCA must, so far as is compatible with acting in a way which advances the consumer protection objective or the integrity objective, discharge its general functions in a way which promotes effective competition in the interests of consumers”.
That is either a pointless subsection because it has no meaning whatever, or it is a subsection which gives priority to competition. One does not need to labour the point that the tragic and appalling depths to which the City has sunk over recent decades and which it is not yet out of—let us make no bones about it—have their source in simple, ethical failure, and not in a want of competence, aggression of trades, shrewdness or anything else. We as a Parliament really owe it to the country—and, in a strange way, to the City itself—to make it clear that above, before and after all else it is integrity which must be supreme.
I must confess that I am now sorry that I did not attack proposed new Section 1B(4) head on. With other amendments, however, I have sought to strengthen the arm of the regulators in Amendment 26D, which puts as one of the issues that has to be considered when the regulator construes the integrity objective what I call,
“the fairness and integrity of policy and conduct of those directing or operating in the financial markets”.
It is a bit strange that there is no reference in this huge Bill to the regulator in relation to the individuals who are conducting business in the financial markets. My second amendment is to the proposed new section that defines the competition objective. It requires, among the matters to which the FCA must have regard,
“how far the methods or culture of any competition may undermine the integrity objective”.
I have just one more thing to say. The regulators in the City—as I said earlier, I have been there, mainly, not as a City player but within the City and acting occasionally for City entities and individuals—have an almost impossible task. That is because the law on regulation is now so voluminous and complicated, and those against the regulator are so clever, intensive and overwhelming in the resources that they can bring to resisting when it tries to intervene, that we owe it to what we are trying to achieve and, in aid of that, to the regulators to make it clear beyond peradventure that although this new Section 1B(4) will give competition priority between the three factors, none the less these additional subsections would introduce the conduct of the individuals and the concept of fairness into the equation, because they are notably absent in the wording of this Bill.
I have dealt with some of the regulators over the years and I can only pity them. We need to think what it is like when they are under huge attack and dealing with heaven knows how many cases, all of them complicated and all against businesses which will array against them 10 times the number of professionals that they have to deploy. We really need to make life that bit easier for them so that some cynical and crafty lawyer cannot say, “If you look at that clause and that clause, then that schedule and that schedule, then this Act and that Act and the rest of it, it is not clear. So, old friend, go ahead”. We do not want that.
Lord Barnett
The noble Lord makes a good point. He should perhaps have talked to some of his friends on the last group of amendments, when they all voted with the Government. I wonder what they might do this time. Has he convinced them, I wonder? We will have to wait and see. I was surprised by the proposed new section to which he referred because I thought I had understood the “may” or “must” argument. Those words are used profusely throughout the Bill. Indeed, the noble Lord, Lord Sassoon, told us that he had asked officials to go through the whole Bill and work out which of them they should keep. What I had not appreciated—this is a point drawn to our attention by the noble Lord, Lord Phillips—is that on page 20 we have, in new Section 1B(4), another method of having “must” or “may”. We have a qualified must:
“must, so far as is compatible”,
with the later words. In practice, it is not “must” at all. The noble Lord wants to strengthen it, and I agree. We need to strengthen the arm of regulators everywhere. That is why I voted for the previous amendment.
We may be told that we should wait for the banking Bill, which we have in draft. We cannot be sure that that Bill will appear in that form. I know that at least one noble Lord on the Opposition Benches wants to insert in it something that the Government do not have in mind to insert; namely, a Glass-Steagall amendment. The Minister will know what I mean. I do not know whether he has committed himself or the Government to the draft Bill appearing in the new year. I think he said that we will have it in the new year. Perhaps he will confirm that. We clearly need a banking Bill.
I understand when the Minister says that the Government will take into careful consideration what the banking commission says, but he has not committed himself on that either. What exactly are the Government committing themselves to? They have set up this very high-powered commission, of which colleagues on all sides of the House are Members, and I understand that they are doing a first-class job, but we have been told only that he may, after serous consideration, introduce what the commission recommends. Will he firm that up this afternoon? Will we definitely have a Bill early in the new year, based to a large extent on the work of this high-powered commission, that will deal with some of the points that have rightly been raised about integrity and care? All these matters could be in a banking Bill as well as in this Bill but, for the moment, we have only this Bill. I support my noble friend Lady Hayter and the noble Lord, Lord Phillips. I will support him when he moves his amendment, and I hope his colleagues on the Liberal Democrat Benches will do the same.
Lord Hodgson of Astley Abbotts
I was not aware that I said that everything in the City was perfect. I said that integrity lies at the heart of the financial services industry, as indeed it lies at the heart of most commercial endeavour. I said that there were clearly areas where the City had fallen short, but I pointed out to my noble friend and to the noble Lord, Lord Peston, that the significant influence function committee has very considerable powers that it has been exercising with increasing strength in recent years. Therefore, I doubt that we need amendments such as this.
Lord Phillips of Sudbury
I am a bit confused. If the noble Lord absolutely agrees with me on the primacy of integrity, he cannot have read proposed new Section 1B(4) of FiSMA or he would not be content to oppose these amendments. New Section 1B(4) clearly states that the three objectives are equal but one is more equal than others—namely, competition. If he agrees with me and if one is going to be more equal than others, it should be integrity.
Lord Hodgson of Astley Abbotts
My Lords, I am not on the Front Bench, but as I read it, proposed new Section 1B(4) gives equal weight to these objectives. It states that in,
“so far as is compatible with acting in a way”,
the three are equal. I agree that integrity is extremely important, but we are not in a position where we want to avoid the other objectives, which have a real place in the creation of a dynamic City that is competitive on the world stage.
Lord Newby
My Lords, perhaps I may remind noble Lords that the rules of the House are that on Report, Members speak once on an amendment.
Financial Services Bill
Lord Phillips of Sudbury Excerpts(11 years, 9 months ago)
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Lord Phillips of Sudbury
My Lords, my name is on Amendment 31, but before saying a word or two about that I would like to thank my noble friend the Minister for government Amendment 26, which is surely another big step forward to take account of social investment.
Amendment 31 is a harmless amendment, I am almost inclined to say, which gives a bit of flexibility in the light of experience for the Government to amend the considerations to which they must have regard when considering what degree of protection to make for consumers under proposed new Section 1C. That seems a bit of good common sense, so I hope that the Government will accept it.
Baroness Noakes
My Lords, I hear what the Minister said about the drafting of Amendment 26 not referring to social investment or anything like that. As drafted, however, it says that the things which the FCA must take into account include,
“the differing expectations that consumers may have in relation to different kinds of investment or other transaction”.
Read as it is, that seems to require the FCA to take account of consumers’ expectations, whether or not they are reasonable. So if consumers have unrealistic expectations about what they will have in return from their pension investment, for example—and that is a fairly widespread misconception—because the Government have chosen to use this unspecific form of drafting this could quite easily be interpreted as applying to expectations that operate in a quite different sphere from that intended. While the Government might say that it is intended only for social investment, these are clear words; they do not need any other explanation from the Government to make them understandable. It may be dangerous in its current drafting to leave it without the reference to social investment that my noble friend’s Amendment 31 has. His amendment is clearly rooted in what it is that is trying to be achieved.
Lord Newby
It is not all over the place because people who are investing in these products are doing so for different motives. They are doing so because they want a project to be successful and to achieve a social outcome. That is not the kind of product that one normally associates with a product that is limited to sophisticated investors, so I think that the noble Lord is talking about two different sorts of products entirely. Very often, the products that are marketed to sophisticated investors have the attraction that, if all goes well, they will bring a larger than average rate of return. Nobody expects the kind of products we are talking about here ever to be generating vast returns for anybody; that is not their purpose. The purpose is to get new money into socially desirable areas of activity. There is a distinction and I hope that he is persuaded that we are not all over the place.
Although I was beguiled, as always, by my noble friend Lord Phillips’ comments about my accepting Amendment 31, I am sorry that I am not able to do so. I think that our amendment does the business.
Lord Phillips of Sudbury
I am terribly sorry to interrupt my noble friend. He says that Amendment 26 does the business. With respect, Amendment 31 is a very gritty one: it simply gives the Government of the day the chance to amend, or add to, the crucial provisions by order. Surely that is desirable, because we wait to see how all this is going to work out.
Lord Newby
Yes, we do indeed, but the government amendment is broader and gives considerable flexibility to the FCA in the way that it deals with this new mandate.
The noble Baroness, Lady Noakes, raised the question of what happens if consumers have unrealistic expectations, and she thought that this could, in effect, be a dangerous amendment. I do not think that it is, because I do not believe that this is the way that the amendment will be interpreted by the FCA when it looks at products in this area and gives advice about them. While I can see where she gets the arguments from, I am confident that the FCA will ensure that we do not have the kind of dangerous consequences which she mentions.
Lord Phillips of Sudbury
My Lords, I support the sentiment of the noble Lord’s amendment. He is absolutely correct in diagnosing the woeful inadequacy of education for ordinary pupils as being a source of trouble now and the problem is getting worse. I should declare an interest as the founder and now president of the Citizenship Foundation. We work with over half the state primary and secondary schools providing citizenship education, including a very big vein of financial education which was for many years supported by Deutsche Bank. I wonder whether this amendment attacks the issue in quite the right way in that it seeks to insert, as a matter of primary law, financial literacy into the core education curriculum. That has been hugely debated for the past year or more and I am not even sure that Mr Gove has not already come out with his latest proclamation on what shall be the core curriculum in the future.
The noble Lord, Lord Flight, is absolutely right in the broad thrust of what he says. As with my complaint about the failure of governments of all persuasions to provide adequate implementation resources for legislation such as that we are putting through in this Bill, so too governments of all persuasions fail consistently to give our young people the chance to be citizens with sufficient knowledge and confidence to deal with the complicated world they are supposed to be citizens of.
Lord Deben
My Lords, I would like to support the comments of the noble Lord, Lord Phillips. This may not be the right amendment but I hope the Minister will accept its thrust. It seems to me very curious how the education curriculum excludes for many schools and scholars two issues which may be of most importance to them in future life. One is financial literacy, which should be taught to boys and girls, and the other is proper cooking, which should also be taught to boys and girls. The obesity problem which we have today is very much affected by the fact that we do not seem to be able to produce at home the food which enables us to have a proper balance. The financial problems we have today seem to be very much affected by the fact that we do not seem to be able to produce in the average family the ability to make the sort of decisions which necessitates a basic understanding of the way in which finance works.
I hope the Government will not just brush this amendment aside on the basis that it does not quite work. I think it probably does not quite work but I hope the Government will take it seriously as one of those things that we really have got to stop hiding from. If young people do not learn how to balance their budgets and do not understand the basics of finance, it will not be surprising that financially illiterate people will make choices they should not make. The fault is not theirs. It is the fault of an education system which has decided that these necessary tools of life can be left on one side. I hope that the Government will take seriously the amendment of the noble Lord, Lord Flight.
“( ) the fairness and integrity of policy and conduct of those directing or operating in the financial markets”
Lord Phillips of Sudbury
My Lords, it is now three and a half hours since we had the debate on this amendment and scarcely anyone who was present then is present now and vice versa. Therefore, it would be rather fruitless to do as I had intended originally and put the amendment to the vote. However, I shall bring back the principle involved—which is the primacy of integrity over the other two objectives—at Third Reading. On that basis, I withdraw the amendment.
The Deputy Speaker (Lord Geddes)
My Lords, as the noble Lord has spoken to the amendment, I must give the opportunity for other noble Lords to speak if they so wish.
Financial Services Bill
Lord Phillips of Sudbury Excerpts(11 years, 9 months ago)
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Lord Flight
My Lords, I do not particularly see how having a debate about the appointment after the governor has been appointed does very much to improve accountability. Ongoing accountability is needed. The debate is whether or not that should be through the Treasury Select Committee, or whether potentially there should be much greater constitutional development in terms of appearing before one or both Houses of this Parliament, in the sort of way that occurs in the USA. I agree with the principle that there is a great deal of power, which needs to have some accountability. Looking back over the events of the past five years, there was certainly a period between autumn 2007 and summer 2008 when it was very clear that the Governor of the Bank of England was completely unaware that a major banking run was overtaking this country. A bit of accountability and some questions from this House or the other place would perhaps have stirred things up.
Lord Phillips of Sudbury
My Lords, I concur with what the noble Lord, Lord Flight, has said, and I am a bit foxed by the way in which the noble Lord, Lord Eatwell, introduced this amendment. I think I heard him say that these appointments have become more and more politicised, and that he regretted that. It strikes me that to require a debate to be held in the House of Commons after the appointment has been made is an invitation to the utmost politicisation, especially because, as far as I can see, there would be no consequence to that debate, in that the appointment would already have been made.
Lord Sassoon
My Lords, before I turn to the detail of this amendment, I thank the Bill team for dealing with a significant hatful of amendments, this being the first, that turned up from the noble Lord, Lord Eatwell, rather late yesterday evening.
Lord Eatwell
My Lords, once again, we return to an issue that we discussed in Committee and I promised at that time to return to it on Report. I am keeping that promise. Subsection (6) of new Section 9A requires the court to review the financial stability strategy once every three years. That is far too long. Let us consider what has happened over the past three years. Since 2009 there has been a fundamental change to the overall economic environment, a radical change in government policy, and a double-dip recession. Really significant things have happened, which should be taken on board in assessing the strategy. The idea that, over that period, the court would not review the financial stability strategy in the light of events is, I believe, inconceivable. If the court really is going to review the strategy in the light of events, the markets need to know that. A regular report once a year would be a significant reassurance, even if that report says no change. Indeed, that would be a significant reassurance to the markets that the financial stability strategy is unchanged.
I quite understand that strategies are not designed to be the creatures of current events, but it is important to learn from events and not plough on regardless when the facts change. An annual review would provide the court with ongoing insights into the systemic risks associated with the financial stability strategy. That is far better than a review which is postponed, as facts change, for three years.
Let us then suppose that something really dramatic happens so that there has to be a review before the three-year time limit is up. What effect will that have on confidence? How much better to pursue the reasonable strategy of an annual review, both to ensure that the financial stability strategy is up to date and to provide appropriate confidence that the Bank’s strategy deals with matters with which the markets are concerned. I beg to move.
Lord Phillips of Sudbury
My Lords, I wonder whether the noble Lord, Lord Eatwell, has taken sufficient account of the provision in proposed new Section 9A(1)(b) that allows the court to review the strategy at any time. There is reference later in the proposed new section to revision of the strategy. I would have thought that those provisions covered precisely the concern that he correctly raised.
Lord Hodgson of Astley Abbotts
My Lords, I am slightly concerned at the proposed obligation to conduct an annual review. The role of directors is constantly to keep a strategy under review and to see whether it is still relevant. However, to impose this would impose a burden. A proper strategy review is an extremely expensive and far-reaching undertaking. It would be far better to have a backstop of a three-year requirement and rely on the good judgment and good sense of the directors, in particular the non-executives, to call for more frequent reviews as and when they are needed. It is inconceivable that we would go through the sorts of events that we have been through since 2008 and that non-executives would sit and say, “We do not need to look at the strategy”. It is part of their role to do that and we should rely on their judgment, not on process, with a backstop of the three years, as proposed.
Lord Eatwell
My Lords, we are debating two things at the same time. I will refer first to my amendment dealing with the timing of reviews of the financial stability strategy. Writing into the Bill that there should be a backstop of three years is a major mistake because it creates the possibility—even probability—that a review will have to take place in a shorter timeframe, as the noble Lord, Lord Phillips, pointed out. If that is done, what will be the effect on confidence? It will give the impression that the Bank is panicking and is not willing to go to its three-year period; it has suddenly had to shorten things. The reaction will be: “My gosh, something is really going wrong”. That is why the notion of an annual review has solidity and regularity. It fits in with the publication of the financial stability review, which is twice per year. So every year there would be a review, even if it endorsed a policy of no change to the financial stability strategy. Including the three-year figure is a major mistake because it will tend to excite apprehension when reviews take place more frequently.
Lord Phillips of Sudbury
Is the noble Lord not assuaged by the wording of the Bill, which seems to be extraordinarily wise? It calls for a strategic review, which it later defines as coming every three years. It then states that the court of directors must,
“from time to time review, and if necessary revise, the strategy”.
Surely that is exactly what the noble Lord was talking about. If circumstances take an unexpected and dramatic turn, that stipulation is precisely germane. I do not see why the noble Lord is not satisfied with what seems to be an extremely sensible arrangement: a report every three years, but also a power of review.
Lord Eatwell
I am sorry that I did not make myself clear. I was referring to a review taking place other than at three years and the effect that that might have on the confidence of the markets. They might feel that the Bank is not sticking to its usual three-year timetable but is bringing things forward because something is going badly wrong that it knows about and perhaps the markets are not fully informed about. An annual review is embedded in so many companies. The annual away-day where everybody goes off and does the annual review is such a standard procedure that I think the three-year business is a mistake.
I want to return to the noble Lord’s revisionist comments on the position that he took on the earlier amendment when we were referring to the business of the oversight committee and the public interest notion of publication. I asked the noble Lord whether in this section Bank meant court. I think that I made clear that if it did mean court, the best option would be for it to say so. Therefore, the best option would be for him to come back at Third Reading and say, “Look, the word Bank occurs all the way through the Bill. It is used in different contexts in different places and let us be absolutely clear who is responsible. We will amend this clause at Third Reading to say ‘court’ because that is what I mean. It is not what I say; it is what I mean”. Let us now say that the noble Lord means court.
I was quite deliberately saying that if the noble Lord really wants the word Bank to mean court throughout the Bill I would read through it. I was confident that I would have no difficulty finding a number of cases where he did not want it to mean court. That is why he has now stood up, having received the advice of his officials, to correct what he said earlier.
Baroness Kramer
My Lords, I feel positively disturbed by this amendment. I am far more concerned that ultimately we will have to resist the optimism and buy-in to “all is going well, let’s take the leash off”, and the erosion of regulation and structural protection. It is important that financial stability should be the primary objective for the Financial Policy Committee. It was important to add the economic growth objective to sit alongside it, but in a secondary role—to say that if the requirements for financial stability are met, the committee should make sure that, alongside and within that, economic growth has the chance to take place. That is an appropriate balance, which has been achieved by earlier amendments to this Bill.
To pull away that protection now and put us back exactly where we were—perhaps I may say, under the last Labour Government—would suggest that people have not learnt their lessons. That is the great fear: we have a crisis and people immediately react to counter the crisis. However, my goodness, our memory is short. As soon as times become good, it is very hard for a regulator to continue to impose constraint and manage risk. It is absolutely crucial that we make clear that this is meant to be a permanent feature of the Financial Policy Committee, not just a feature for now.
Lord Phillips of Sudbury
My Lords, I will add a rather mundane legal point. I do not believe that the amendment tabled by the noble Lord, Lord Peston, would achieve anything, even if it were accepted. Subsection (1), whose two limbs cover the matters to which the Financial Policy Committee must have regard, is quite clear about the stability objective. However, in a situation where the Government had no objective for growth, it would not bite, even if you took the words “subject to that” out of the clause. That is, as I said, a very mundane lawyer’s point.
Baroness Noakes
My Lords, I recall that when the previous Government set up the Monetary Policy Committee, they formulated its secondary policy objective in precisely this form, “Subject to that”. Can the Benches opposite explain when they had a damascene conversion on this topic?
Lord Sassoon
My Lords, I thought that was what I had done in the last three minutes. I explained that this is not an exhaustive list. Yes, the factor that the noble Lord identifies is an important consideration, but we have included the much more specific categories of systemic risk which are identified in the research. If we started putting looser considerations in there, it would be difficult to know where the list should stop. Indeed, as one extends lists like this, it risks by implication leaving out other important factors. I do believe that subsection (3) and the whole of proposed new Section 9C as drafted completely embrace the ability and the requirement for the FPC to pick up what the noble Lord is getting at, but does not run the risk of us trying to draft in some of the other things that we all might be able to think of.
Lord Phillips of Sudbury
Before my noble friend sits down, will he comment on the essential point made by the noble Lord, Lord Eatwell, about the risks defined in subsection (3) covering only “micro” rather than “macro” risks? It does seem that the language is actually “macro”. It talks about systemic risks, structural features and so on. Does the Minister agree?
Lord Sassoon
Yes, I agree with my noble friend. He makes an important point.
Financial Services Bill
Lord Phillips of Sudbury Excerpts(12 years, 1 month ago)
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Lord Peston
My Lords, this is a very important amendment. It is important in its own right, but it also exposes what is fundamentally wrong with this Bill, which is that it is based on an economics model of the rationally informed consumer.
No one doubts that there are large numbers of rationally informed consumers out there, able to take optimal decisions, but a vast amount of research has been undertaken in recent years that shows that there are considerable numbers of consumers who are not best described as part of the rationally well informed model. Indeed, one can go further. I have seen research papers that show that even for what one might call brilliant consumers, the complexity of the instruments they are dealing with is so great that it would take them several years to do all the calculations required to make an informed decision. Therefore, what is wrong with this part of the Bill is its fundamental philosophy of the rationally informed consumer.
The other point to bear in mind is that the objective of the financial intermediaries that this applies to is not, in any sense, to be helpful to anybody. Their objective is to make money. What they are looking for are instruments, some of which are so complex—like CDOs, and so on—that you have to be a genius to understand what they amount to in the first place. There are several other examples of that that have got my head spinning.
What this leads us to is a matter that arose the last time that the Committee met and the subject of duty of care was raised. You will not find anything like that in this Bill or any of the philosophy behind it. What is required in the Bill is that everybody acting as a financial intermediary should be instructed that they have a duty of care. That duty of care should involve presenting information in a way that quite ordinary people can understand and pointing out the perils of all the mistakes that can be made.
I myself am not that rational a consumer in this regard. As for the idea that I would look at every bank and work out the optimal one that I should deal with, I take the view that there is more to life. If I end up paying rather more for any financial intermediation that I am involved with, I have to bear that cost because there are other things I want to do with my time. Then again, I am not badly off and I can afford to do that. But very poor consumers need something much more. I repeat that what needs to be in the Bill is the equivalent of a duty of care on the part of all financial intermediaries dealing with ordinary consumers and an acceptance of responsibility for what they are offering them.
Lord Phillips of Sudbury
My Lords, I support the purport of the amendment moved very effectively by the noble Baroness, Lady Drake, and supported entirely fairly by the noble Lord, Lord Peston. I confess that for 26 years I tried to deal with the British public’s legal problems as the legal eagle on the “Jimmy Young Show”. I suppose that I take a particular interest in the effect of legislation such as this on the ordinary consumer. There are a number of practices at large these days in what I call big business that leave the individual consumer way behind in terms of any fairness of dealing. The big battalions will call in aid lawyers, often paid on a conditional fee basis, and it is frankly terrifying if you are a small bloke and have a dispute with a large company. You will quickly be given the clear indication by the large company that if you do not buckle and pay up you will be crushed. I put that a little dramatically, but not much.
As it happens, I have been dealing with one of the large energy companies lately over a disputed electricity Bill. I have been astonished at the general tenor of the dealings and the way in which it so organises its affairs that if I were not an old fart of a lawyer I would easily have been overborne by its tactics and approach.
Lord Phillips of Sudbury
I am glad to see that my noble friend doubts that I am an old fart of a lawyer, but I am—55 years in the saddle and still riding.
I appreciate that the Minister has, at all stages along the way, tried to protect the Treasury, the FCA and so forth against all these vague and difficult notions of fairness. Indeed, he might like to clarify in summing up whether he thinks that the ill to which the amendment addresses itself could be healed by the integrity objective. The amendment is to the competition objective, but the integrity objective could enable the FCA to take account of the matters raised by the noble Baroness, Lady Drake, in order to improve things. But I seem to recollect from one of the amendments in my name and that of my colleagues that the Government think that the integrity objective is not about fairness: it is about the mechanics of the system, if I can put it that way. I have the same general misgiving as the noble Lord, Lord Peston, and many others in the House, that the Bill does not address issues of fundamental fairness that affect ordinary citizens. I shall be very interested if there is any consolation that my noble friend can give.
Lord Phillips of Sudbury
Rather than the noble Lord remain in rather dangerous flight, I believe he means the noble Viscount, Lord Trenchard, does he not?
Lord Whitty
My Lords, I do. I was looking at the Marshalled List and saw the name of the noble Lord, Lord Flight, to the next amendment. I beg the pardon of the noble Viscount, Lord Trenchard.
When faced with issues of consumer care and consumer protection, the FSA, in its early days and for much of its time, tended to resort to stipulating the information that the consumer needed to be given. By the time that had gone through the corporate lawyers of the various banks and insurance companies, it amounted to five, six or sometimes 25 pages of close 10-point type, which was even more difficult for the average consumer to understand than it is for the average Member of the House of Lords to understand this Bill.
That is a very passive form of consumer protection and it is a very passive definition of customer care. The amendment attempts to put an obligation on the FCA to ensure that companies operating in this sector operate positive customer care, not simply passive provision of information which a large number of consumers cannot understand. To answer the noble Baroness, Lady Noakes, one reason why I believe that it is appropriate for it to be in the competition area is that when the FCA looks at where competition is succeeding, one of the measures of the proper outcome of competition that it considers is the way in which companies compete, as regards customer care, for their consumers.
Competition is not an end in itself. Competition policy and the enforcement of competition should protect and enhance benefits to consumers. One of those benefits is that the truly competitive company looks after its customers in a positive way and competes with its competitors in that regard. The passive provision of information is not customer care. This clause goes a significant way towards ensuring that customer care is seen as an objective both of consumer protection and of competition policy.
Lord Phillips of Sudbury
I seek to help my noble friend. Regarding the language of new Section 1E(2), where it states:
“The matters to which the FCA may have regard”—
there is no danger of the kind he suggested in the amendment of the noble Lord, Lord Barnett. This is because there is the crucial word “include” at the end of the preamble to the new section, which states:
“The matters to which the FCA may have regard … include”,
paragraphs (a), (b), (c) and (d). That is a clear indication that this is non-exhaustive. One could therefore add a number of further provisions without endangering the ability to think more widely.
Lord Sassoon
My Lords, my clear legal advice is that the FCA does not require this additional “have regard” and that there is, notwithstanding the wording to which my noble friend draws attention, a danger that if the list becomes longer and suggestive that it is intended to be exhaustive, that may give rise to legal challenge. That is the advice that I have received from the best legal advisers that the Government have to hand and it is all that I can say on the matter.
I want to wrap up this discussion by going back to some of the things that noble Lords have drawn attention to in new Section 1C on the consumer protection objective. The noble Lord, Lord Peston, for example, is of course quite right to say that some or the majority of consumers of financial services are not “rationally well informed,” to use his term. This is precisely why, among other things, new Section 1C(2)(b) refers to,
“the differing degrees of experience and expertise that different consumers may have”.
This is also why, among other things, we have discussed the important work of the Money Advice Service in improving the ability of consumers to make informed choices, which we will come back to. I therefore agree with the noble Lord’s starting position, but I suggest that the way to deal with it is not through this amendment. I could point to a number of the other provisions in the consumer protection objective which go to the heart of many of the concerns raised in this debate. Coming back to my fundamental analysis that the legal analysis on which this is based is, in the view of the Government, flawed, I ask the noble Baroness to withdraw her amendment.
Lord Phillips of Sudbury
My Lords, I support totally the tenor of the amendments in this group, which have been so well spoken to. I add some practical examples of where I believe that these amendments or amendments like them would be of immense social utility. It is generally accepted that community life in our dear land is breaking down everywhere. At the same time, there is a general perception and I think agreement that anything that can be done by a community or a group within a community to shore up its social assets is doubly valuable against the background. For example, a local scouts organisation might want to build a new hut; a local sports club may want to build a pavilion or buy some boats or a bus to take teams away; or a local amenities society may want to improve a local building or acquire one. A local church might want to do something. One can go on and on. Local organisations every day of every week in every part of the land want funds to do something that they all agree would be of great benefit to that community. At present, the regime that my noble friend Lady Kramer so vividly described is a complete road block against having a general appeal to the community to chip in perhaps £10, £20 or £100—it need not be £500 or £1,000.
What is needed is for my Government to be imaginative enough, although I realise that the Treasury is not the homeland of social imagination, to see that if we could amend the arrangements provided for by this Bill, realising that one size does not fit all, we could unleash an unpredictable but extraordinary outpouring of funds. Many will be reluctant to give but much readier to lend, even though they appreciate that the basis on which they lend is somewhat uncertain. As my noble friend Lady Kramer said, the upfront costs of having to comply with the present regime are simply prohibitive. She mentioned social impact bonds of £1 million to £5 million, but I am talking about appeals of £50,000.
The value of those small local appeals, which can be met by people lending in small amounts but large numbers, is double. They provide badly needed social facilities and, in the process, bring the community together and give them the sense of achievement. They shore up community and are of inestimable public benefit. My noble friend the Minister has had a horrendous job steering this Bill through its stages and has dealt with it in an exemplary fashion. I hope that the Government will think again over the two next months and come back in the autumn realising that they have to make major concessions on this part of the Bill for the good of us all.
Lord Tunnicliffe
My Lords, I hope to set a precedent whereby the commitment of our Benches is not necessarily proportionate to the length of the speech. I support the amendment in the names of the noble Lord, Lord Sharkey, and the noble Baroness, Lady Kramer. Social enterprises are businesses that trade to tackle social problems and improve communities, people’s life chances or the environment. They make their money from selling goods and services on the open market and reinvest their profits back into the business of the local community. When they profit, society profits. We believe that Amendment 118AZA would contribute to their formation and therefore we support it.
On our Amendment 128AA, in the names of the noble Lord, Lord Eatwell, and the noble Baroness, Lady Hayter, we believe that given the consensus in at least part of this Chamber that social investment is a good thing, it would be appropriate for the FCA to have a social investment panel that would sit alongside the small business and market practitioners and consumer panels. The FCA would have a duty to consult. The panel would represent the interests of organisations that specialise wholly or mainly in social finance or investment. Today’s debate has shown that if we can persuade government to go into this area it will be complex and will need an appropriate panel to help to develop the regulations around it.
Lord Sassoon
I entirely accept that. However, the effect of these particular amendments would be to take away all regulation and protection. We certainly do not want to go from the current situation, which it appears people are already seeking to exploit, to one where merely because the apparent purposes of the investment were perfectly worthy and the overwhelming majority of promoters would obviously be people of the highest standing, others would be allowed to fly under their banner.
Lord Sassoon
Perhaps I may make one other point and then I will let my noble friend in. My noble friend Lord Hodgson mentioned the exceptions to the financial promotions order for sophisticated persons. Although I should not discuss the advice I gave Ministers in my previous life as an official, all I would say is that I am extremely familiar with the construction of that order in that particular respect. In my view, Ministers at the time made a very wise decision about that particular provision. I do have form, as it were, in this space. I encourage practical ideas for amending, which will be seriously considered, and although it is not easy to amend the financial promotions orders as regards the Red Tape Challenge, Ministers will look at them. Specifically, Amendment 121A is not needed in order to make that happen.
Lord Phillips of Sudbury
In his final remarks, my noble friend pre-empted what I was going to ask him, which was to confirm that it is not beyond the wit of this House to take account of the very proper points he raises and, at the same time, to take account of this big, potentially vital sector of social investment. However, I think that he has already impliedly agreed with that.
Lord Sassoon
I have drawn the Committee’s attention to the opportunity that exists at the moment, and of course the Red Tape Challenge is a cross-government initiative. No. 10 and others take it very seriously; it is not simply a Treasury matter; and it goes with the wider drive in this area. I shall leave it at that.
I should say just a little about Amendment 128AA. I do not believe that the FCA needs to have a dedicated panel for representatives of social investors. As the FSA’s panels already do, the FCA’s panels will advise on a wide range of policies and regulations from a broad range of perspectives, and I do not believe that it is necessary or proportionate to establish another panel, at additional cost, purely to represent the interests of social investors and social sector firms. Social sector organisations will be able to feed in their views through public consultations. The interests of socially oriented financial services firms can be adequately represented by the Practitioner Panel and Smaller Businesses Practitioner Panel, and many of the FSA’s Practitioner Panel members belong to firms which are involved in social investment.
However, again in the spirit of wanting to be helpful in response to the amendment, and accepting that the interests of smaller specialist firms also need to be appropriately represented, I have sought and gained assurance from the FSA that from now on it will approach trade associations which represent social investors, such as the UK Sustainable Investment and Finance Association, asking them to put forward nominations to the Smaller Businesses Practitioner Panel. I hope that that will give additional reassurance to the noble Lord, Lord Tunnicliffe, about the approach in this area. Given all that, I ask my noble friend to withdraw her amendment.
Taxation: Avoidance
Lord Phillips of Sudbury Excerpts(12 years, 1 month ago)
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Lord Sassoon
My Lords, the estimate of the tax gap in 2004-05 was 8.5% and it is now 7.9%. It still means that there is a tax gap of £35 billion, which HMRC will vigorously pursue. That is why only this week we made further announcements and consultations to make sure that aggressive tax schemes and the people who market them are targeted more effectively and why HMRC has reinvested £900 million of its spending in this spending round to target this area.
Lord Phillips of Sudbury
My Lords, is it not seriously damaging to social cohesion—and demoralising in the literal sense of that word—when some of the highly paid and some would say highly overpaid public company directors are paying a much lower rate of tax on their grotesque earnings than the lowest paid employees in their companies?
Lord Sassoon
My Lords, what is important is that we have a tax system that is fair and which means that those with the broadest shoulders pay the most, which is exactly what the most recent Budget did, and that we have a tax system whereby in all parts of the earning scale people are incentivised to work. That is why raising the tax threshold on the way to our target of £10,000 is one component of making a real, radical change to the tax system in this country.
Financial Services Bill
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Lord Phillips of Sudbury
My Lords, seven amendments in this group of nine are in my name and that of my noble friend Lady Kramer. All the amendments have support from other quarters: from the noble Lord, Lord Hodgson of Astley Abbotts, who supports several; from the noble Baroness, Lady Meacher, who apologises to the House that she has had to make a compassionate visit this evening; and from the right reverend Prelate the Bishop of Durham.
There is a vast constituency outside the House that is listening to our every word tonight. That may surprise some; however, the not-for-profit world, if I can call it that, or the social investment sector, to use another phrase, is fair and square behind these amendments. My noble friend the Minister will have already received a letter on 25 June, signed by 16 bodies. Your Lordships may be interested to know that they include Charity Bank, the Community Development Finance Association, the National Council for Voluntary Organisations, the Charities Aid Foundation, the Social Stock Exchange Association, Co-operatives UK, Social Finance and, no less in support of recognition of the social investment sector in this Bill, Big Society Capital, which was set up by the previous Government under the Dormant Bank and Building Societies Accounts Act 2008. There were also CFG—the Charity Finance Group—Triodos Bank and ACEVO. There are very many others. They all have one plea, and this group of amendments has one central aim—to distinguish in regulation between a Barclays Bank on one hand and at the other end of the scale, a small not-for-profit local organisation. I thought your Lordships would be interested in an unsolicited communication I had in the last week from the Perth and District YMCA, which is an exemplar of this not-for-profit sector. The development manager there wrote this:
“Just today I was at the official launch of the Living Balance Programme in Perth and District YMCA which is supported by the Department for Work and Pensions Innovation Fund and is structured as a Social Impact Bond. This project will provide a unique project for 300 young people over the next three years to progress towards a stable independent life style in their local community. Nearly two thirds of the investors in this Social Impact Bond were local private individuals who invested sums ranging from £5,000-£30,000 of their own money … I am convinced that we need to … create the opportunity for this kind of investment to occur in a way which is not so over burdened with prohibitive legislative barriers that the immense potential value of these opportunities is lost”.
That message is repeated from end to end of the not-for-profit sector. It wants the regulators to have a sensible discretion to distinguish, as I say, between these very different animals.
The Minister in the Commons made a plea that we must have a level playing field, with no distinction between massive international banks and a little local social endeavour. To the sector, and indeed to me, that is not a level playing field; it is a level killing field. One size does not fit all. What we need, and with the Bill we have a chance to do this, is to regulate proportionately, appropriately, sensibly and sensitively and to avoid stifling the very initiatives that were referred to in the previous set of amendments and which are vital for the success and advance of power in our embattled society.
I use the word “proportionately” because that is one of the six regulatory principles enunciated in the Bill, and it is classically needed in this instance. I am sure that I do not need to elaborate or enlarge on our present circumstance, but we in this country are now in a critical situation vis-à-vis the financial sector as a whole. This is not just because of the economic and financial crisis over the past three years; it is because we have had a really dispiriting series of revelations about the motives and modes according to which far too big a part of the financial sector has run, and continues to run, its affairs—a monolithic, obsessive preoccupation with profit and profit alone.
One of the beauties of the not-for-profit sector is that it contrasts almost wholly with that rather grey and demoralising picture of the financial sector. By contrast, it is made up of charities, mutual organisations, community interest companies, co-ops, friendly societies and so on, and all of them, not just as a matter of policy but as a matter of constitutional centrality—they have no choice in this—have a public benefit purpose, a social purpose, a not-for-profit purpose. By dint of this wholly different set of values and motives, they are able to reach the parts that the conventional financial sector has not reached, is not interested in reaching and will never reach. The answer to the maiden’s prayer for them is to allow them to go on growing dynamically, rootedly, accountably, socially and morally, vibrant as they are.
In case anyone thinks that this is not a sector worth worrying about, it might be worth repeating the statistics that the Young Foundation and the Boston Consulting Group researched: in 2010-11 the amount of investment by the sector was £165 million and, more importantly, if the regulation barriers could be lowered for it, the investment level would be expected to rise to £750 million. A report in 2011 by Social Enterprise UK shows that 57% of social enterprises predicted growth for this year. That is a 40% higher rate than for small and medium-sized enterprises, which, as noble Lords will know, are themselves much more dynamic in terms of development than the large companies. These small, socially innovative organisations have an infectious enthusiasm. They want to grow; they want to help; they want to do more.
I received a letter from the parliamentary affairs counsel to the City Corporation, which realises that it ought to get involved. He refers to the fact that big society capital will invest £50 million by the end of this year in these social bodies. It is in that context that Deutsche Bank is apparently launching a fund of £10 million and HSBC a fund of £4 million—small amounts, but, I believe, indicators of much more to come. Through its Bridge House Estates the City has allocated £20 million for social investment.
There are many other examples which will cheer us all. Peterborough prison has issued a social impact bond—a rather unlikely development. Bonds have recently been issued by the charity Scope. There is fast growth in what are called crowd funding and peer-to-peer lending, such as Buzz Bank and Zopa. Oxfam is engaged with a microfund to be used in the developing world. We have the prospective launch in London next year of the Social Stock Exchange. And so it goes on.
New Section 137R on page 89, to be inserted into the Financial Services and Markets Act 2000, stipulates under general supplementary powers that the rules by either of the regulators, the FCA or the PRA,
“may make different provision for different cases and may, in particular, make different provision in respect of different descriptions of authorised persons, activity or investment”.
My noble friend Lord Sharkey referred to that in what he just said.
These amendments will give a clear and essential steer to the regulators to enable them to use with imagination and flexibility the powers that they have under new Section 137R. They will offer a realisation of what great profit there is to this country and our society by liberating some of these small, non-profit organisations from heavy-handed regulation. Everybody accepts that such regulation may be necessary for huge financial entities that can cope with it and, by dint of what has happened recently, need it. We cannot pretend that one size fits all.
Lastly, we in the coalition—and I appeal to the Minister—must walk our own talk. The country is a little anxious about the extent to which we are doing that. If ever we have talked up the importance of social investment and the not-for-profit sector in finance, it is in this area. The big society idea is at the root of it. I have already referred to Big Society Capital. We had a paper from the Government in February last year, Growing the Social Investment Market. What was that about? It was about encouraging and not stifling the market that this Bill, unamended, will indeed stifle. We had the Red Tape Challenge and the task force in pursuit of it. My noble friend Lord Hodgson is involved in that. We had another paper in May this year called Unshackling Good Neighbours. What was that about? It was about promoting investment in social ventures. In the autumn the Cabinet Office is producing a response to Unshackling Good Neighbours, in particular to that bit of it which says that,
“regulation barriers make it difficult for social ventures and investment in them”.
Francis Maude and Nicholas Herbert have gone on record again and again extolling the need for social investment. I appeal to the Minister. Although it may be difficult in some ways, we must put something in this Bill. I ask him not to say, as he said to the previous group of amendments, that we will have to have a separate Bill. That will not wash. It is not good enough.
I end by saying that this vital sector needs the chance to grow and to do what nobody else is doing or can do. It is bottom up, it is rooted, it is ethically vigorous, it is public spirited and, above all, it is grounded in fellowship. With that introduction, I hope very much that, although there are only 14 of us here at this time, there may be some support for this group of amendments. I beg to move.
Lord Hodgson of Astley Abbotts
My Lords, my name is down to four amendments, Amendments 104, 120, 137 and 139, and I support very strongly what my noble friend Lord Phillips has just said. I take issue with him on only one technicality. He talked about “not for profit”. I think the words should be “not for profit distribution” because these small organisations must be able to accumulate reserves for the bad times, for the contracts that do not go quite as well as—
Lord Phillips of Sudbury
I am grateful to my noble friend for making the point. He is absolutely correct.
Lord Hodgson of Astley Abbotts
Apart from that, I agree with the thrust of his remarks.
I chaired the task force that produced Unshackling Good Neighbours, and I am glad to be able to tell my noble friend that we have already had the Government’s response and are meeting on 26 July to produce our follow up. The problem with this is not making the recommendations but making sure that they are followed through. As I have told the House before, I am completing the review of the Charities Act 2006 for the Government and will be publishing a report on that next week. The terms of reference for that review required me to consider the barriers to the growth of social investment.
This is a very interesting area. The market is immature and therefore carries with it some dangers, such as overexpansion, perhaps of too much money being raised before there are projects sufficiently ready to absorb that money, and of overoptimism. There is a weight of expectation about what can be done that we have to make sure is not disappointed. As my noble friend made clear, this idea has the capacity to transform the financing structures in the charity and voluntary sector and so radically increase the amount of funding and the number of people who will give support to those sorts of endeavours. As I have said elsewhere, how do we persuade someone who would give £50 to invest or lend £500? How do we turn this social investment chrysalis into a butterfly?
There are lots of regulatory challenges, and not all of them are in my noble friend’s department. Not all of them are actually for the Government; they are also for the professions and the sector. As my noble friend said, we need to send signals from this area because this is the keystone that will set in train other serious changes. Therefore, the enabling provisions contained in Amendments 104, 120, 137 and 139 are important because they recognise, and ask the regulator to recognise, the distinctive features of social investment and regulate appropriately in an even-handed way. The hour is late. I could go on for a lot longer, but this is important, and I very much support what my noble friend said.
Amendment 104ZA is tabled in the name of the noble Baroness, Lady Hayter. That amendment is not suitable, because it requires the FCA to promote the growth and development of social finance and social investment. The role of a regulator is not to promote but to enable. It can promote good behaviour and good approaches, but it should not promote a particular form of finance, because that could lead to the disillusionment that I have referred to. I quite understand her good intentions, but they do not help us. Nevertheless, I very much support Amendments 104, 120, 137 and 139, and I hope that my noble friend will be receptive to this important part of the big society and localism, on which we as a party and a Government have placed such stress.
Lord Sassoon
My Lords, let me begin by saying that, as with the previous group, I wholeheartedly support the sentiment underpinning these amendments. The Government want markets which serve the wider economy, underpin growth and contribute to a more prosperous society as a whole. We want more proactive and judgment-based regulation, and we want the FCA to be tough and decisive in identifying and acting on bad practice in the financial services sector.
The Government have been very clear that they want social ventures to create positive change in our society and that to achieve this we need to make it easier for them to access the capital and advice they need. There is a growing social investment market which seeks to combine financial return with social impact. Investors are often willing to accept higher risk and a lower financial return because of the social value that their investment can make. However, as has also been noticed, the market is embryonic and needs support. The Government are committed to providing that support. In a moment, I will describe how we seek to do that. Before I do so, I will turn to some of the specific amendments to which noble Lords have spoken.
There are a number of reasons why I cannot support Amendments 104, 104ZA, 120, 137, and 139. First, where their intention is to promote social investment, that is simply not an appropriate role for the regulator. Although I agree with my noble friend Lord Phillips of Sudbury that the Government need to act in support of the social investment sector, we will not create a healthy UK financial services market, including for social financial services, by giving the FCA the job of taking forward what should be and is part of the Government’s wider social policy agenda. Let me be clear: the FCA’s job should be to administer a regulatory regime, policing it so that consumers are appropriately protected, regardless of what they invest in, that there is effective competition, and that markets are clean and operate with integrity.
Secondly, where the intention behind the amendments is to—
Lord Phillips of Sudbury
I am sorry to interrupt my noble friend, but he did make a provocative remark just now, I suspect without realising it. He said that I was asking in these amendments for the FCA to “take forward” the social investment market. That is not the case. These amendments are couched extremely carefully, and not in any proactive way. To take Amendment 104, they merely ask the FCA,
“so far as is compatible with acting”,
in accordance with “its operational objectives”, to take,
“account of the distinctive features of social investment”,
and not to inhibit the development of it. On no basis can that be characterised as asking the FCA to “take forward”. It is merely asking the FCA to note the particularities of this sector and not to impede it.
Lord Sassoon
My Lords, we will have to disagree on the construction of some of the words here. Taking some of the amendments in the group, I appreciate that some of them are couched in the way in which my noble friend has just elaborated. However, for example, Amendment 103 inserts into new Section 1B(4) the words “and society” at the end of a very critical recital of what the FCA must do. It says it must,
“discharge its general functions in a way which promotes effective competition in the interests of consumers and society”.
I accept that it is all driven with an override,
“so far as is compatible with acting”,
in a way that advances the consumer protection objective, but it would add something which is tantamount to asking the FCA to be proactive in driving forward the social objective.
Lord Sassoon
My Lords, one of the problems is that I am speaking here to a group of amendments. If we had longer or they were all degrouped, we could tease out one from another in more detail. I appreciate that some are more directive than others. However, perhaps I may move on to my second area of difficulty here. It probably will not help but I have a number of difficulties with this group of amendments.
Where the intention behind the amendments is to ensure proportionate regulation of this budding social investment sector, I reassure the Committee that the FCA will indeed take a proportionate and risk-based approach. Both regulators must take a proportionate approach to the regulation of small or socially orientated firms, particularly in comparison with large and complex banks.
My noble friend Lord Phillips of Sudbury referred to new Section 137R, which enables different rules to be made in relation to different authorised persons. I could also draw the Committee’s attention to new Section 1C(2)(a), which requires the FCA to have regard to the differing degrees of risk involved in different transactions. Another is new Section 3B(1)(b), which requires the FCA to have regard to the principle of proportionality. Therefore, I believe that there are appropriate layers of protection there without this series of amendments highlighting the social investment sector in the way that they seek to do.
Lord Sassoon
Perhaps I may finish this part of the argument and then of course I will let my noble friend come in again. I believe that this proportionate approach that I have described will be vital in supporting effective competition, as well as helping the social sector, and the requirement to make regulation proportionately has to be an important tool in delivering that. However, equally, consumers have to be reassured that if they deposit money with, or buy financial products from, socially oriented financial institutions, they will be subject to the same level of protection and security as would be the case with any other institution. My noble friend may come back and say that that is not what the words actually say. He compared the activity of the big banks with the very well meaning institutions—which I accept they are—in this budding sector. Nevertheless, we have to be very clear and careful in making sure that those who deposit money are subject to the protection that they would expect, regardless of whom they transact with. I believe that in this area the Bill as currently drafted will deliver a proportionate balance for both regulated firms and consumers. I will continue to listen to the full range of arguments on this important issue and we will continue with important strands of work.
My noble friend Lady Kramer referred to the ability of financial advisers to advise on social investments as an asset class. I agree that this is a concern. That is why it is one of several regulatory issues that are currently being considered by the Cabinet Office review. Therefore, there are other avenues through which these issues are being actively considered, as they should be.
Lord Phillips of Sudbury
I am grateful to my noble friend for giving way. I am sorry to detain the Committee at this time of night but this is an important group. My noble friend Lord Hodgson of Astley Abbotts made one extremely telling intervention. I recognise what a difficult task my noble friend the Minister has in piloting this incredibly complicated measure through this place. He called in aid—reasonably, because I myself referred to it—new Section 137R, which is headed “General supplementary powers”. I quoted from the first part of that new section in what I said. My point, which I do not think my noble friend has taken account of, was, and remains, that unless there are some indicators in the first part of the Bill as to the considerations that are legitimate for the regulator to take into account, being naturally conservative, it will not take them into account. It will not differentiate. The wording in Amendment 103 therefore adds “and society” to the part of the new section that instructs FCA as to what it must do. That section says:
“The FCA must, so far as is compatible with acting in a way which advances the consumer protection objective or the integrity objective, discharge its general functions in a way which promotes effective competition in the interests of consumers”.
The Minister objects to the addition of the words “and society”. Surely we have learnt over the past three years that the objectives of consumer protection, integrity and competition depend on a financial sector that, in promoting competition, does not just take into account the interests of its customers but also of society at large. Society is what social investment is about. It slightly gives the Government’s game away for the Minister to argue as he did. I repeat that this important section that he referred to, which gives the FCA and the PRA the power to make rules, seems to cut off the prospect that he afterwards says is there; namely, the power to differentiate between different types of financial organisation, including the social financial organisations.
I am sure this is a discussion we perhaps had better have outside the Committee. It is late at night. I am only registering—I think I have some support in this—disappointment that the Government are not construing their own provisions in a way that seems consistent with how my noble friend started when he said they were wholly behind the development of the social finance sector.
Lord Sassoon
I will keep saying it and no doubt we will have to disagree on this. On the narrow point of new Section 137R, that is a power to make different provisions. However, the other relevant provisions that sit with it are duties. There is a duty to act proportionately and a duty to have regard to different degrees of risk. When it sets rules, the FCA will have to explain and justify those matters in the consultation processes it goes though. It cannot simply escape from this.
I will again directly address the points made my noble friend Lord Phillips of Sudbury on Amendment 103. The same thing applies to Amendment 111. There are certain things that we can expect of the FCA and there are other things that would place entirely unrealistic expectations on it. When the FCA is assessing whether there is effective competition in a market, we can expect it to consider the needs of consumers and act on its assessment. However, the needs of society as a whole are another matter entirely. It is not, and cannot be, the responsibility of the FCA to consider, even in a passive way—which I agree is different here from the way that it is formulated in some of the other amendments—what the best outcome for society is at any given point. It simply does not have the mandate to do that. It would not have the expertise or the powers fully to act on its findings. This is not in any way to say that these are not important matters. It is simply that I contend, as with the previous group of amendments, that these are judgments not for the FCA but the Government. The Government will not shirk these judgments.
I have referred to a number of the initiatives that are going on and there are others that I could mention, such as the Treasury’s current review of financial barriers to social enterprise. Recommendations from that review will sit along with the community interest tax relief revisions that were announced at the Budget. There are multiple strands of work at the Treasury and the Cabinet Office that are aimed, among other things, at making it easier for investors to invest in community development finance institutions. Those must go on. They are not the proper province of the FCA.
Lord Sassoon
I understand. I will check on that but I hear what my noble friend says. The FSA is under pressure in a lot of areas. I stress again that I do not mean to say that there are no barriers. I have explained the ways in which we are looking at them but this is a Bill about the regulatory structure. There are other avenues through which the structure of the industry is being looked at, not least through the Bill that will enact the Vickers reform. In the most fundamental ways we are prepared to take on the structure of the industry. It is just that we want to keep this Bill and this architecture to what it is intended to be, which is about financial regulation and not about wider social issues, however important they are, even though there is great interlinkage with what we are talking about in the Bill.
I should do justice to Amendment 109, which is the last one that I have not directly touched on. It is another amendment over which I have some concerns. It seeks to ensure that the FCA considers social responsibility in advancing its market integrity objective. Social responsibility sits rather oddly alongside the other matters listed in new Section 1D that elaborate on what is meant by integrity. All the matters in the non-exhaustive definition of integrity in that section have a clear expectation of action associated with them. The FCA will act to prevent or root out and punish activities such as insider dealing or other market misconduct and abuse as well as money laundering, terrorist finance and corruption; it will test the reliability and robustness of computers and wider systems and controls to see whether it can guarantee the operational soundness, stability and resilience of the system, its orderly operation and the transparency of the price-formation process. These are all concrete actions, critical to ensuring that the financial system is effective in meeting the needs of people who use it and is, I suggest, rather different from social responsibility which very much stands out from that list.
Before I let my noble friend come in again, I want to repeat that determining what social responsibility is and how it should be delivered is a matter for the Government.
Lord Phillips of Sudbury
I am grateful to my noble friend for giving way and hope this will be my last intervention. In new Section 1D, the integrity of the UK financial system—which is of course crucial, because it is one of the FCA’s operational objectives—is said to include soundness, stability and resilience. In Amendment 109, I have suggested adding “and social responsibility”. The Minister asks what on earth social responsibility has to do with the FCA which is all about banking things such as stability and soundness and so on. My point is that we are dealing here with a financial sector that marches to a completely different drum. It is about social responsibility: that is its purpose. For that not to be an element in the section of the Bill which, in effect, defines integrity, first, does not face that reality, and, secondly, demeans it. Thirdly, I hark back to the matters which the two regulators have the duty to have regard to when making rules and so on. Lastly, I put it to the Minister that if we had social responsibility in this list, it would mean that in future the regulator could and indeed should look at, for example, mis-selling. Mis-selling is not a crime, it does not impact on the soundness, stability or resilience of the bank, but it is none the less a practice which I am sure he will agree has been powerfully damaging to all concerned. That phrase in this part of this section would, I believe, put the regulator on its mettle to look beyond the conventional issues and take account of the social impact of some of the practices of the banks.
Lord Sassoon
My Lords, I cannot agree with that construction of what is intended here. Mis-selling very clearly comes under new Section 1C, the consumer protection objective. We have, perhaps, teased out of this discussion that if we are talking about social responsibility in the sense that my noble friend intends and in the way he has described it, it is more linked to the consumer protection objective, rather than the integrity of the UK financial system. The difficulty may partly be in the different uses of “integrity”. We are not talking in new Section 1D about integrity in the direct sense of the behaviour of the individuals in the system. We are talking about the wholeness and stability and soundness of the financial system, which is why these particular factors are listed in Section 1D(2). They are linked to concrete actions that would be expected of the FCA, examples of which I have just given. We may be partly mixing up apples and pears here because I do not think that social responsibility fits into this clause of the Bill.
If my noble friend came back and tried to attach it to proposed new Section 1C, I would still argue that social responsibility is a matter for government. Social responsibility in the sense that he is talking about will go to the heart of what the Joint Committee will look at in response to the LIBOR scandal. The responsibility of the participants in the sector will be tackled in different ways.
I have tried to reassure the Committee—I can see that I may have given only partial reassurance—that the Government firmly believe that the financial industry should serve society. There is a big unfinished agenda and the Government will not shy away from driving it forward. The right way to do so is through different avenues but not through expecting the FCA to be responsible for these particular areas. I ask my noble friend to consider withdrawing his amendment.
Lord Lucas
My Lords, while my noble friend is doing that, perhaps he will say something about the effect that Amendment 103 would have in a practical sense. If faced with the words “and society” at the end of the subsection, how would the FCA’s decisions be different? Under what kind of practical circumstances would it make a difference?
Lord Phillips of Sudbury
My Lords, that is a strictly out-of-court request at the moment. However, if the Committee will indulge the noble Lord, Lord Lucas, and myself, I will give him a short answer.
I am concerned, and those who have supported the amendment and the whole of the social investment sector are deeply concerned, that there is no single recognition in 168 pages of its special nature—not one single indication. I agree with them—others have made the point—that that is a profound omission given where we are, the financial sector we have got and the innovative drive and importance—potentially more than actually—of this new social sector.
Lord Hodgson of Astley Abbotts
Does the noble Lord not accept that we have a very immature sector still? We have not got the right corporate forms that will combine the different streams of investor, whether it be a Government, a charity which is running the scheme, a grant-giving charity or private investors, who may be corporate or private individuals. We must be very careful not to put too much weight on the structure too early because if we arouse expectations about what it can deliver and it crumbles away, not only will the sector be disappointed but—dare I say it with my noble friend on the Front Bench?—the regulator will say, “I told you so”. We need to be very careful about that.
Lord Phillips of Sudbury
I wholly agree. That consideration is not at all incompatible with the intent of this group of amendments—indeed, my noble friend has strongly supported the group. It is partly because I share his concern about the immaturity of this new branch of the financial sector that I want it to be incorporated within the regime that will follow on from this massive piece of legislation.
At this time of night and with this tiny number of people present, the Minister can be safe in the expectation of there not being a vote called, but I say to him that we must, by hook or by crook, have included in the Bill by Report some form of words which recognises this new sector and gives it proper allowance and scope to develop and thrive, because, as everybody agrees, including the Government, it has the potential to be hugely important in the future. If the Minister will agree to meet between now and Report, which I hope will be after the Summer Recess, we may be able to concoct something which satisfies the new financial sector and those of us who supported the amendment. I do not think that that is beyond the wit of man. I beg leave to withdraw the amendment.
Financial Services Bill
Lord Phillips of Sudbury Excerpts(12 years, 1 month ago)
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Lord Phillips of Sudbury
My Lords, one takes one’s life in one’s hands if one tries to interpret the ineffable complexities of the Bill and of these amendments. However, I will try because I think that there has been some misunderstanding of Amendment 35, starting with the noble Lord, Lord Eatwell, and finishing with the noble Lord, Lord Davies of Stamford. If one analyses it closely, one sees that the fears that were expressed are not justified.
First, the promotion bit of Amendment 35 is couched within the purpose of the committee, which is to,
“contribute to the achievement by the Bank of the Financial Stability Objective”.
Therefore, whatever it does by way of promotion must be within that objective. The amendment continues by stating that this shall include promoting, first and crucially,
“a stable and sustainable supply of finance to the economy”.
That is the number one priority. Only then, and subject to that, as the noble Lord, Lord Peston, made clear, is there the inclusion of promoting,
“objectives for economic growth and employment”.
For the life of me, I do not see how the noble Lord, Lord Eatwell, can persevere with his concern, given that the right of promotion is subject and subsidiary to promoting a stable and sustainable supply of finance, and then has to be within the Bank of England’s financial stability objective.
Furthermore, there is no coercion here given that the economic growth objective is third on the list of priorities. Frankly, there is not a straw of difference between “promoting” these things and—in Amendment 35A, tabled by the noble Lord, Lord Sassoon—“supporting” them. Some may say that there is a difference, but as a lawyer I say that there is little or none. I contribute these thoughts in the hope that more light will be cast on Amendment 35.
Lord Flight
My Lords, I support the Government’s amendments. I would like to make two small points to pick up on the point made by my noble friend Lord Trenchard. First, when it comes to the achievement of stability, having adequate competition in the domestic market is crucial. The problem with the banking system is that it became too much of a cartel without enough competition. When cartels exist, they tend to do the same thing at the same time and the resulting problems are often large in scale.
I well remember, following the Barings problem, having many discussions with the then Governor of the Bank of England, the late Sir Eddie George. What happened then was that the lender of last resort principle was deemed to apply only to banks that were too large to fail, so smaller banks such as Hambros were closed down and sold, and we ended up with a moral hazard problem and a cartel problem. I stress that adequate domestic competition is very much part of the stability objective, whereas with economic success it is international competitiveness that is arguably more important, particularly for the role of London.
We will come to this subject later on, but there is an important difference in the interplay between adequate domestic competition and being adequately competitive internationally in terms of the two objectives of stability and economic growth.
Lord Barnett
My Lords, I am delighted to follow the right reverend Prelate. I was in his cathedral on Friday and it was a very happy occasion. It is as beautiful as people say.
As my noble friend Lord Peston said, the two amendments are reasonably innocuous. I can certainly accept both of them with the exception of those three little words, and this is the first time that I have heard a real defence of them. Indeed, the noble Lord probably printed them himself. Last week I said that the noble Lord, Lord Sassoon, does not need to reply to most of these debates because we have three noble Lords here in the House who would be even better able to do so. However, as I say, I have not previously heard a proper defence of the words “subject to that”. The noble Lord is the first to do so, and I am sorry to have to disagree with a potential Governor of the Bank of England, if he still thinks that after all our debates.
The words “subject to that” have always seemed to be totally unnecessary because the Government of the day will certainly want to deal with inflation and, not subject to that but always on top of that, to look at economic objectives. I cannot see why that should not be so, and if I may say so, I have still not heard a good defence of it. But the amendments seem harmless enough, subject to the removal of those three words.
The question of QE has been mentioned in this brief debate. I do not wish to extend it, but it so happens—probably luckily for the Government rather than as a result of their policies—that inflation has remained relatively low. My noble friend Lord Peston, who is my professional adviser on these matters, may be right to say that that has nothing to do with the Government. However, what concerns me about both of the amendments is that I am not sure where the objectives of the Government lie on growth. I wish they could explain them, but perhaps on another occasion rather than today. Perhaps the noble Lord, Lord Sassoon, or one of the other defenders of the Government’s policy could also tell us what their policy is on economic growth and employment, because it is not succeeding. However, I will not pursue it any further except to say that I hope that the Government will be able to accept the removal of those three words.
Lord Phillips of Sudbury
I have a great deal of respect for the noble Lord, Lord Barnett, who says that he wants to see the words “subject to that” taken out. Am I quite clear that, in saying that, he is not in favour of a stable and sustainable supply of finance ranking as a higher priority than growth?
Lord Barnett
I am saying that I find the two amendments relatively harmless, and that I would be able to accept them. That is all I was saying.
Lord Carlile of Berriew
I am grateful to my noble friend, who has considerable experience of dealing with high-level legal matters. I believe that might be achieved, but in my view there needs to be the clearest statement of intent by the Government. My intention, as my noble friend implies, is that whoever carries out this special investigation should be invested with the powers of the Serious Fraud Office, which are considerable and important. That is why I suggested earlier that this should take place under the instructions of the director of the Serious Fraud Office, Mr David Green QC. However, I believe that the Serious Fraud Office is completely unresourced for this kind of investigation. I also believe that in public terms, if the Government made it clear that they would provide Mr Green with the resources immediately to appoint a special prosecutor, albeit under his umbrella, and that person was provided with a team, probably largely from outside the SFO, which has been recruiting a large number of staff recently and may not have the experience to deal with this inquiry at present, then we would have a quicker and better result.
I do not want to detain your Lordships’ House for too long. However, I want to make the point that we have not yet reached the situation in which the essential issue is being investigated properly—that is, the potential criminality of those whom we were entitled to trust.
Lord Phillips of Sudbury
My Lords, I came to the City as a young lawyer in 1964 and am still there. Until last Christmas, I was a non-executive director of a well known City insurance entity. I agree wholly with the sentiments of the noble Lord, Lord Eatwell. However, the writing has been on the wall about the state of values in the City for very many years. The most recent shock—the LIBOR scandal as one might call it—is but one of many and there will be many more still to come, I am sad to say. It has been an open secret in the City that the culture has declined over the years to one of near amorality, where the law rather than normal moral instincts has been the arbiter of conduct. That in turn has declined, predictably, to a situation where too often if amorality is confronted with a significant loss of a good deal then there is little resistance left in the system and criminality occurs. Most of it is impossible to trace as it is in the form of market manipulation and oral conspiracies—whether within a firm or between different firms. It is a sad spectacle. To be fair, the vast majority of people in the City deeply regret where we have got to. Unfortunately, however, the culture of huge corporations tends to crush the moral life out of people in those entities. You get the occasional whistleblower who will stand out against the herd but one knows, I am afraid, what has happened recently to those few brave people.
The noble Lord, Lord Eatwell, is absolutely correct in his strategic overview of where we now are. We must, however, ponder this a little more than the space of this debate will allow. I am inclined towards giving serious thought to some sort of commission. It does not have to be a royal commission—a phrase which has attracted a good deal of adverse thought lately—but it is such a huge congregation of issues, not just confined to the City and certainly not confined to narrow misdeeds such as the LIBOR matter, that we may be better off with a royal commission that can look at the thing in the round, take its time, and let the criminal side of all this be separated and dealt with by the Serious Fraud Office or, conceivably, a special prosecutor.
My Amendment 109—to which my noble friend Lady Kramer and the noble Baroness, Lady Meacher, have added their names, and which we will probably get to next time—ironically achieves almost the identical effect to that of the first part of Amendment 110ZA, tabled by the noble Lord, Lord Eatwell, so I am obviously in favour of that.
In closing, the other quick point I should like to make is to wonder whether there should not be a wider duty of integrity in the Bill than that which applies only to the FCA in proposed new Section 1D on page 17 of the Bill. The prudential authority should be subject to a similar integrity objective, and it might make sense to have such an objective for the whole financial regulatory sphere. That is all I wish to say beyond thanking the noble Lord, Lord Eatwell, for raising this matter at this time.
Lord Neill of Bladen
My Lords, I should like to make a few observations about the amendment. We are at Committee stage of the Bill. While it is passing through your Lordships’ House there has been an enormous scandal about the fixing corruptly of the LIBOR rate by Barclays over, I understand, a period of years—a practice in which it is possible that other banks took part. They have thereby done enormous damage to the reputation of the City of London as a place where you can get honest dealing. The matters thus far brought to light show innate corruption, whereby it is seen as perfectly all right to rig the figures that you supply in order to fix the LIBOR rate and to bring in profit or reduce losses. That is a form of corruption.
One can go back to one’s early days with a bank. I banked with Barclays from the mid-1940s onwards. The notion of the bank then being involved in this type of activity was absolutely laughable. The banks have turned into merchant banks of the worst possible character, and that ethos is reflected in conduct that reveals a completely disgraceful picture.
The question is: what is the best way to have a wider inquiry into that matter? At the moment, it is a pity that what is called the Tyrie inquiry is being allowed to carry on on its own, without any thought as to whether or not the investigation of those facts would be central to any wider inquiry about the integrity of banks. However, how do you investigate integrity? The theory is that you are not allowed to look at other cases because Tyrie is dealing with the matter. In fact, it is the best possible evidence you can have of the way that bankers think today. You want to know all the details of that case and not exclude them from it, rather than ask a generalised question: how do we establish integrity or lack of it in the City?
I therefore assume that today we are having an exploratory discussion, that the amendment will be withdrawn, and that there will be time, at least by Report, to consider revised proposals of what might be done by way of investigation. The suggestions of noble Lord, Lord Carlile, are interesting and persuasive, but all this has just been pitched upon the House of Lords because of a curious financial scandal coming to light at this very time while we are in Committee. I hope that consideration will be given as to whether matters in relation to the banks and financial institutions could be better conducted after we have had time to think and the Government have had time to react to the amendment. I hope that some reasonable and rational delay will be introduced and that the amendment will be withdrawn.