Financial Services Bill
Lord Sassoon Excerpts(12 years, 4 months ago)
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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.
Baroness Hayter of Kentish Town
My Lords, along with most other speakers, I support the amendment moved by my noble friend Lady Drake. As I have argued in Committee before, it is no good having a competitive market for banking and insurance—not that we have one—if consumers effectively cannot enter the market, if they cannot identify what they need and if they cannot get value for money. As we have heard, all sorts of people find it challenging to know what services are suitable for them. How else could HSBC have sold bonds designed to be held for five and more years to 2,500 with an average age of 83? It is a little like people trying to sell PPI to my noble friend Lord McFall, or Barclay, HSBC, Lloyds and RBS mis-selling interest rate swaps to 28,000 businesses.
My hope is that Amendment 117 will give the FCA an explicit mandate to put a stop to unfair overdraft charges, excessive fees and complicated price structures, all of which hinder competition, which is probably why I think the amendment belongs within this area. The FCA has to be able to tackle hidden charges if it is to promote effective competition, given that, as we have heard, individual consumers simply cannot do this for themselves. If we, as consumers, buy a theatre or an airline ticket, there is a pernicious little booking fee—at least we can see it. I have just had to pay £2 on a £10 ticket to go to the Noel Coward Theatre, which seems a bit high. At least we can see such a charge and we can choose whether to pay it or not to go to the theatre, but that is not the case with bank charges.
A recent Which? survey found that 60% of those polled said that they paid what they felt to be an unfair bank charge and half paid a charge which they thought was disproportionate to whatever benefit they received. It is not clear, from the current language in the Bill, that the FCA will have the necessary mandate to tackle hidden charges. I know—and my noble friend Lady Drake quoted it earlier—that the Financial Secretary in the other place said that the FCA had,
“the powers and the mandate to intervene on matters of price and value for money”.—[Official Report, Commons Financial Services Bill Committee, 1/3/12; col. 261.]
The Financial Secretary argued that the FCA does not need these bespoke powers, given that it can take action under the competition and consumer protection objective. However, a Queen’s Counsel advised Which? that the current wording of the objective could allow the industry to challenge the FCA’s mandate to tackle hidden charges, which could lead to a repeat of those failed and expensive test cases to which my noble friend referred. Any such uncertainty would make the FCA very risk-averse; it would be reluctant to take action for fear of being challenged. Unless the FCA has a really clear, unambiguous mandate to tackle hidden charges, I can share its reluctance to be at risk of legal challenge from the industry. Therefore the Bill must give this power to the FCA; it is absolutely key to promoting competition. At present there is insufficient responsibility on firms to ensure that products are appropriate for the consumer in terms of meeting their needs, accessibility and reasonable value for money, as Consumer Focus argued to the Joint Committee. The Council of Mortgage Lenders said that the regulator,
“should have an appropriate degree of protection for consumers and should reflect a differential approach not only between market and retail consumers, but within the retail market itself”.
The amendment is simple; and can only promote confidence in the industry. Who, after all, could argue with appropriate services and value for money? Not even, I think, the Minister. We need to get back to trusting the banks and the pension providers, as the noble Lord, Lord Lucas, said. Therefore we trust that the Minister will accept Amendment 117. In the words of my noble friend Lord Barnett, it can do no harm; it can do good.
Lord Sassoon
My Lords, this has been an interesting and wide-ranging debate to kick off today’s Committee session. I will deal first with the amendment on its own terms and then pick up some of the wider important points, although perhaps they may not be directly relevant to the key reason why I cannot accept it.
As we have heard, this amendment seeks to add a new have-regard to the FCA’s competition objective. I know that it has been promoted by the consumer group Which?. As we have heard, it drives at the same issues as a number of amendments discussed in another place—namely, that the FCA should have, in the words of Which?—which were quoted by the noble Baroness, Lady Hayter of Kentish Town—an explicit mandate to,
“put a stop to unfair overdraft charges, excessive fees and complicated pricing structures where they hinder competition”.
I agree, of course, with what lies behind this amendment. Consumers should have access to the right financial services and products; they should be able to buy in the confidence that they know what they are getting and what they are paying for. That must be clear and transparent; there ought to be no place in financial services for a culture where consumers are kept in the dark.
However, let me put on the record what the Government have said a number of times before—both in publications and during discussions in another place—which is that if the FCA finds problems in pricing, charging or in the ability of the consumer to obtain value for money that cause it concern, it will have the mandate and the powers to act. It has the mandate both under the effective competition and the consumer protection objectives, a point that has been made by a number of my noble friends and other noble Lords in this debate. It can apply its extensive regulatory toolkit in pursuit of price intervention, should it think it appropriate to do so. The FCA does not need new powers nor do its objectives need expanding. We simply do not agree with Which?’s legal analysis. Fundamentally, it is a narrow legal point.
Having said that, a range of important issues have been raised which I will spend a minute or two addressing. The noble Baroness, Lady Drake, in introducing this amendment, talked among other things about the OFT bank charges case. It is important that the Committee understands that the powers available to the FCA are far broader than those available to the OFT at the time of the bank charges case. The OFT was in fact relying on the Unfair Terms in Consumer Contract Regulations. I suggest it is incorrect to draw a line somehow between what the OFT was or was not able to do and what the FCA will be able to do, because the FCA has much wider powers.
In terms of what the FSA can do now and what the FCA might do in future, first, as we discussed in Committee on previous occasions, the FCA will have additional product intervention powers. The noble Baroness I think gave an example of a low headline price to attract new customers that is then offset by high ancillary charges. That is a very good example—and one that I might have given if challenged—of precisely the sort of situation where the FCA might well intervene and where the FSA has already begun to take a similar approach, as set out for example in its consultation paper on the mortgage market review. I do not think there should be anything between us there.
Looking more widely, I think the noble Baroness said at one point that the FCA “must” be required to have regard to ease of access to value for money. However, the amendment does not achieve this—it simply adds to the list of matters to which the FCA may have regard. Linked to that, I can assure my noble friend Lord Trenchard that the have-regards listed in this new Section 1E are of course not exhaustive. The FCA is not precluded from taking other matters into account in assessing the effectiveness of competition. That takes me to the point made by the noble Lord, Lord Barnett, where we would get into difficulties. The easiest thing would be to say, “I agree with the sentiment behind this, let’s put it in”. One of the arguments in favour of putting it in is that the FCA would be vulnerable to legal challenge if it is left out. However, as I have clearly stated, our legal analysis is simply different—I have not seen what lies behind Which?’s legal analysis but we disagree on that. If we were to go down the line of putting in a longer list of have-regards, we get more and more into the difficulty of suggesting somehow that the list is exhaustive and that the FCA cannot do things that are left off the list. Potentially, the more we add to the list, we risk getting into legal difficulties that we are not in at the moment, because the FCA will have all the legal powers it needs. The noble Lord, Lord Barnett, put it as a reasonable challenge, as he always does to me, but I think there is a danger in going down the route of this amendment.
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 Peston
I am full of despair because the noble Lord seems to have missed the whole point of what we are discussing. He keeps going back to technicalities, which is exactly the wrong way to view this matter. I think it was the noble Lord, Lord Lucas, who focused on why this Bill is a wasted opportunity, particularly in the way that it is being handled by Ministers. The real disaster that has hit this country is the destruction of the reputation of the financial intermediary sector. We in your Lordships’ House have a chance to do something about that. The way to do this is not to talk about technicalities and to say, “My lawyers say this, and your lawyers say that”. The way to do it is to place in the Bill a particular amendment—I do not really care where it is put. I will not object if the Minister does not like the wording as long as he makes the wording better. We have a chance to save the reputation of an industry which matters enormously to this country.
I find it very upsetting that in the last opinion poll I saw, the financial intermediaries had fallen nearly as low as politicians in terms of their public reputation—we can live with that because in some sense we do not matter. This is enormously important and I implore the Minister to listen to what his noble friend Lord Lucas said. We have a chance here to make a contribution to improve and, indeed, eventually save the reputation of a vitally important industry. This Bill simply does not do that, but it could. That is why I call it a wasted opportunity.
Lord Sassoon
My Lords, we are in Committee and discussing a very specific amendment. I therefore make absolutely no apology to the noble Lord, Lord Peston, who raises extremely important Second Reading-type debating points.
Lord Sassoon
I will not give away again to the noble Lord for a minute, if he will forgive me. We are discussing a very specific amendment. I have explained why I believe it is defective. The sentiment underlying that is completely shared by the Government: we do not believe it is necessary. The noble Lord raised matters which, although somewhat different, are also related to the capabilities of consumers. I have attempted to address a very serious point by pointing out that his concern will be at the heart, right at the centre, of the new regulatory body’s objective and thinking.
When it comes to his new point, which is not the one I was addressing before, about the standing of the industry, again, I completely agree with him. However, we are now talking about a regulatory structure. The Joint Committee of both Houses has been set up and will look very quickly at some of the wider questions of integrity and standards in the industry. This morning, I am trying to focus on the specific matter of this amendment.
Lord Peston
My Lords, I find it almost impossible to cope with the way in which the Committee stage of this Bill has been handled. It is completely different to any other Bill which I have taken part in. My point was not a Second Reading point. It was germane to this specific amendment, to what lies behind it, and to the philosophy of it. The Minister’s absolute refusal to even say, “Some good points have been made and I would like to go away and think about them some more”, is what annoys me about this Committee. My experience with the Ministers that I have usually dealt is that when a good point has been made, they always say, “I will go away and think about it some more”, without making any promises. However, the noble Lord, Lord Sassoon, never says anything like that. I have not heard him once in five days suggest that there is anything wrong with this Bill, or that he would like to think again. There comes a point when one has to say that, in order that people know that their Lordships have rather high standards.
Lord Sassoon
Does the noble Lord, Lord Peston, agree that the Government came forward with a package of very substantial amendments that have already been discussed in Committee? I refer the noble Lord to the number of government amendments that have already been laid and debated, and to the number of times in Committee when I have indeed said that I will look at things or have made concessions. I do not accept for one minute his statement about the attitude with which I have come to the Committee.
Lord McFall of Alcluith
Can I suggest that the noble Lord does not get so het up? There are issues and principles here, and we want to tie them down. Looking at Amendment 117, if I am correct, it is for the FCA to include,
“the ease with which consumers can identify and obtain services which are appropriate to their needs and represent good value for money”.
This goes to the heart of consumer interest. Given the Minister’s position—and let us get rid of the legalese jargon—does he think that this Bill, in this area or elsewhere, ensures that the type of scandals which we have seen going on for years and years without being addressed will be nipped in the bud by the new powers? Will we see the FCA step in straightaway, without prolonged pain for both the industry and consumers? That is what is behind the amendment and the points put by Members.
Lord Sassoon
My Lords, all I can usefully say is that while I believe that this amendment is well meant, it is based on a legal construction that the Government do not accept. The FCA has all the powers that it needs and there are some dangers in putting this amendment in. That is what we are discussing.
Baroness Drake
My Lords, perhaps I might respond to some of the issues that have arisen in the debate and in the reply from the noble Lord, Lord Sassoon. The Minister is arguing that the FCA has a sufficient mandate through the competition and consumer objectives, as drafted, to tackle these matters. My problem is that I do not share that confidence in the absence of the amendment to the competition objective that I seek. I accept his point that the FCA’s powers are much broader than those of the OFT, but with the bank charges case I was trying to illustrate the disposition of the industry to mobilise quite effectively if there is ambiguity in the statutory or regulated provisions. Rather than arguing whose legal advice is better, I was seeking simply to nail this issue by saying clearly that effective competition means that consumers have to be able to identify whether services are appropriate to their needs and represent good value for money. The lawyers could then argue as much as they like, but that provision of what effective competition embraces would be laid out in the Bill.
The Minister made too much of my use of “must” in my speech, rather than “may” as it is in the Bill. I am seeking not to challenge the word “may” but to establish with clarity that competition cannot be effective without it being value for money for the consumer. My amendment does not seek to establish a long list but it seeks to give clarity on a very important issue, which goes to the heart of what effective competition is. I think that 20 million people out there are with me, based on their personal experiences of the financial services sector in recent times.
In response to the noble Baroness, Lady Noakes, in my own defence I have tabled amendments to both the consumer and competition objectives. My noble friend Lord Whitty very ably answered the question in part. However, I am seeking an amendment to the competition objective because on this occasion, at the risk of repetition, I am trying to give clarity to the definition of effective competition in terms of the matters that the FCA has to have regard to which, I reiterate, is the ability of consumers to identify what is appropriate to their needs and represents good value. At the heart of my argument is that the FCA cannot judge effective competition unless it has regard to those matters. I feel they are so fundamental to a judgment of effective competition that they are worthy of being spelt out in the Bill as a matter to which the FCA may have regard.
On the market integrity point, there is consistency in my amendment in terms of what I am arguing in respect of both market integrity and the competition objective. My argument would be that a key characteristic of well functioning markets is that they can provide consumers with products and services having value for money. The wording of the market integrity clause does not address or mitigate my concern, hence the amendment I have tabled.
Lord Lucas
Before the noble Baroness withdraws her amendment, I wonder if I might take the opportunity to make a couple of points to my noble friend on the Front Bench. He has been saying that his lawyers are better than theirs, which I of course accept, but it really is not a matter for either set of lawyers. It is for the lawyers that the FCA will have when it comes into existence to interpret this Bill. One problem with the FSA is that the limitations it imposed on itself as to the speed and determination with which it has pursued some of these other problems have resulted in them ending up much worse than they might have been.
It would help if my noble friend was prepared either to say now or to consider allowing me to give him an opportunity to say on Report that the sentiments expressed by this amendment—indeed, the particular courses of action envisaged by it—are ones that he would expect the FCA to undertake on the basis of the powers that it already has in the Bill and that he would expect it to act quickly, as the noble Lord, Lord Peston said, to nip things in the bud rather than waiting until it is absolutely sure that it has identified the exact nature of the problem. In other words, it should be able to take swift and pre-emptive action. If nothing else, under Pepper v Hart this would give the FCA’s lawyers some comfort when they come to interpret the Bill in future.
Lord Sassoon
My Lords, I briefly draw my noble friend’s attention to a couple of things that I have already highlighted this morning. First, there are the additional product intervention powers that the FCA will have, as opposed to those which the FSA has had. Those go to the heart of his concerns, because we are certainly not giving those powers to the FCA, and it is not receiving them, without an intention to use them. Secondly, I drew attention to the consultation on the mortgage review, which indicates a developing line of thinking that goes precisely to his points. The evidence points in the direction that my noble friend is looking for.
Baroness Drake
My Lords, I had come to the point where I was reserving this for Report and begging leave to withdraw the amendment.
Lord Flight
My Lords, I support the common sense of these amendments. However, charities are regulated by the Charity Commission. Although one hopes that all these social endeavours are extremely honest and properly run, it is important to be clear about what charges are involved, and that the people organising them are fit and proper people. There is a very real issue to address here. It would be fine to say, “Here is a green light. Be an investor like a sophisticated investor”, but behind this territory lie quite big issues concerning good conduct.
Lord Sassoon
My Lords, we have already, quite reasonably, spent considerable amounts of time discussing issues of social finance and social investment. I want to reiterate, at the start of my response, that I do share the aims of those who wish to nurture the social investment sector and see it grow. I am pleased that there are plans for some of the noble Lords who are interested in these matters to have a discussion with the Bill team over the recess. I am happy to encourage that to happen. There are a couple of other ways to address this issue, which I will refer to as I proceed. So I hope that the Committee will bear with me for a moment or two. I will explain why I think that Amendment 118AZA and Amendment 121A are not appropriate; but there is another channel as well as further discussions between me and the Bill team where it might be possible to make some progress during the summer on practical steps. So I ask noble Lords to bear with me for a couple of minutes.
I am, of course, aware that my noble friend Lady Kramer had a meeting with the FSA on this matter two weeks ago, which she was good enough to tell me about. Those discussions informed Amendment 118AZA. I completely agree that if we are to help social investment grow we must make it possible for social investment vehicles, and in particular smaller schemes, to market themselves. I take her point about costs. In parenthesis, when my noble friend Lord Hodgson of Astley Abbotts talks about the costs being high, they are high. I do not challenge the numbers of my noble friend Lady Kramer but when my noble friend Lord Hodgson of Astley Abbotts talks about the prospectus directive and half a million pounds, we are in the territory of listed investments, which are rather beyond the sorts of investment fund we want to target. I am sure he wants to target them initially, but I accept the costs are high.
The effect of this amendment and why I cannot support it is that it would have the effect of making all financial promotions that relate to social investment exempt from all the requirements placed on firms and investment schemes, about how they can market their products and investments. I agree with my noble friend Lord Flight that we need to be careful. An essential component of a successful financial services sector, as came up in the discussion of the previous group, is that of trust. We already know what a huge job there is for the sector to rebuild trust. We do not want to undermine trust in the social investment space, because an advertisement or a financial promotion might well be the first point at which matters go wrong if a consumer buys a product or service on false or misleading information. So we do have to make sure that the marketing of financial services is regulated; that financial promotions are clear, fair, and not misleading, whether they are related to social investment or to any other product. In particular, we want to make sure that unscrupulous providers do not see some wide exemption in this area as a loophole—my noble friend is nodding in agreement. We must ensure that there is not a loophole to exploit consumers by offering products around claims of social purpose and getting around the rules. We need to be careful about that, because that will undermine the sector.
Lord Hodgson of Astley Abbotts
I am extremely grateful to the Minister for suggesting that we might be able to make some progress over the summer. His example of an industrial and provident society underlines exactly the point we are making. That is one of the areas that falls between the stools. At the moment it is neither a charity nor a proper regulated body, and this is exactly what we are trying to get at. We are trying to get our arms around this space in a way for which the present regulations do not provide coverage as regards the IPSs.
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.
Lord Lucas
My Lords, all of us in this House wish for that sort of reply from my noble friend, although some of us are not so lucky. I am sorry that the noble Lord, Lord Peston, was not present to hear that so that his scepticism on this matter might have been calmed. It was indeed an excellent reply from my noble friend and I very much hope that my colleagues will be able to take advantage of it.
Perhaps I may draw my noble friend’s attention to an organisation called lendwithcare.org, which is an excellent example of how to do things right in this area. It is concentrating on micro-lending in the third world but the pattern it follows would fit very well the sort of projects that my noble friend Lady Kramer and others have outlined. It takes proper steps to make it absolutely clear to those who lend that there is a serious chance that they will never get back any money. That is crucial. There is far too much opportunity here to induce in those who sell something as a loan the idea that they have a reasonable chance of getting their money back, and that can be very dangerous in unregulated investment.
Lord Sassoon
My Lords, I can be brief on this. As the noble Lord, Lord Davies of Oldham, has explained, the amendment seeks to add money-laundering and the financing of terrorism to the list of matters that are considered to constitute financial crime. First, I should make it clear that the FSA is already able to take action in both these areas because the definition here is broad and the list of matters is indicative and not exhaustive.
On the issue of money laundering specifically, financial crime is defined as including the offence of,
“handling the proceeds of crime”.
Money laundering is plainly part of that—it is one way in which a person can handle the proceeds of crime—so there is no need to list it separately in the Bill.
Turning to the next part of the amendment, it struck me as somewhat odd that the definition of financial crime did not list as major an element as terrorist financing. It seemed a strange omission. I did a bit of research and actually the definition, which is picked up in the draft Bill, stems from FiSMA, the previous Government’s Bill drafted in the late 1990s. I do not intend to be critical of the drafting of the previous Bill but it was drafted when terrorist financing was not as significant a concern as it has since become. I think it would be a good thing to include terrorist financing in the non-exhaustive list in this Bill. The world has moved on. I can confirm that we will consider whether and how to amend the Bill on Report to include terrorist finance in Section 1H.
I am sorry that the noble Lord, Lord Davies of Oldham, seemed to think that I would not pick up his excellent suggestion that we have a look at this again. I am very receptive to all good ideas from the Committee, big and small. I am very sorry that the noble Lord, Lord Peston, is not in his seat because this is one of many concessions and willingnesses to listen to arguments. I should make it clear that I cannot promise that I will continue in this end-of-term spirit for the rest of the day. Even though this will make no substantive changes to the duties and objectives of the FCA, I am grateful to the noble Lord for drawing it to the attention of the Committee and I would ask him to withdraw his amendment on the basis of the assurance I have given him.
Lord Davies of Oldham
My Lords, there is a character in “Cabaret” who expresses herself with “I am overwhelmed,” and that is the only phrase I can think of that is apposite at this moment. I am very glad that I am able to catch the Minister in his wonderfully benign mood. If he can just sustain it to the end of the day we can probably deliver this part of the Committee stage by 7 pm. He has given warning that not all amendments will commend themselves to this extent but I am glad that this one has. I am grateful for his response and I beg leave to withdraw the amendment.
Finance: Loan Guarantee Scheme
Lord Sassoon Excerpts(12 years, 4 months ago)
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Lord Barnett
To ask Her Majesty’s Government how the loan guarantee scheme, announced in a Written Statement by Lord Sassoon on 18 July, will work.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, under UK guarantees the Government aim to kick-start major infrastructure projects that may be struggling to access private finance. Eligible projects will be subject to a detailed assessment process and the Government will conduct and consider the most effective form of guarantee based on the specific project risks. The Government have wide discretion over how a guarantee is structured, subject to the terms and dynamics of each individual project. The guarantees could cover key project risks such as construction, performance or revenue risk.
Lord Barnett
I thank the Minister, although his Reply might have been better as an Oral Statement. I welcome the infrastructure plan. However, with the Prime Minister talking about a 10-year austerity programme and with growth likely to indicate tomorrow that we are in a triple-dip recession, is that not one of the reasons why even companies with 100% guarantees will not want to borrow money? That applies to the main scheme and even the PPP. No one should be surprised. The Prime Minister originally said that the plan would come into force in 2014 at the earliest but, given the economic background, do we not need it now, not in 2014? In those circumstances, could he suggest to the Chancellor that he consider a quadruple U-turn and find a little cash to help kick-start the infrastructure plans, which are so welcome?
Lord Sassoon
My Lords, I am very happy to correct the noble Lord, Lord Barnett. Some £40 billion of projects in the national infrastructure plan that are due to start construction before 2015 could well be eligible for guarantees under the scheme. We are inviting applications for guarantees now and, subject to legislation, we hope to have the first guarantees granted this autumn, so this is absolutely not something that waits till 2014. It is because of the strength of the national balance sheet and the fiscal retrenchment that we are able to come forward with a £40 billion scheme that starts this autumn.
Lord Wigley
My Lords, will the Minister confirm that this scheme will extend to Wales, Scotland and Northern Ireland? That being so, will he confirm that there were discussions with the three Administrations before the announcement was made?
Lord Sassoon
I can confirm that the scheme will extend to the devolved Administrations.
Lord Sharkey
Is there anything about the design of the loan guarantee scheme that makes it more likely that funding to SMEs, particularly those in deprived areas, will increase?
Lord Sassoon
My Lords, the £40 billion infrastructure guarantee scheme is linked to nationally significant infrastructure projects. Typically, the promoters of those projects will not be SMEs, but of course there will be very many SMEs in the supply chain for the projects that will benefit. SMEs working in the public/private partnership space will also benefit from a possible £6 billion of additional loans that was also announced in this package, as will exporters, for whom a £5 billion export refinancing facility will be extended.
Lord Peston
My Lords, it is obvious that this loan guarantee scheme must involve immense risk because if there were no risk involved, the guarantee would not be required. How will the costs of meeting those risks enter into the public accounts, or will the Government try to fiddle the figures so that they do not eventually appear as public expenditure?
Lord Sassoon
My Lords, there will be no fiddling of the numbers by this Government on this or anything else. The position is very straightforward: the financing markets for these projects are extremely difficult but good projects are coming forward in the pipeline, and the beauty of the scheme is that we can use the strength of the government balance sheet. To answer the technical question, the infrastructure guarantees will be financial transactions and will have no impact on PSNB. A project would have an impact on PSND only if there was a non-negligible expected loss, which is not something that we anticipate. The guarantees will generally count as contingent liabilities, and that is very clear.
Lord Elystan-Morgan
My Lords, may I gently tempt the Minister to answer the second question asked by my noble friend Lord Wigley? I take it that there was no consultation. Why was that? Was there an intention to show contempt for the views of the devolved Administrations or did the Government just not think about it? What is the answer, please?
Lord Sassoon
My Lords, we have come forward with a very positive financing package to help our infrastructure providers and our exporters. I believe that that will be welcomed very widely, as it has been, by business organisations. I hope that it will be welcomed by the devolved Administrations; as I have said, it extends to them.
Lord Davies of Oldham
My Lords, of course we welcome this scheme but, as my noble friend Lord Barnett indicated, this is in the context of the UK being in a double-dip or, as he suggested, triple-dip recession. We certainly are the only country in the G20 apart from Italy that is in recession. This modest scheme is welcome. Will the Minister explain, therefore, why the Government axed the similar scheme to support public/private partnerships put forward by the Labour Administration in 2009?
Lord Sassoon
My Lords, again, I am happy to put the record straight. The noble Lord, Lord Davies of Oldham, may not have noticed that this package includes £6 billion worth of facility available to public/private partnership projects that are ready to start in the next 12 months.
Baroness Farrington of Ribbleton
My Lords, would the Minister care to help the House by confirming or denying that there were discussions with the relevant Administrations in advance of the scheme being announced—and not announced to Parliament?
Lord Sassoon
I cannot confirm or deny it. All I say is that this is good news for the whole of the United Kingdom and has been widely welcomed.
Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2012
Lord Sassoon Excerpts(12 years, 4 months ago)
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Lord Sassoon
That the draft order laid before the House on 14 June be approved.
Relevant document: 4th Report from the Joint Committee on Statutory Instruments, considered in Grand Committee on 17 July.
Financial Services Bill
Lord Sassoon Excerpts(12 years, 4 months ago)
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Lord Barnett
My Lords, I, too, congratulate the noble Baroness on her appointment to the Joint Committee. I hope she will be able to do something that, from what I have seen, the committee has not been able to do before; namely, focus on the job in hand. She said—and I disagree with her strongly—that this Joint Committee would be enough to do the job completely. I cannot see that happening from what I have seen of it now, although I am sure she will not be grandstanding as members of the committee are doing today. My noble friend Lord McFall will probably do a better job; I congratulate him too on his membership of the Joint Committee.
I strongly support my noble friend Lady Hayter on this amendment. I am concerned by the broader issue of the FCA. The Government have changed the name from the FSA to the FCA. I am not sure that the FCA will be any better at dealing with the problems that have arisen about LIBOR or anything else, or with all the mistakes that were made. Perhaps the Minister will have in his brief the number of FSA staff who have now simply changed their letters and become members of the FCA. While I am digressing slightly, perhaps I could digress a little more and ask the Minister if he can do what the noble Lord, Lord De Mauley, could not do earlier; namely, to answer my question about why the Government decided to make a statement about an important issue of loan guarantees on the “Today” programme this morning and not in the House. I look forward to hearing the Minister on that.
The whole issue of what the FCA is going to be able to do within the Bank of England disturbs me a great deal. I am not at all sure that it should have been done in this way. To give huge powers to the Bank of England, as I said, is hardly likely to help, judging by what has happened in the past. We now know from the governor of the Bank and others that they knew nothing whatever about what was going on, which is rather surprising, to say the least.
The noble Baroness, Lady Kramer, was able to bring LIBOR into this whole issue in her amendment. Like my noble friend Lord Peston, I am not quite sure how she managed to get it there but she did, and the best of luck to her. I hope that she gets a reply. For the moment, though, I wonder what changes the Minister hopes to see that will improve what went on before. The FSA was clearly not successful in the role that it had been given. I would like to see some of these amendments approved so that we can see the FCA doing a better job. I wish that that might be true but I am bound to say that I look forward to what the Minister will tell us about how great this new FCA will be. For now, though, I will leave it with him and, as I say, perhaps he can digress slightly and answer my other question.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, I hope that the Committee will agree that it is probably better, given the number of members of the committee here, if I stick to matters relevant to this group of amendments rather than wandering off into the long grass from where I might never come back. All three amendments in this group relate to concerns that have arisen in connection with the recent LIBOR scandal, and in that context I am sure that the Committee would like to thank not only my noble friend Lady Kramer and the noble Lord, Lord McFall of Alcluith, but my noble friend Lord Lawson of Blaby, the noble Lord, Lord Turnbull, and the right reverend Prelate the Bishop of Durham for kindly agreeing to join the parliamentary committee on banking standards, which goes to the heart of the concerns raised in the amendments.
I turn to the issue of professional standards. Amendment 104ZB seeks to place requirements on the FCA to impose a training regime. The object of the regime is to specify minimum standards of competence and integrity, and it will include continuous professional development and a code of conduct. Amendment 110ZB seeks to extend the non-exhaustive definition of the integrity of the UK financial system by adding a reference to the professional standards of those working in financial services.
As a former chairman of the IFS School of Finance—what was previously called the Institute of Bankers—I believe as firmly as anyone that professional education has to be a cornerstone of standards in the banking industry. Personally, I wish that more banks would insist on more of their employees going through structured professional education, not just at the start of their careers but right through them. In answer to the point made by the noble Lord, Lord Davies of Stamford, there are indeed providers of these courses of great distinction, including the IFS School of Finance, and many bankers go through them. However, we would all like to see many more going through them and on a continuous basis.
Having said that, particularly in the light of the LIBOR scandal, we must ensure that our regulators have the right powers to set and enforce high standards of behaviour in the financial services industry. That is why we have invited Parliament to set up an inquiry into standards in that industry. While I share many of the concerns of the noble Baroness, Lady Hayter, that does not mean that I can support these amendments, which I consider unnecessary and to be coming forward at the wrong time. Neither amendment gives the FCA powers to impose standards of integrity and competence that it does not already have. The FCA’s integrity objective contains an indicative and non-exhaustive list of matters that are relevant to the UK financial system operating with integrity. The conduct of those working in financial services is already covered by the objective, even if it is not listed here. The list contains a number of matters relevant to the LIBOR example, including the soundness of the system and the orderly operation of markets. These can be ensured only if standards of professionalism are maintained by those in the industry.
Lord Davies of Stamford
The Minister agrees with me that it is highly desirable that there should be regular courses for people working in the financial markets, so that those advising the less sophisticated can be kept up to date. Yet I cannot understand why he resists the suggestion that that should be a statutory, mandatory requirement—that, as my noble friend’s amendment lays down, such people should be forced on an annual basis to have their qualifications validated. What is his reason for resisting that?
Lord Sassoon
If the noble Lord, Lord Davies, would permit me to complete the argument, I have explained that the FCA has an integrity objective, under which standards of professionalism need to be maintained by those in the industry. Within the overall integrity objective the FCA already has a mandate and powers to deal with these issues. It will specifically have powers to impose standards, including training and qualification, on individuals. Training, qualifications and minimum standards will be of considerable importance to the issue of re-establishing a proper banking culture. They are matters which will be relevant to the regulators’ consideration of applications by persons wishing to become approved to carry out significant influence functions, but it is a big step from that to the FCA mandating a training regime across all areas of financial services.
The forthcoming reviews, including that of the parliamentary Joint Committee, will show whether my analysis is right, or whether the committee believes that the FCA needs additional powers. To answer at least one of the challenges from the noble Lord, Lord Barnett, I refer back to the existence of the committee; this is going to be central to what it is looking at. I see one member of the committee nodding assent, but I think it is obvious.
Lord Peston
From what we know about the LIBOR scandal is it not valid to infer that, whoever these people engaging financial intermediation are, they are not a bunch of professionals? Is someone not going to have to be responsible for raising professional standards, or if not raising them then introducing them? I am surprised that the Government do not take this as seriously as they should.
Lord Sassoon
My Lords, we take it extremely seriously and that is why we thought that it was right to set up the Joint Committee. Unlike the noble Lord, Lord Barnett, I do not doubt that it will get through its work efficiently, effectively and quickly.
Lord Sassoon
I recognise that we are giving it a big challenge and I am grateful to it for taking the challenge on, and for the terms of reference, but we should wait to see what it comes up with in this area. Even if it came up with nothing, there are adequate provisions. On another point that the noble Lord, Lord Barnett, raises, what will be different with the FCA? One of the things that will be different is that the Government are publishing new threshold conditions for all regulated firms. Indeed, they have been published today on the Treasury website in advance of the relevant clauses being debated in due course. They include tougher standards on the probity of staff and management in regulated firms. The noble Lord, Lord Barnett, is right to insist that tougher standards should be imposed by the FCA than the FSA, and that is exactly what we are doing. As ever, he is right on the ball and goes to the heart of the matter.
Baroness Hayter of Kentish Town
Is that it?
I will start with a small correction. The Minister said that these amendments arose from LIBOR. If he had picked up my hints when I anticipated him—code for “That’s what his friend said in another place when it was going through Committee in March”—he would know that two of these amendments predated LIBOR.
Lord Sassoon
Just to be clear, I said that these relate to concerns that have arisen in connection with the recent LIBOR scandal. Of course, they arise in relation to the conduct of the industry more generally. I fully recognise that and I did not in any way exclude that from my remarks.
Baroness Hayter of Kentish Town
Not purposefully; I did not mean it like that. But these amendments are built on many other things. I thank those who have contributed to this debate—the noble Baroness, Lady Kramer, as well as my noble friends Lord Peston, Lord Davies and Lord Barnett. On a small issue, if there are new requirements on the Treasury website today, perhaps they could be shared with Members of the Committee.
I think the Minister gave us the ammunition that we are asking for. In talking about his role as chair of a training organisation or an accreditation organisation, he said that he wished more banks did structured training. That is the point we are trying to make. Because they do not all do it, we want it mandated. He also said that there will be a higher entry bar for new approved persons. But this is not just about people coming into this industry; something needs doing now. That is also what these amendments are about.
Most worrying, however, is that there was no reference to a code of conduct. That is why I was slow to get to my feet; I was awaiting another page. Obviously, the Government do not feel that is needed in this industry for financial professionals on whom we rely as clients and consumers. It is highly regrettable that the one thing the Minister did not bother to answer on was the need for a code of conduct. I do not know what it is about that that he cannot accept. I do not know why he cannot accept the demand for proof of competence. As was made clear, there need not be one proof of competence for everyone in this field; there can be a range of them. We are not asking for a single mandate; we are asking for the FCA to come up with a regime that would have competence requirements.
Finally, my question, like that of my noble friend Lord Barnett, is this: what will improve without such amendments? If this is just the FSA becoming the FCA, will we see anything different? I believe we need some signals about a code of conduct and raising standards. This may be something we need to return to later but for the moment I beg leave to withdraw the amendment.
Lord Stevenson of Balmacara
My Lords, I support the amendment in the name of my noble friend Lord McFall. I declare an interest as chair of the Consumer Credit Counselling Service, the country’s leading debt advice and debt management charity. I want to focus in particular on people who struggle with debt, often because they have got into arrears with their credit cards or personal loans and other consumer credit products, but also because of mortgage arrears, rent arrears and, increasingly, fuel and utility debts and council tax.
CCCS has helped more than 1.5 million people in the past three years and about half of them told us that unemployment or reduced income were the main reasons for their debt problems. People also say that life events such as illness or separation can quickly overwhelm family finances and cause or contribute to mounting debt. What they find is that debt is rarely a problem in isolation. There are nearly always other factors that need to be addressed, including the link between problem debt and depression. Nearly half of CCCS clients said they had been worrying about their debts for a year or more before seeking help from a debt advice provider. Around a third of people said that their debt problems had weakened their relationships or led to a break-up. Nearly half said that debt had shattered their self-confidence to support themselves and their families.
The pre-crash boom in consumer credit, which peaked in about 2007, also remains a key part of the UK debt narrative. Even after several years of near zero lending, the total outstanding secured and unsecured debt is still some 91% higher than it was 10 years ago—so it is a pretty bad picture. Research for CCCS by the Financial Inclusion Centre concluded that some 6.2 million households are currently either already in financial difficulty or at risk of getting there, and it is going to get worse.
The IFS estimates that real median household incomes will fall by 7.1% between 2009-10 and 2013-14 as a result of low growth and fiscal tightening, the largest decline since the 1974-77 fall of 7.5%. Unemployment remains at a stubbornly high 8.3%, or 2.65 million people, although it has just reduced. Youth unemployment sits at 22%—more than one in five young workers is without a job. This is particularly worrying as we know that time spent not in employment, education or training as a young adult can have a scarring effect as well as reducing earnings.
At the same time, we are experiencing an extended period where households are facing rising costs for essential goods and services. Food, fuel and transport costs are rising sharply and we will sooner or later face a rise in interest rates, which are unnaturally low at present. Figures from the Financial Inclusion Centre show that if living costs rise by more than £50 per week, it would double the percentage of households—which is currently 30%—who have no spare cash at the end of the month.
There is surely sufficient evidence in what I have said that the idea that consumers should be required to take full responsibility for their decisions does not accord with what happens in the real world. My noble friend Lord McFall made this point very eloquently, and we strongly support his idea that in considering what degree of consumer protection may be appropriate, the FCA must have regard to the differing ability, disability and vulnerability of different consumers.
However, it goes further than that. The FCA has also got to take into account what the CCCS and FIC research tells us about the way people’s history and the impact of family issues, illness and relationships interact with their credit arrangements. Families are being squeezed hard at both ends, with incomes and expenditure under pressure. The Bill ought to be amended to reflect less of the theory of caveat emptor and be more reflective of what is happening on the ground.
Lord Sassoon
My Lords, the debate on this group of amendments has been very interesting. However, it has some characteristics of straying into Second Reading territory because it has gone much wider, albeit over very important areas, into questions of broad mis-selling standards in the industry, which we have discussed already this afternoon. Therefore, I will not go over all the points that have been made but stick to the issues that are the focus of the specific amendment, subject only to one general point about the important questions raised by the noble Lord, Lord McFall of Alcluith, on proposed new Section 1C—on the consumer protection objective, which clearly goes to the heart of this—and his observations and questions on proposed new Section 1C(2)(e), which concerns the general principle of care.
One issue around the drafting that we should bear in mind is that the FCA will be responsible for the protection of retail consumers, but will also have a responsibility for wholesale markets, professional markets and counterparties. The reason behind the drafting of proposed new Section 1C(2)(e) is to make sure that it encompasses both the very strong duty of care that is due to individual consumers, on the one hand, and the fact that between professional counterparties the nature of the duty of care is very different. Indeed, in the terms of this particular principle, there may be no duty of care under this provision if the market is purely professional—it is very different from a consumer product market. It is important to understand that background to the discussion. However, these amendments are very much concerned with protection of the consumer.
Baroness Liddell of Coatdyke
There is some confusion in my mind about what the noble Lord is saying. He is talking about the responsibility and the environment of risk in wholesale markets as against retail markets. Even in wholesale markets, there is now a need for a duty of care. The noble Lord was managing director of financial regulation at the Treasury, so he will be aware that from the time of Barings onwards there has been an issue about the duty of care in the wholesale market, too. I am not saying that it should be equated across the board with the duty of care to consumers, but no one who has watched developments over the past few years can take a laissez-faire attitude to what is happening in wholesale markets.
Lord Sassoon
I am not suggesting for one moment that there should be a laissez-faire attitude. I am merely pointing out that a very different set of parameters has to be used by the FSA, and will have to be used by the FCA, when dealing with different parts of the financial services market. To those who argued earlier that we should not lose caveat emptor, I point out that in professional-to-professional markets, of course there has to be a high degree of integrity. Recently we saw exactly what appears to have been going on in what are fundamentally professional markets. However, that is very different from the duty of care owed in the case that we are talking about, which is of selling products to vulnerable, disabled consumers. Wholly different considerations apply from those that apply in professional markets. I point that out because the noble Lord, Lord McFall of Alcluith, got into this broader question, and as background to the question that we need to come on to, which is whether it is appropriate to include amendments to highlight important issues about disability, ability and vulnerability that address consumer product markets.
Lord Davies of Stamford
I hope that the Minister will think again about this before Report, because he has got it profoundly wrong. There is a duty of care for all clients. Of course, it has different consequences according to the nature of the client and according to their sophistication, capital resources and ability to absorb risk. When Goldman Sachs placed collateralised debt obligations—securitised packages of mortgage loans—with professional clients, they knew that the products were junk, and internal e-mails referred to them as such. They were breaching a duty of care; there is no doubt at all about that. The courts will be looking at this in connection with LIBOR and are very likely to decide that if it were the case that even professional clients were working on the basis of a falsified LIBOR rate, there was a breach of fiduciary responsibility and duty of care. Duty of care is an enormously important term of art. The Minister, this afternoon, is trying to weaken and dilute it. That is an extremely dangerous line to go down.
Lord Sassoon
No, my Lords, I am trying to use duty of care in the precise way in which it is used in FiSMA and the regulations that go with it. There are, of course, all sorts of other considerations that apply, whether it is in the LIBOR market or other markets. However, I am trying to use the term precisely as it relates to this legislation and the regulations under it. If we want to redefine duty of care or anything else as something that it is not, now is not the time to do it. This has been a wide-ranging debate. However, I would like to focus on the amendments themselves, which highlight important issues with much more focus than some elements of the discussion we have just had. The issues concern disability, ability and vulnerability. I fully share the views of the noble Lord, Lord McFall of Alcluith, that the ability of consumers to engage in financial services can be affected by their age, disability or other personal circumstances. These are points that have been made by a number of noble Lords in this debate, albeit that some other points went rather wider.
The first thing to be clear about is that I disagree with the noble Baroness, Lady Liddell of Coatdyke. It would be nice to be in a world in which these issues did not have to be referred to in legislation at all, but that is not the position I take. I believe that they should be reflected in legislation, and indeed they already are in a number of ways. For example, both the FSA and the Money Advice Service, which we have been talking about, have duties under the Equality Act 2010. The FCA and the PRA will be subject to the same requirements, so the Equality Act also bites on them. Also, under the public sector equality duty set out in the Equality Act, both the FCA and the PRA will be required to assess their rules and processes for their impact on protected groups, and take mitigating action where appropriate. In addition, equality law applies to financial services providers so that firms are required to make “reasonable adjustments” to their services for consumers with a disability under the Equality Act, depending on the nature of the product, the barrier and the size of the business. So there is indeed a body of law that goes very much to the points which the noble Lord, Lord McFall, makes.
Then there is the question of monitoring compliance by the industry with equality law. This is not a job for the FCA or the PRA. It is for the Equality and Human Rights Commission, as the regulator responsible, to enforce the law, and it indeed has the powers to do that. These powers include helping individuals with their legal cases and taking legal action against organisations that appear to have broken the law.
Amendment 136 specifically concerns the regulatory principle concerning consumer responsibility to which the PRA and FCA must have regard in discharging their general functions; and through Amendment 105 the noble Lord wishes to ensure that the FCA, in determining what an appropriate degree of consumer protection is, has regard to the way in which certain consumers may need extra help and protection. These issues are reflected in the FCA’s proposed principles-based approach to regulation, which is designed to ensure that firms adapt their approach depending on the needs of the customer. Instead of having myriad detailed rules and requirements that focus on different degrees of vulnerability, disability or other personal circumstances, requirements on firms will focus clearly and unequivocally on the overarching principle that firms need to take account of their customers’ needs and treat them fairly.
This builds on the FSA’s current approach. For example, principle 7 of the FSA’s Principles for Business states:
“A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading”.
In setting penalties for the failings of firms, one key aspect the FSA considers is,
“whether the breach had an effect on particularly vulnerable people, whether intentionally or otherwise”.
There are examples of where the FSA has taken very significant action. I will cite only one, but I am sure the noble Lord is familiar with it. Late in 2011, the FSA fined NHFA—a subsidiary of HSBC—£10.5 million for mis-selling products to elderly customers. The firm sold asset-backed investment products to elderly people wishing to fund their care home costs, but in fact many of them were not expected to live beyond the period for which it was recommended the products were held. I could also cite cases in relation to the Bank of Scotland and Swift 1st Ltd, so the FSA has been on the case.
The principle that a customer with greater needs should be better protected or offered more support and assistance is clearly enshrined in the regime, but it would not be appropriate to take a more detailed approach, for two reasons. First, we would not want the FCA to cut across or duplicate the efforts of the Equality and Human Rights Commission in considering what circumstances might need special care, and how they should be accommodated. The current approach strikes the right balance of setting a high-level framework with requirements directly imposed on firms by the Equality Act and, on the other hand, with discretion for the FCA to impose more detailed requirements as necessary to ensure appropriate consumer protection.
Secondly, I do not think it is right to list all these matters here. Again, it is potentially duplicative, but more importantly it also risks being incomplete. For example, we might legitimately add age, gender or geographical location—issues which I believe have been raised in previous debates on this Bill—to the list already proposed in the amendment, but where would we stop? I believe there are sufficient powers there. We will come on in due course to the new product intervention powers, which are important in this context compared with what the FSA has at present. Although we will no doubt come to them in detail in due course, the product intervention powers in new Sections 137C and 138M, which mean that in extreme cases a product could be banned with immediate effect, are also additional important safeguards to back up the general principles and approach which I have outlined.
I hope that I have made it clear that the Government take these issues extremely seriously. Unfortunately we cannot and should not rely on people doing the right things, which is why we have the various provisions in the equality legislation as well as the provisions for the FCA—provisions that will be tougher on intervention powers than the powers that the FSA currently has. I therefore invite the noble Lord to withdraw his amendment.
Lord McFall of Alcluith
My Lords, in withdrawing my amendment I express my disappointment with the Minister’s response. Just to illustrate that individuals in this House are up to date with electronic technology, I can say that I took advantage of looking up the meaning of “objective” in Dictionary.com, because that is in bold at the top of the paragraph we are talking about. “Objective” means,
“something that one’s efforts or actions are intended to attain or accomplish”.
In other words, it is the purpose, the goal or the target of what we are to achieve. I submit that there is nothing more comprehensive than that. Therefore, we do not stray away from the subject; this is very germane to the subject. There is still disappointment in the FCA being expected to attend something rather than having a duty to attend. Tonight, we expect to get to a particular clause before we adjourn at 10 o’clock, but the consequence of not getting that far is that we take it on the next day. In other words, the consequences are not very great. There is a difference between that and a duty.
I submit that the Minister, for whom I have great respect, has muddled thinking on this. I wish that he would look at this again so that we can come back on Report to get clarity. Besides me, quite a number of people cannot understand what the Minister is trying to achieve here. I beg leave to withdraw the amendment.
Lord Sassoon
My Lords, I shall respond to the amendment that has been moved but I shall not respond to the amendment that has been not been addressed. Amendment 106ZA seeks to add to the list of matters to which the FCA must have regard in advancing its consumer protection objective. The new “have regard” proposed by my noble friend focuses on data protection, as he has explained, and specifically would require the FCA to consider the issue of consumers having to give informed consent in order for their data to be shared, in particular within a group of companies which includes a non-financial services institution.
Of course, I agree that consumers should have full knowledge about what is being done with their data at all times and have to consent to any sharing of them. I will do my best to reassure the Committee, as I think it is fairly clear, that there is already legislative provision in place to deliver what my noble friend wants to achieve and that this applies whether or not we are talking about different entities—because it is essentially a legal entity test—within a banking group or different entities within a supermarket group. The bank within a supermarket group is bound to be in a different legal entity from the supermarket operation itself. The same considerations apply whether within a banking group, within other financial services groups or within a supermarket group.
The ability of a subsidiary to share personal information about its customers, either with the parent company or with another member of the group, is already regulated by the Information Commissioner under the Data Protection Act 1998. It is legislation that applies to a financial services firm in exactly the same way as it applies to a supermarket or any other data controllers. If a financial services firm has breached a customer’s rights under the Data Protection Act—for example, if it has used the customer’s personal information unfairly, for a reason that is not the one for which it was collected, or without proper security—then the right course of action is for the customer to complain to the firm and then to the Information Commissioner. The Information Commissioner has the powers to force compliance with the law.
The FCA will not, therefore, be the first line of defence in the area of data protection. It is important that we do not blur the lines of responsibility between a financial services regulator and the Information Commissioner, who, as we have seen through numbers of cases, whether in financial services or in other areas, is a regulator with teeth. The case in 2007 of Nationwide is an example of the Information Commissioner taking aggressive action. In support of that, the FSA will take action where appropriate. The Information Commissioner is the first line of defence, but if a financial services firm were to do something reckless, such as losing a laptop with consumer data on it, then it will be fined, as Nationwide was fined £1 million in 2007.
We have the Information Commissioner as the first line of protection to make sure that information cannot leak from one entity to another within the group without the informed consent of the consumer and that the data within the entity are properly used in the way I have suggested. However, as a second line of defence, in areas such as the one that I have described, of the loss of a laptop, the FSA—and in future the FCA—will have important supporting powers. Therefore, I would suggest that this “have regard” is one that is not necessary or appropriate and might raise false expectations about the responsibility of the FCA in an area where there is a regulator with proven ability to come down hard on those institutions that abuse consumer data. I ask my noble friend to withdraw his amendment.
Lord Lucas
My Lords, I am very grateful for that explanation. At this stage, it is exactly what I was hoping for. I beg leave to withdraw the amendment.
Lord Sassoon
My Lords, there is a lot to deal with because of the number of amendments in this group, although they all broadly cover the same ground. I feel that if I err on the side of treating them in short order I will not do justice to each individual amendment, but if I deal with each in turn I risk going on too long. I think that in this case I should probably err on the side of doing justice to these amendments, because each is somewhat different.
The amendments all focus on the need for firms and advisers to act honestly, fairly and professionally in the interests of consumers. This follows a recommendation from the Joint Committee in its pre-legislative scrutiny of the Bill. I doubt that anyone in this Committee would question the need for such integrity in firms’ dealings with their customers—certainly, they have not done so in this debate—but I do not believe that the approach suggested by the amendments would help secure the outcome intended.
I can assure noble Lords that we carefully considered the wording suggested by the committee, but concluded that the best way to address the concerns underlying its recommendation was to modify the matters to which the FCA is required to have regard, thus reflecting what firms should already be doing, rather than to seek to impose directly some kind of high-level duty on firms.
The consumer protection objective ensures that, as the FCA acts to protect consumers, it will be required to have regard to the level of care that firms should provide to their customers, based on the level of risk involved and the capability of the customers. This is set out in new Section 1C(2)(e). The phrase “level of care” is wide enough to ensure that fairness, honesty and professionalism, and certainly acting in consumers’ best interests, are all taken into account. I am not sure how the amendments being proposed would add to the existing provisions; in fact, they may narrow the definition of “level of care that is appropriate”, which I am sure the Committee would not wish to do.
I thought that I heard my noble friend Lord Sharkey refer to the enforceability in law of principles of regulation. I make it absolutely clear that principles of regulation are indeed enforceable in law. It was those general principles which the FSA used to pursue, for example, the Barclays LIBOR case, and it will be exactly the same for the FCA and the PRA.
Amendment 106A would create a “general duty” for firms to act in the way that the amendment suggests. Such a duty would be so high level and vague as for it to be very difficult for firms to know what was expected of them, and it is far from clear what, if anything, such a duty would add to the contractual requirements and terms that already protect clients and consumers. Such a vague duty would also be difficult for consumers or the regulators to enforce. It is the Government’s position that it is clearer, better and safer for consumers for the FCA to make a body of clear, specific and targeted rules that give both firms and consumers an understanding of what level of care is expected, and that is the approach that we have taken.
Amendment 136A would add to the “senior management” regulatory principle an acknowledgement of the requirements for senior management,
“to act honestly, fairly and professionally”.
As with Amendment 106A, I do not believe that this addition would benefit consumers. Both the PRA and the FCA will have powers, under Sections 56, 63 and 64 of FiSMA through amendments made by Clauses 11 and 12 of this Bill, to take action in relation to a failure on the part of an approved person to act in a fit and proper manner in performing functions in relation to regulated activities. Therefore, there is already a perfectly clear and sufficient mandate to ensure that, if either regulator judged an individual to be acting in a way that was not honest, fair or professional, they would be prompted to take robust action against them, up to the removal of their status as an approved person. We do not need extra provision to make this happen. I hope that I can assure the Committee that the amendment is not required.
Amendment 108C would require the FCA to have regard to,
“the general principle that firms or advisers must act honestly, fairly and professionally in the best interests of their customers”.
We agree that they should, but the amendment would not guarantee that they would. It would not establish any duties on firms additional to the detailed rules made by the regulators. It would instead add something to which the FCA would have to “have regard” when considering what was an appropriate level of consumer protection. As I have already said, new Section 1C(2)(e) already deals with the point.
Amendment 138A would include the same phrases, “honestly, fairly and professionally” and “best interests of consumers” in the list of principles to which both regulators will have regard when carrying out their general functions. In addition, it would add the principle that,
“authorised persons should manage conflicts of interest fairly, both between itself and its clients and between clients”.
While I agree with the sentiment of both of these suggested additions, I have to say that they are again unnecessary. I have already explained why I believe that the wording referring to the expected level of care in the FCA’s consumer protection objective is the best way of ensuring this.
On the specific issue of conflicts of interest, if firms were not appropriately managing conflicts of interest, it is unlikely that they would be providing an appropriate degree of protection to consumers. In those circumstances, the FCA would have very clear powers to act. I am not convinced that the amendment would give the FCA power or authority that it does not have already. I thank noble Lords for tabling these amendments and assure them that I understand their concerns. However, in advancing its consumer protection objective, the FCA will already be focused on ensuring that firms treat their customers fairly, honestly and professionally and act in their interests.
Amendment 107 would include in the list of things to which the FCA must have regard when considering what degree of consumer protection is appropriate a firm’s responsibility to act in consumers’ best interests where the consumer has reposed trust in the firm. I should recognise that the noble Baroness, Lady Drake, made a valuable contribution to the Joint Committee that considered the draft Bill. I am pleased to see that Amendment 107 in her name continues that input into these Committee proceedings.
I am sure that we are all again in agreement that financial services firms should always act in the best interests of their consumers. It is an issue which it is important to discuss, as I shall go on to do, but, as the noble Baroness would expect, I argue that Amendment 107 would not ensure the outcome that we all desire. Instead, it would add something that the FCA would have to consider when deciding what was an appropriate degree of protection for consumers. It would require the FCA to proceed on the basis that there is a “duty” for firms to act in their consumers’ best interests where consumers place trust in those firms. Acting,
“in the consumer’s best interests”,
is a noble aspiration, but defining what this means is difficult, particularly in the context of the FCA determining what level of consumer protection is appropriate under such a duty.
The best way to ensure that firms act in their customers’ best interests is not through a general duty on firms. The noble Baroness acknowledged that there would be a difference of view about whether the amendment would impose a new duty on firms. Again, she will not be surprised that I argue that the analysis we have done suggests that there is a new general duty here, but we think that the better way to do it is through FCA rules and principles in support of the consumer protection objective—rules that must be clear, specific and enforceable, and that act to protect consumers against firms that do not or may not act in their interests. Therefore, while I disagree with the substance of the amendment, I support its driving principles. This is why we are creating the much more focused conduct-of-business regulator, the FCA, which will have a very clear consumer protection objective and the suite of new powers to protect consumers that we have discussed.
Baroness Hayter of Kentish Town
I am not quite clear, despite all the noble Lord has said, how conflicts of interest will be dealt with. This is not about timely advice or all those other things he mentions, but it is absolutely central to the issue of duty of care.
Lord Sassoon
To be absolutely clear, the regulators—and the FCA in particular—will have very clear powers to make any further rules on top of those that already exist in the FCA’s rulebook in order to deal with conflicts of interest. I can be completely clear and unequivocal on that point. The powers are there and further rules can be made in this area if the FCA at any point regards them as necessary.
Lord Sharkey
I thank the Minister for his detailed response. I listened very carefully to everything he said, but I was not convinced by the notion that this group of amendments might narrow the FCA’s scope to act in this area. I was equally unconvinced that the general duty to provide services honestly, fairly and professionally was too vague, wide or ill defined, if that is what the Minister was actually saying.
I continue to believe that there is merit in an explicit inclusion of the two principles that we suggest in the list of the regulatory principles common to both the PRA and the FCA. The debate has also shown the high level of concern about this whole area. The detail of the Minister’s response shows that he is alive to that level of concern. I expect that we will return to this matter on Report. In the mean time, I beg leave to withdraw the amendment.
Lord Sassoon
My Lords, I am sorry to say that this is one of those groups of amendments where I do not think that the Committee’s time will be well served. I have repeatedly made public and private offers to the opposition Front Bench to talk to us in the Bill team at any time about any of their amendments. Not once in the process of this—now long—Committee stage, or before it, have the Opposition taken up the offer of talks to discuss amendments.
Lord Sassoon
If the noble Baroness will let me, I will complete my sentence before letting her in. She herself began by saying that these amendments are defective, and that is indeed the case. As I shall explain, however, they also do not reflect one or two of the simple facts of the situation. Although there is, of course, a proper concern in this area, if the party opposite were prepared to discuss those facts, we might not be talking about some of these amendments in the way that we are.
Baroness Hayter of Kentish Town
My Lords, that offer has not come to me. I was at one meeting with the Bill group and asked whether I had access to the Bill team, but I have yet to be given its e-mail address. I had an e-mail from the team about one of our amendments earlier this week, and I have written to it on another issue. I have not had repeated offers. I have talked to the FRC about this amendment, and it knows all about it. I am therefore slightly surprised by the Minister’s comment.
Lord Sassoon
My Lords, I believe that I made the offer in the last Committee session, on the Floor of the House. Hansard will record when I last made the offer in this Committee. I cannot speak to every member of the opposition Front-Bench team but I have made the offer repeatedly to the noble Lord, Lord Eatwell. Indeed, I know that the Bill team has made quite clear to the opposition research team how it can be reached. I make the offer again because I think that there are many things around which we could clear the ground, and that would be helpful for everybody. I can quite understand that there may be issues here, but there are many interested parties who put forward all sorts of good ideas for amendments which, on scrutiny, might not be reflective of the situation as it exists.
Let me help the noble Baroness with a couple of the facts of the situation. First, the FCA has already brought in a rule with which she may be familiar but to which she did not allude: rule 2.2.3 of the current Conduct of Business Sourcebook. This requires UK-authorised asset managers to put statements of commitment to the stewardship code on their websites, or—if an asset manager does not commit to the code—to provide its alternative investment strategy there. I would of course expect the FCA to carry forward this important rule in its own rule book. So I would suggest to the Committee that the suggestions underpinning the discussion we have just had—the contentions around the lack of joined-upness—are not reflected in the way in which the FCA Conduct of Business Sourcebook already explicitly refers to the stewardship code.
I agree with the noble Baroness completely about the need for an MoU. However, what she does not do in her speech this evening is to recognise that the FSA already has an MoU with the FRC. I believe that it covers all the relevant matters. We have discussed the subject of MoUs before. The Bill provides explicitly only for MoUs between the key players in the regulatory system: the Bank of England, the FCA, the PRA and the Treasury. We have discussed why that should be. That does not mean that there will not be—and are not already—MoUs between the new regulators and other bodies; we have talked about the OFT, and there is already an existing MoU with the FRC.
So I understand where the noble Baroness is coming from in this group of amendments. I believe that the matters are already properly accommodated within the Bill. I wish that we could have had a discussion about this outside the Committee, but I am glad to have now got that on the record. I would ask the noble Baroness to withdraw her amendment.
Baroness Hayter of Kentish Town
My Lords, it would not be very satisfactory not to consider such an important issue in Committee. Concern about it is shared not just by the FRC but by the ICAEW, which last night again expressed its support and its belief that the issue is important. As the Minister will know, there are vital and urgent requirements to improve client asset audits. Those can be undertaken only by regulated professionals overseen by their recognised professional bodies, such as the ICAEW, and these are overseen by the FRC rather than the FSA. So this is key stuff. This is not—this will sound awful but I will say it—“a little discussion with the Baroness, who does not really understand it but can be well briefed outside this House”. I think that that was the tone of the Minister’s comments. I am speaking on behalf of organisations such as the ICAEW, which feels very much that it has a key role to play, which it wants to play, in the regulation of this industry. We know that we need improved rules and guidance about how auditors should work. We know that this is in the hands of professional bodies, not the FCA. If there is already an MoU with the FSA, it seems to me that there will be one with the FCA. So I do not think that writing it in legislation will cause a revolution, nice though that would be. There are important issues of discipline in the hands of ICAEW and other professional bodies overseen by the FRC. It would be inadequate for those to be free-floating and not in the Bill. For the moment, however, I beg leave to withdraw the amendment.
Financial Services Bill
Lord Sassoon Excerpts(12 years, 4 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Lucas
My Lords, both segments of the amendment are in effect questions that ask my noble friend where he envisages that the limits of the FCA’s powers will lie in dealing with what I perceive to be a couple of current problems. The first part of the amendment is aimed at things such as tropical forestry investment. One finds full-page advertisements in supplements, in particular in the Guardian but doubtless in other places. Presumably, advertisers think that Guardian readers are notable suckers for green investment. The advertisements promise rates of return varying from 18% to 22% per annum over a period of 15 years, and are backed up by a remarkable lack of financial information of any kind—just lots of happy pictures of growing trees and talk about the value of the eventual timber and the many uses for it, about the unspecified rise in the market price of timber, and so on. As far as I can make out, they are complete scams. I investigated one of them in as much detail as I could—which turned out not to be very much, because not much was forthcoming.
The schemes escape FSA regulation because they are not considered to be collective investment schemes. Although they involve a collection of people pursuing a single investment objective—which is the way the scheme manager makes money—they are not collective in the sense that at their root is individual ownership of a separate plot of trees, land in the UK, wine or another similar separable asset. Therefore, the FSA currently is unable to regulate them.
Thanks to my noble friend, I had very helpful conversations on this matter with his department, where officials said that the tack that I was originally pursuing might lead to the FCA having all sorts of jurisdiction over arrangements that were essentially private, such as arrangements between consenting adults to do something that might or might not be to their advantage but which the FCA would have no business regulating. Therefore, I attempted to reapply myself to what must be—from the frequency and scale of the advertisements—a large-scale fraud by now, and attach myself to the concept that if something is widely advertised as a consumer investment it is something to which the FCA should be able to pay attention. That is a reasonable way of separating large-scale public frauds from minor arrangements that should be outwith the ambit of the FCA.
The second part of the amendment deals with the fees or benefits that accrue to managers of investments. I will take as a particular example stock lending fees. Over a long period the FSA has been unable to make managers declare their full benefits from managing funds. The level of fees in this country is far too high anyway. Managers take far too large a proportion of the total return. Noble Lords may have heard the Danes on the radio this morning, threatening to bring low-cost investment management to the UK. Good luck to them; I hope that they will be permitted to do so. However, we ought also to pay attention to our own business, and to making sure that, where a firm says that it charges 1.5%, that is what it will charge, and that it will not indulge in something that is essentially a risky practice and take all the benefit from it without telling its clients that that is what it is doing.
There are a number of ways in which the City has derived benefit from the investment management process. One that particularly gets my goat is high-frequency trading, which is robbery by any other name. People get a preferential supply of information about trades and are able to surf the wave of real investors’ trades. Every penny that they make is at the expense of real investors—in other words, our pensions. The only reason we tolerate it is that they are doing this to foreigners as well, so we are making more money out of it than we are losing. That is not a healthy way to go on. We should have an open and transparent arrangement for saying how money is earned in the City, and it should be clear to people who are investing exactly what bite the managers and others in the City are taking out of a scheme, so that they can make a reasonable judgment on whether this is the right place to invest or whether they should take their money off to somewhere where they will be allowed a higher share of the total return. I beg to move.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, I am grateful to my noble friend for bringing up these important matters. As he knows, they are not easily dealt with. I will say a few things about where we are. I will not dwell too much on the specifics of the amendment because, as he said, his intention is to provoke a discussion around some of these topics rather than around the specific drafting.
The difficulty around these unregulated activities and schemes is that a line must be drawn between regulated and unregulated activities. Around the margin, wherever the line is drawn, there will always be incentives for rogues to exploit the boundary. This may well be what people are doing on some of the schemes to which he referred—I do not want to express a view. The first thing that we need to recognise is that a line has to be drawn between regulated and unregulated activities. For example, we would not want to draw the regulatory net so wide that it would capture investments in a family farming business or investments by family and friends in a small start-up business—the sort of activity that as a Government and as a House we very much encourage.
Once one accepts that there will be investment schemes that involve a number of people that we do not want to capture in the regulatory net, there will always be a borderline, and I fear that there will also be people who seek to exploit it. It certainly appears that the schemes that my noble friend referred to were structured specifically to avoid being captured in regulations. That means that the regulator cannot act unless either the schemes fall into the regulatory net, or the promoters of the schemes hold themselves out to be regulated. Some fall into the trap of holding themselves out to be authorised and regulated, and then they can be caught. However, the majority do not. I do not think we can simply or easily change the definition of a collective investment scheme in Section 235 of FiSMA to address the point, because either the boundary will shift somewhere else, or we will capture the sorts of legitimate activity that I have referred to.
What my noble friend Lord Lucas usefully draws attention to is the role of the FSA at present, and that of the FCA in future, which is to think very hard about the preventive consumer education work that is needed to warn the public about the risks of these unauthorised schemes. The fact that my noble friend regularly comes back to them undoubtedly helps to raise that awareness. On the other side, the regulator, whether it is the FSA or the FCA, will also work with the police, trading standards, and the Insolvency Service in this space to do whatever they can. However, I appreciate that unregulated activities will be nigh on impossible to stamp out altogether. I am sorry, but it is no great surprise that I cannot give my noble friend Lord Lucas a complete answer on that.
On fund management fees, the main point is to give my noble friend reassurance that there is a substantial regime in place through the FSA’s rulebook regarding the disclosure of investment management fees. There is a lot of debate and discussion in this area at the moment. The fact that it was discussed on Radio 4 this morning shows that this is becoming an issue which is getting a lot of exposure, which must be a good thing in terms of making investors aware of how much of their capital can disappear through regular compounding of fees. Whether the fee levels in the UK are particularly high or not, compared to other jurisdictions, is clearly not a straightforward matter but is another dimension of this which has been referred to. Ultimately I suggest that these issues are not matters for the Bill beyond the fact that I am sure that the FCA will have all the powers necessary in this area. It is an area in which awareness-raising of the sort which my noble friend is engaged in will focus the regulators to use the powers that they have. I am grateful to him for raising these points, but I ask him to withdraw his amendment.
Lord Lucas
My Lords, of course, I am grateful to my noble friend for his reply, although I do not share his optimism as to the number of people listening. As far as advertisements are concerned I can see I have lost that argument, and we will wait until some crisis arises and events force the Government’s hand. There we are. People should have been more careful with their money; they should have known that 20% compound for 15 years was probably not safe.
So far as investment management is concerned, I think we have been doing some useful things in these last few years in paying real attention to fees, to executive remuneration, and to other ways in which the return to capital is being eroded and the way in which that is costing us all in terms of pensions, support for pensioners and the health of the economy. I hope we continue to make progress. I shall certainly take an interest in the way the FCA asks for disclosure in this area. However, for the moment I thank my noble friend and beg leave to withdraw the amendment.
Lord Stevenson of Balmacara
My Lords, my noble friend Lord Borrie kindly drew the Committee’s attention to my position as chair of the Consumer Credit Counselling Service and I declare my interest again. I would also like to thank him very much for his kind remarks about the work of the charity, which does so much for people who have unmanageable debt.
This is a wide-ranging group of amendments in the sense of issues that have been raised. I will focus on two areas: the claims management area and the debt management space. Claims management companies have increased in number and have come to the attention of the public, and the industries in which they operate, much more in recent years. You have only to turn on the TV or listen to the radio to be bombarded with advertisements from claims management companies. E-mail traffic is also increasing.
There are apparently more than 3,200 authorised firms operating today. Of course, many in the claims management industry act responsibly. The part of the industry that does not adhere to best practice breaches guidelines on cold calling, text messaging and e-mails. Some will take up-front fees and/or fail to disclose properly the amount of compensation that a consumer will pay if their claim is successful. Through high-pressure sales they will sign up people who have no possibility of making a successful claim on the basis that they can get you thousands of pounds in compensation.
That sort of activity is prohibited under existing regulation, but unless it is effectively policed it comes to nothing. However, large numbers of those in the industry do not adhere to best practice and a few could even be described as rogues. In a recent debate on this subject in your Lordships’ House, the noble Lord, Lord Kennedy, said that the Government need to take a long, hard look at the industry, look at existing provisions and make a number of changes to beef-up existing regulation and ensure that existing provisions are used effectively in an industry that needs effective policing.
In those circumstances, it is also fair to pick up a point made by the noble Lord, Lord Flight, that the current arrangements with the Ministry of Justice acting as both the sponsoring department and the regulator appear to have broken down. It would be good if the Minister could report on what progress has been made on this list of helpful suggestions.
My noble friend Lord Borrie drew attention to the debt management sector and in particular to the 2007 Act. There are nothing like as many private sector debt management firms in the UK, as much of the debt advice is undertaken by charitable bodies such as Citizens Advice and my own body the CCCS, which offer a free service of high quality. Collectively, commercial firms administer some 200,000 debt management plans and about 50,000 IVAs. The trade body, DEMSA, estimates that this is some 40% of all the debt management plans currently in operation.
DEMSA states that its goal is to promote best practice and protect the interests of clients and the lenders to which they owe money, but in its review of the sector in 2010 already referred to, the OFT found instances of non-compliance among DEMSA member firms, albeit DEMSA members received a clean bill of health compared to the rest of the sector, and action was taken on a number of firms.
On the publication of its report on debt management in March 2012, the chair of the BIS Select Committee, Adrian Bailey MP, said:
“During these difficult economic times, increasing numbers of people up and down the country—not least some of the most vulnerable members of our society—are relying on the provision of consumer debt management services and payday loans to make ends meet. And yet this industry remains opaque and poorly regulated. Despite a Government consultation that ended almost a year ago little has been done to remedy the situation. The Government must take swift and decisive action to prevent firms from abusing the needs of such a vulnerable customer base”.
The committee’s main recommendations are worth repeating. The Government must work to phase out up-front fees: the provision of guidance on this point by the OFT is inadequate. The Government should introduce the necessary regulations to ensure companies publish the cost of their debt advice and their outcomes if an agreement cannot be reached during discussions with the industry. The Government should establish effective auditing of debt management companies’ client accounts. The report concludes that greater transparency in the commercial debt advice market would benefit consumers hugely and that voluntary codes of practice are highly unlikely to achieve this aim. The Government must be prepared to regulate if consumers are to receive the protection and the level of information they require.
It seems clear from all this that we have reached the stage in these two sectors whereby strong and effective regulation is required. We also think it is time that the Government should take advantage of the opportunity of the Financial Services Bill to make the new regulatory bodies responsible for this currently unregulated part of the market which affects so many vulnerable customers.
Lord Sassoon
My Lords, this group contains an interesting mix of loosely related amendments, if they are related at all. I shall respond first to the amendments concerning claims management firms.
Amendments 118D and 147K seek to bring claims management companies under the regulation of the FCA. Clearly the regulation of claims management companies must be effective, but there are two reasons why a transfer of CMC regulation to the FCA is not the right course of action. First, the best way to improve regulation of CMCs is to make changes to the current regime, rather than by transferring responsibility for regulation to another body. My noble friend has already questioned whether the transfer of consumer credit responsibilities by April 2014 is achievable. I should say, in parenthesis, that I believe it is achievable, although I appreciate that there is a lot to do. There will be a consultation early in 2013 about how it will operate. However, we are talking here about making another transfer of responsibilities, which I do not believe is necessary or the best way to achieve the objective.
The Ministry of Justice, as we have heard, is the body responsible for regulating the activities of businesses providing claims management services. It carried out a review last year of claims management regulation which concluded that fundamental reform was not needed but identified a number of areas where improvements could be made. A shift in responsibilities now would not address the underlying problems in the conduct of claims management companies and would detract from the concrete steps that the Government are taking to address those problems.
Lord McFall of Alcluith
The Minister said that the Ministry of Justice undertook a review that concluded that fundamental reform was not needed. As I mentioned earlier, two months ago I chaired a meeting between the banks and consumer groups on PPI, where £8 billion is at stake. Both groups were very concerned about some rogue claims management companies and asked for an urgent meeting with the Ministry of Justice. Indeed, I hope that they will get a meeting with Ken Clarke as a result. Therefore, on the ground the situation is much different from the one the Minister describes, with the Ministry of Justice saying that fundamental reform is not needed.
Lord Sassoon
My Lords, I have said, however, that improvements are needed, as was identified in the review. If any impetus is needed in setting up the meeting which the noble Lord seeks, I shall relay the message to my colleagues in the Ministry of Justice to make sure that it happens if it is not already fixed. Yes, there are problems to fix. They include—very much to the point of the noble Lord, Lord McFall—the establishment by the claims management regulator of a specialist team to handle CMCs that pursue claims for mis-sold PPI. Not for the first time, the noble Lord is one step ahead of me, but that is one of the specific items that need to be addressed to improve the situation.
Since last November, the team has conducted more than 60 audits of claims management companies to identify any evidence of lack of compliance with the rules. That team is working with the Financial Ombudsman Service, the FSA and the Financial Services Compensation Scheme, as well as with major banks, to help identify non-compliant businesses, gather evidence and help improve the claims process for consumers. It is recognised that there is a problem, and the authorities are working in a joined-up way to deal with it. More broadly, the Government have reviewed the conduct rules which all CMCs must comply with as a condition of their licence. The Ministry of Justice will shortly launch a consultation on amending the conduct rules to tighten up on certain practices and provide further clarity. I firmly believe that improvement is needed and that the improvements to regulation of CMCs currently being proposed by the Ministry of Justice are the right course of action. Transferring responsibility for regulation to another body would not be.
Secondly, the FCA will be a conduct-of-business regulator for financial services, but claims management companies do not provide a financial service. It is true that many of those companies are active in the financial services sphere, particularly in relation to matters of PPI, but their business is not limited to claims in relation to financial services. It is therefore not clear why it would be logical for the FCA to take on this responsibility.
I turn to Amendment 108, concerning the regulation of consumer credit. The amendment would require the FCA, in considering what degree of protection is appropriate for consumers, to have regard to,
“where credit is granted to a consumer, a clear statement, in cash terms, of the total cost of such credit”.
I am conscious that, with an amendment in the names of the noble Lord, Lord Borrie, and my noble friend Lady Oppenheim-Barnes, I am facing a formidable duo with vastly more experience in these matters than I have. The Government clearly recognise that there are difficulties with APR—which, for the avoidance of doubt, refers to the annual percentage rate—representing the cost of short-term loans such as pay-day loans, but let me explain to the Committee what we are doing.
My colleagues in the Department for Business, Innovation and Skills have been working with the short-term loan industry to ensure that borrowers receive clear information about the cost of a loan in cash terms per £100 in addition to its APR. The four main trade associations, which represent over 90% of the short-term loan industry, have agreed to update their codes of practice to reflect this and made other commitments to help consumers, and that will be done by 25 July. I believe that this is very significant progress. Having said that, I would argue that the APR serves a useful purpose in enabling consumers to compare the cost of different credit products, so that will remain in place in addition to the new cash cost number that will be given.
Lord Borrie
The people who will subscribe to the new code are those who are more likely to conform to the requirements of the Government, the ministry or whatever. It is the other companies, which may not subscribe to these requirements, that one is bound to be more worried about. Those are the ones that will not provide the cost of credit in cash terms.
Lord Sassoon
My Lords, I believe that a step that takes us from no agreement in this area to a situation where over 90% of the industry has agreed through the code of practice to reflect the cash cost, and for that agreement to be in effect from 25 July, is a huge step forward. Of course, because it is done via a code of practice and a voluntary agreement, BIS has been able to do it relatively quickly. I would suggest that having it 90% done, and done quickly—which one hopes will drive fringe players out of the market if they do not buy into the codes of practice—is the right way, and an energetic and effective way, for my colleagues to address the situation. We should wait and see how that operates, but I believe that it will be effective. It is a major advance and is compatible with the difficult constraints of the European directive.
Baroness Oppenheim-Barnes
Could the motive behind the European directive possibly be their desire not to see anything quoted in euros?
Lord Sassoon
I am not going to question the motives of the directive, except to note that in this area, as in others, we are not free agents.
I turn to Amendment 118E, which seeks to insert into the list of “regulated financial services”, referred to in the FCA’s objectives,
“debt management companies or debt adjustment services companies”.
There is no explicit reference to debt management or debt adjusting on the face of the Bill. However, I would like to reassure—I am grasping for whose name is attached to this amendment—the noble Lord, Lord Eatwell, but also the noble Lord, Lord Stevenson of Balmacara, that Clause 6 enables all consumer credit activities currently regulated by the Office of Fair Trading to be transferred to the FCA, including debt management. So I hope the noble Lord will accept my assurance that no further provision in this area is necessary, because it is indeed picked up by the definition of Clause 6.
I should turn next to Amendment 197ZA, before I address some government amendments in the group. It concerns the question of the statutory debt management scheme and is also in the name of the noble Lord, Lord Borrie. It would amend enabling powers in the Tribunals, Courts and Enforcement Act 2007 for a statutory debt management scheme, if implemented, to apply to commercial as well as not-for-profit organisations.
As I said, the Government are currently working to deliver non-legislative alternatives with the debt management industry, as we have with the fee-charging pay-day loan industry. We want to give sufficient time and focus to that work to develop a voluntary code and to take account of the wider changes to the regulation of the debt management sector enabled by the Bill, which will lead to more proactive and intrusive regulation for the sector, before we look to a statutory scheme. If the Government were to resort to a statutory scheme, that would be the appropriate point to revisit the provisions in the Tribunals, Courts and Enforcement Act 2007 to ensure that they meet the policy needs, rather than addressing it at this stage through the Bill before we have bottomed out the ability of a non-legislative solution to have effect.
I shall speak briefly to the government amendments in the group, Amendments 142 and 194 to 196. Noble Lords may be aware that the Government brought forward a number of amendments at Report in another place to support the transfer of consumer credit regulation from the OFT to the FCA. Among those amendments was provision enabling local weights and measures authorities—trading standards—to continue to provide services to the national consumer credit regulator and to take action against those who provide credit on an unregulated basis following the transfer to the FCA. The amendments complete the group by creating parallel provisions for the Department of Enterprise, Trade and Investment in Northern Ireland, which plays the same role in Northern Ireland as does trading standards in England and Wales.
With those various assurances abut this rather disparate group of amendments, I ask the noble Lord, Lord Borrie, to consider withdrawing his amendment.
Lord Borrie
Yes, of course I will withdraw my amendment, but I must express disappointment with the disinclination of the Minister to take the one further step that would enable a change to be 100%, rather than whatever percentage of good boys will conform to a code of practice.
Lord Sharkey
I support Amendment 112 in the name of the noble Lord, Lord McFall. As the Bill stands, the use of “may” instead of “must”, when listing matters to have regard to in considering the effectiveness of competition in the markets under discussion, seems to have two problems. The first is that it makes the competition objective less strong than the consumer protection objective, in which the FCA is given a list of things that it must have regard to. In the competition objective, the FCA is given a list of things that it may have regard to. Why is this? Why is the consumer protection objective definite about what the FCA must have regard to, while the competition objective is not? Surely it would be more sensible to have these objectives on an equal footing and in both cases supply the FCA with a list of things that it must have regard to.
The second problem is that the use of “may”, regarding what the FCA takes into account in considering the effectiveness of competition, seems to render the whole clause without much force or substantive meaning. Why list the factors that the FCA may have regard to if it actually does not have to do so? Either the factors listed are important to consider or they are not. If they are important, surely the FCA must consider them. If they are not important and can be disregarded by the FCA, as the Bill seems to provide, why are they there at all? I hope that the Minister may see the virtue of “must” and might agree to the noble Lord’s amendment.
Lord Sassoon
My Lords, I am infinitely flexible; it depends how long we go on this evening but I can see one or two amendments coming up on which I can be more accommodating than I will be on this one.
I shall start with perhaps the easiest part: the questions from the noble Lord, Lord Tunnicliffe, around Amendment 111A. I am delighted to see the noble Lord joining the fray. We have now had four players on the Front Bench from the Opposition; I wish that we had such depth of reserves on our side. However, I will battle on.
Amendment 111A seeks to bring the activities of market makers into the scope of the FCA’s competition objective. I reassure the noble Lord and the Committee that the activities of market makers are already very much covered by the objective. Put very simply, to operate as a market maker firms will have to obtain permission to deal in investments as principal, and that is a regulated activity. That means that such firms are performing a regulated activity or a regulated service, and noble Lords will see that new Section 1A(1)(e) clearly states that markets for regulated financial services fall within the scope of the FCA’s objective, so the FCA can indeed shine its regulatory light on market makers as on any other part of the sector. For completeness and to clarify, as far as recognised investment exchanges or RIEs are concerned, they can be exempt from the general prohibition under Section 285(2) of FiSMA, but even their activities are brought within the scope of the competition objective by virtue of subsection (1)(b) of new Section 1E in the Bill. I hope that that deals with that.
Turning to Amendment 112, competition can mean many things to many people. To indicate what the Government might want the FCA to look at in deciding how to advance its competition objective, subsection (2) of new Section 1E sets out a number of matters to which the FCA may have regard in assessing the effectiveness of competition in a given market. It is an indicative and, importantly, a non-exhaustive list. The FCA cannot dodge or duck out of its overall competition objective. Had we not put the non-exhaustive list of examples down there we might not be expressing the concern that we have. There would be the simple competition objective and that would be that.
Given the list, let me explain a bit more why there is danger in changing “may” to “must”. That would mean that the FCA would always have to consider all the issues set out in new subsection (2). The FCA should not necessarily have regard to all of that list when looking at particular competition questions. There could be unintended consequences.
If the FCA wishes to take action to promote switching, the consideration of barriers to entry will not be as important as the ease with which consumers can transition between providers and how that is affected by the structures of the market or behaviours of incumbents. To enable the FCA to generate the outcomes that we want under the competition objective it is important that the list is expressed in the terms that it is. This does not make the basic objective of the FCA weaker in this area. It just means that we need to give it a degree of discretion to be able to target the particular issues that they are looking at at any one time.
That addresses the amendments that are being spoken to and I hope that the noble Lord, Lord McFall of Alcluith, will consider not pressing his amendment.
Lord Tunnicliffe
My Lords, I am sorry that the Minister did not rise to my invitation to wax a little lyrical over his commitment to consumer interest, but at this late hour I do not now invite him to. I am sorry too that he was not able to see the attraction of “must”. I have laboured on such ventures and I know the ferocity with which one’s brief has said that one must never move from “may” to “must”. Many of us would have been more satisfied if the Minister had accepted “must”, and we will have to see whether my noble friend Lord McFall brings this back later for further consideration.
I thank the Minister for his straightforward assurances on Amendment 111A and I beg leave to withdraw.
Lord Sassoon
My Lords, in addressing Amendments 114, 119 and 117B, the Committee has drawn attention to some very topical and important issues. I cannot now remember why Adam Posen of the MPC came in; I think it was Adam Posen who the noble Lord, Lord McFall of Alcluith, referred to. This is an area that is rightly being widely discussed. The Government agree that innovative finance models such as peer-to-peer lending are important. Some £100 million of the £1.2 billion that will be invested through the Business Finance Partnership will be invested through other non-traditional lending channels, to reach smaller businesses such as peer-to-peer platforms, so the Government are putting their money in this space.
We agree that if these types of operations are to be regulated, the regulatory approach to be applied should be proportionate. However, the Government do not believe that the case for regulation has yet been made. As I said when I responded at Second Reading, this is a new and growing sector and we do not want to inhibit its growth. Nor do we want to put up barriers to new entry by protecting the incumbents. Furthermore, we would expect the costs of regulation to be passed on to consumers.
I reassure noble Lords that the Treasury is alive to the needs of the sector. My colleague the Financial Secretary has met some key players in this emerging market. While the Government do not think that statutory regulation is appropriate at this point, we will keep this under review. I say advisedly that the Treasury will keep it under review because the decision is for the Treasury and not for the FCA when it comes into operation.
I am happy to confirm to the Committee—this is important in relation to some of my noble friend’s points—that the changes being made as part of the Bill under Clause 6 would make it legally possible to bring direct platforms into scope. I stress again that we have made no decision to regulate and do not believe that we should. However, unlike the position under FiSMA, we now have an enabling provision in new Section 1J whereby we can amend the objectives to bring peer-to-peer platforms, for example, into the scope of regulation. My noble friend is right to draw attention to Clause 6 as an enabling clause.
I turn to Amendment 117B. Where innovative finance models are regulated, the FCA will of course take a proportionate approach, as I made clear when the Committee discussed social investment last week. Where they are not regulated, there is no role for the FCA, and there can also be no role for the FCA to facilitate the work of other government departments. I regret to say to my noble friend that the decisions about tax treatment, for example, will remain a policy matter for the Chancellor, as will the decision about the scope of regulation in this area. Of course, the Chancellor keeps all tax policy matters under review in the context of his Budget.
It is perhaps worth saying that there has never been a generalised income tax relief for losses on investments, which is part of what is being discussed in this area. HMRC has always sought to classify dealings in financial products by individuals as investment rather than trade, and a targeted income tax relief specifically for loans made through p-to-p platforms would be open to particular risk of avoidance, would encourage other, similar investments to request similar tax relief and might prove challengeable under EU state aid rules. Therefore, I do not want to get my noble friend’s hopes up in this area, although he was of course right to draw our attention to the issue.
Finally, I cannot support Amendment 119 because only if and when the Government decide that direct finance platforms are to be regulated will we insert relevant definitions into FiSMA. As I said, the provision is there in new Section 1J to update the definitions. I hope I have provided my noble friend with at least some assurance that the Bill takes forward the legal framework so that if a decision is made to bring p-to-p platforms into the scope of regulation, it could be achieved. Therefore, I ask him to withdraw his amendment.
Lord Lucas
My Lords, is my noble friend agreeing with me that the principal reason why there is no ability to offset tax for peer-to-peer lending activities is that they are not regulated and therefore there is scope for abuse?
Lord Sassoon
No, my Lords, I am not saying that. There are plenty of different tax treatments for all sorts of regulated and unregulated activities. I see the issues as separate. However, I have indicated a couple of areas in which changing the tax treatment would be difficult and would run counter to some of the broader accepted principles by which we run the tax system. But I would not link the two things explicitly together.
Lord Sharkey
There was a question in the debate about the scope of my suggestion. The amendments were drafted deliberately widely so that they create a “may” or a “must” for the FCA when it considers competition so that it looks at new developments in the market that may be in the interest of consumers.
I have been encouraged by a lot of the debate. There is an almost universal consensus that regulation might be important and might be a very good thing. I think I am perhaps a little encouraged by what the Minister has said, but I will read Hansard carefully tomorrow to check that I am still encouraged. There is one issue here that needs stressing, which is the matter of urgency. It takes only one rogue operator to go bang in a very serious and public way to sink this whole area. The Government should perhaps be a little more alive to that particular problem and the risk of that happening. Having said that, and looking at the clock, I beg leave to withdraw.
Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2012
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Lord Sassoon
That the Grand Committee do report to the House that it has considered the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2012.
Relevant document: 4th Report from the Joint Committee on Statutory Instruments.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, these regulations were laid before the House on 14 June and implement changes to legislation, now required under EU law, to ensure that UK financial services and commodity trading firms are able to bid in auctions of emissions allowances in the UK and across Europe. It is important that the UK allows these firms to bid in auctions of emissions allowances to maintain London’s position at the heart of the carbon market, of which it currently enjoys an 80% global share.
The EU Emissions Trading Scheme was the world’s first and largest international scheme for the trading of greenhouse gas emissions and is at the heart of the UK Government’s policy to tackle climate change cost-effectively. It is estimated that the EU Emissions Trading Scheme will deliver emissions reductions of 3,100 metric tonnes of CO2, relative to 2005 levels, between 2013 and 2020. Across the EU, it is predicted to deliver emissions savings of 21% below 2005’s verified emissions by 2020. There will also be a dramatic rise in the level of auctioning. This is in line with the market-based approach of the scheme and best ensures the efficiency of the system.
As the system moves to a greater level of auctioning, it is important to ensure confidence and integrity in it and in the way that auctions are run, so the EU regulatory framework for auctions has been strengthened and introduces common EU standards for regulating certain bidders in the auctioning of emissions allowances. It is up to each member state to implement this framework in accordance with its own national laws. This includes requiring certain bidders in the auctions to be authorised by national authorities: for the UK, that is the Financial Services Authority. To minimise administrative burdens, these regulations apply only to banks, investment banks and credit institutions when wishing to bid in auctions on behalf of others, and to commodity traders when bidding in their own right or on behalf of others. Under the EU rules, eligible participants in the EU ETS will be able to bid directly, subject to meeting certain admission requirements, without FSA authorisation. However, it is likely that financial institutions will provide an important means for operators to enter the market where direct bidding is not practical or desirable.
Implementing these changes will result in the Financial Services Authority gaining powers to authorise those financial services to bid in auctions of emissions allowances across Europe. To achieve this, the regulations amend secondary legislation relating to FiSMA, the Financial Services and Markets Act, and make minor amendments to the Act itself. Minor amendments to domestic anti- money laundering legislation are also required. We have considered the impacts of these regulations on business and have minimised costs to UK financial institutions by ensuring that, for such firms, we meet our obligations and no more. We consulted on our approach in the usual way and received no substantive responses. In addition, the regulatory policy committee has scrutinised and approved these changes. The FSA has also consulted on its regulatory approach, including any fees and compliance costs applying to those wishing to bid. Again, it received no substantive responses.
It is important to note that only those financial services firms wishing to bid in auctions of emissions allowances will be subject to these regulations and need to be authorised by the FSA. Firms will therefore seek authorisation to bid only if they consider that it will provide a financial return to them.
It is important that we make these legislative changes now, before the first auctions of phase 3 and aviation emissions allowances begin. The first UK auctions will take place in November this year, subject to EU approval. Germany and the European Commission have also indicated that they will begin auctioning allowances after the summer on their own platforms.
In summary, these legislative changes are required by EU law so that UK-based firms can participate in auctions of emissions allowances across Europe and provide services to others wishing to buy allowances. The changes are necessary to preserve London’s position at the heart of, and leading, the developing carbon market.
Lord Davies of Oldham
My Lords, what a joy it is to discuss with the Minister, after a fairly contentious issue last night—namely, the Government’s Finance Bill—this instrument, a measure that is not only uncontentious but is in fact welcomed by the Opposition. I agree with the rationale that he has given both for the necessity of the measure and the benefits that it will bring regarding access to the auctioning of greenhouse gas emission allowances.
We have one or two questions that I am sure that the Minister will be more than ready to answer. Is he as surprised as I am that, from what one can gather, the consultation, which, admittedly, ran for a very limited period, heard from only one respondent? This must surely be some kind of record. It indicates either that the measure is beyond reproach in every way—the answer that the Minister will certainly favour—or that it presents a limited opportunity. Small and medium-sized enterprises do not appear to think that they have much opportunity under the order. Does he have any comments to make on that?
I would be interested to see just how the Minister evaluates the significance of the measure in the Government’s overall objectives regarding climate change. Not only do we share those objectives but we are keen that the Government continue to sustain the policy to hit the targets that have been established for a considerable time now. I note the urgency of the situation, given that European auctions are taking place in the fairly near future. That is required under EU law and it is only right that the measure is before us. We give it our fullest support.
Lord Sassoon
My Lords, I am grateful to the noble Lord, Lord Davies of Oldham, for making sure that our afternoon is not quite as exciting as the close of business last night. I thank him for his support for the measure, which is, rightly, seen not only as uncontentious but as supportive of this important area of policy development. In response to his question about the consultation, I can tell him that it lasted for eight weeks. I believe the lack of substantive responses is a reflection that this is a very simple measure, which simply extends the requirement of authorisation to firms if they want to continue to operate in the EU auction process as it moves into this new phase 3. I am not at all surprised or in any way concerned by the lack of substantive responses. As the noble Lord says, there was one, but I believe that it was pointing out something in the grammar or the spelling of the rules, which it is important to get right—I know that your Lordships’ are always very keen, as respondents to consultations are, to make sure we get the grammar right.
Lord Davies of Oldham
Is the Minister confessing that the Government were wrong and the respondent got it right?
Lord Sassoon
I do not actually know whether the respondent got it right; all I know is that that was the issue that came up.
On the noble Lord’s point about SMEs, I do not see it in the way that he sees it. Principally, this is a sophisticated market—trading in emissions is not something that the man or woman on the street would do. We are talking about, on the whole, sophisticated commodity trading firms or large financial intermediaries, so the measure is not targeted at SMEs directly. They will be the ultimate users and beneficiaries of the broad emissions system being put in place, but they are not likely to be players. On the other hand, if they want to be players, as the impact assessment set out, the costs of going through the registration authorisation process are not onerous.
On the noble Lord’s last point about how the order fits within the objective of meeting the climate change targets, I confirm what I said in opening. This Government, like the previous Government, are keen to see a market-based solution as far as possible to meeting the targets—the emissions trading system and auctioning very much underpin the market-based approach. In that context, this is a small additional measure to make sure that the auctioning element of this construct is properly regulated. I hope that that answers the noble Lord’s questions.
Supply and Appropriation (Main Estimates) Bill
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Lord Grocott
My Lords, I rise only to reflect that if this were a fully elected House, the proceedings that have just taken us about 30 seconds would probably have taken us three weeks instead.
Finance Bill
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The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, as noble Lords are well aware, when this Government came into power they inherited the largest peacetime deficit in our history. We are doing everything possible to get the economy moving and to deal with the enormous debts we inherited. Last week’s Fiscal Sustainability Report by the Office for Budget Responsibility highlighted the importance of the Government’s plans to ensure the long-term sustainability of the public finances. Our consolidation plans build on last year’s public sector pensions deal, which the OBR has identified as instrumental in preventing further increases in public sector net debt over the long term.
This Bill implements further reforms to improve the state of the economy. Despite the challenging economic backdrop, we remain committed to supporting growth. The Bill introduces a number of changes to encourage growth in our economy and help businesses of all sizes. The Government have clearly set out their ambition to have the most competitive tax system in the G20. The competitiveness of our tax system diminished over the last decade, as our competitors cut their corporation tax rates. We have taken action to address this. Clauses 5 and 6 make further cuts to the main rate of corporation tax, to a rate of 23% next year. This will be followed by a further cut in the Finance Bill of 2013. A cut in the main rate of corporation tax benefits businesses right across the country. As the CBI said:
“The additional cut in the headline rate of corporation tax will help make the UK a more attractive place for companies to invest, do business and create jobs”.
The Bill also introduces new controlled foreign companies rules designed to improve the UK’s tax competitiveness. These reforms will ensure that this is done in a way that reflects modern, global business practices, significantly reducing the compliance burdens of business. As my right honourable friend the Chancellor said in his Budget Statement, this reform,
“will stop global firms leaving Britain, as they were, and encourage them to start coming here”.—[Official Report, Commons, 21/3/12; col. 802.]
WPP and other major companies have recently announced that they are considering a return to the UK, or that they will move their tax domicile into the UK.
Alongside these reforms, the Bill also introduces a patent box to encourage innovative activity in the UK, but competitiveness is not only about the corporation tax rate. We had been told that the 50p rate of income tax was damaging to our competitiveness and that it would not raise revenue. Indeed, the HMRC report, published alongside the Budget, sets out that the 50p rate is distortive, is damaging to international competitiveness and is an economically inefficient way of raising revenue. In short, the 50p rate has failed. The analysis by HMRC shows that the yield would be, at best, £1 billion and, at worst, may raise nothing at all. This is because the behavioural response has been substantially larger than expected. The 50p rate has damaged the UK’s competitiveness at the very time we must do all we can to improve it. That is why we will reduce the additional rate to 45p from next year. As the CBI said:
“Reducing the 50p income tax rate will send a clear signal that Britain is open for business”.
We want to make the UK the best place in Europe to start, finance and grow a business. That is why the Bill introduces measures to enable greater investment in our small and medium-sized companies. The increases to thresholds and better targeting of the enterprise investment scheme and venture capital trusts in Clauses 39 and 40 will allow businesses to raise equity more easily. The Bill also establishes the new seed enterprise investment scheme to encourage investment into new, early-stage companies by providing tax relief of 50% to investors.
The Bill also provides for individuals. The increase in the personal allowance in Clause 3 will set the value at £8,105 from 6 April this year and we have announced a further increase of £1,100 next year, the largest ever increase in cash terms. The Government are taking 2 million people out of income tax and providing a tax cut to 24 million people. This is a major step towards our commitment to raising the personal allowance to £10,000 by the end of this Parliament.
The Bill also makes changes to the age-related allowances that support our objective to make the tax system simpler and easier for people to understand, but no pensioners will be worse off in cash terms as a result of these changes and this year our triple lock will see the basic state pension increase by over £275. This is £127 more than the previous Government’s plans.
This Government are responsive to the concerns of working families and businesses about the cost of living and the challenges of running a business. That is why we have deferred the fuel duty rise, so that road users are paying 10p a litre less in taxation than they would be doing had Labour still been in power. As RAC Foundation director Professor Stephen Glaister said:
“This is good news for drivers and good news for the country”.
As noble Lords know, this Government have also had to make difficult decisions so that we can tackle the deficit. This includes withdrawing child benefit from households earning more than £50,000. This is a fair way to make savings. We are also taking steps to ensure that the wealthy pay their fair share. The Budget package ensures that the wealthiest will pay five times more than the cost of reducing the additional rate of income tax. The introduction of a new higher rate of stamp duty land tax at 7% on properties sold for more than £2 million will raise over £1 billion in the next five years. The new stamp duty land tax enveloping entry charge rate of 15% will deter those seeking to put their high-value property into corporate structures to avoid tax. The introduction of the UK-Switzerland agreement will ensure that we address the tax loss from those who put their money into Swiss banks to evade tax, and we are tackling tax avoidance with measures in the Bill raising over £1 billion in total.
We will also raise revenue from those sectors that are better able to pay. The increase in the bank levy in Clause 209 will ensure that that the levy will raise around £10 billion from banks over the course of this Parliament, yield that is helping to ensure that we can reduce the deficit, which in turn ensures the stable, low interest rates that are of such benefit to our economy.
The Government are committed to greater consultation on tax policy changes. Most of the measures in the Bill were announced at Budget 2011 and have been subject to extensive consultation. We published more than 400 pages of draft legislation for comment in December and received more than 450 comments. This consultation has ensured better legislation with fewer changes required.
The Bill sets out changes to improve our competitiveness, encourage investment and support our businesses through the recovery. Of course, we always said that recovery would be choppy. In fact, last year the independent Office for Budget Responsibility revealed that the underlying damage to the economy, and our challenge in repairing it, was much greater that anyone had thought. However, we are doing everything possible to confront Britain’s problems, get the economy moving and deal with the enormous debts we inherited. The Bill builds on the progress that the Government have made to date to help families, help business and support economic growth, and I commend it to the House.
Lord Sassoon
My Lords, as I respond to this debate on the Finance Bill, I thank the dedicated band of noble Lords for contributing to this short and, what was until the last intervention, rather focused debate, before the noble Lord, Lord Davies of Oldham, went off in many different directions. This year’s Finance Bill follows an unprecedented degree of consultation and engagement, and implements many of the changes announced at the Budget. I say to the noble Lord, Lord Davies of Oldham, that there were some 200 measures in the Budget and on three of them, after consultation, we made appropriate changes. Therefore, I think that his characterisation of the Budget-making process, and the changes since, is way off the mark.
First, I will address one or two of the specific points raised before returning to the bigger picture. I start by thanking my noble friend Lady Kramer for pointing out what the noble Lord, Lord Davies of Oldham, seems not to recognise—that we are now engaged in the most progressive tax strategy of any Government in recent years. I completely agree with her. Not only is that the case but it is demonstrably the case. No previous Government have put distributional tables into the Budget document so that it is completely clear where the majority of the pain is falling, which is on those with the broadest shoulders in the top percentiles of the income distribution. I can assure my noble friend that as we carry on the progress on these many issues, we will make sure that we are very alive to loopholes. On stamp duty, for example, there are clearly questions, with possible ways of doing sub-sales avoidance and so on.
My noble friend mentions one offshore financial centre. I think that the agreement with Switzerland, which I referred to in my opening speech, shows that we will work tirelessly to take all appropriate action on that front. The noble Lord, Lord Browne of Belmont, makes a powerful case in relation to marriage. I would not go as far as the noble Lord, Lord Davies of Oldham, in rebutting that case. The coalition agreement commitment remains in place. We keep that commitment, as we do all taxes, under review. The noble Lord would not expect me to say any more this evening, but he has put on the record very clearly his feelings on this matter.
As to the IT systems of HMRC for transferable allowances, again it is an area of questioning that has been raised in another place. There is nothing I can usefully add. We do not tend to give a running commentary on HMRC operational matters. If there is anything more I can do to shed light on the specific questions that the noble Lord, Lord Browne, raises, of course I will write. However, my strong feeling is—as I suspect he realises—that I will not be able to give him anything more on that, but he makes his points very clearly.
My noble friend Lord Flight made some very technical but important points around EIS and VCT schemes in particular. He made the important point that some £12 billion of equity has been raised. These schemes have been extremely successful. As I outlined in my opening speech, we want to expand them. At one point my noble friend characterised them as giving with one hand and taking with the other. We do not see it like that. We have consulted extensively on detailed rules. Many industry groups contributed to the consultation and strongly supported the complete package of changes. However, my noble friend made his point very clearly. We keep these matters under continual review and if there are ways of making the guidance clearer and more helpful, I am sure that his thoughts will be taken on board. I will draw them to the attention of relevant officials. I also take the general point about clearer English, which is something of which we need to be reminded on a regular basis.
The noble Lord, Lord Davies of Oldham, launched a quite extraordinary attack—with which I agreed on a number of matters. My principal point of agreement was with the statement at the end of his speech that this is a recession made in Downing Street. I completely agree. The structural deficit that caused the recession to be as deep and severe as it is came from the overspending in the six years up to the financial crisis of 2008, when the previous Government diverted from the plans they had been left by my right honourable friend the previous Chancellor but three, Kenneth Clarke, who left the nation’s finances in a fine state. If the previous Government had carried on with his plans for a few years more, things would not be in the state that they are.
Lord Davies of Oldham
Would the noble Lord extend the same criticism to all the other advanced countries that face exactly the same issues?
Lord Sassoon
My Lords, we were left with the largest structural deficit in the G20. We have brought it down from more than 11% to 8%, so we are making good progress—but the size of the task was bigger than in any other major economy.
Without rebutting the full litany and charge sheet—noble Lords would not thank me for keeping them much longer tonight—I absolutely rebut suggestions that we are insensitive to the societal and distributional effects of our measures. I explained the transparency with which we set out the effects of the Budget. It is those on the highest incomes who will pay most. The real results of what we are doing are the 800,000 new jobs that the private sector has created in the past two years. It is only by the private sector creating new jobs that we will be able to afford the better public services that the country needs and the lower taxes that we deserve. New jobs, falling unemployment and falling inflation are the things that the Government are concentrating on, and which the Budget continues to underpin.
Finally, the noble Lord, Lord Davies of Oldham, referred to today’s announcement by the IMF that downgraded global growth prospects. He was right to draw attention to it. The IMF forecast minus 0.3% growth for the eurozone this year. It forecast that the Italian economy will contract by 1.9% and the Spanish economy by 1.5%. It forecast that US growth would be only 2%, and it downgraded forecasts for emerging economy growth. It is in the face of those very strong headwinds that we have to carry on with our deficit reduction programme of tight fiscal discipline and loose money. I am very happy to talk about the 1930s. We do not have time to do it in detail, but tight fiscal discipline and loose money is precisely the prescription that caused a significant increase in growth through the 1930s.
In conclusion, this Government have taken difficult decisions to eliminate our structural current deficit over the coming four years and stimulate a private sector recovery. This strategy has been endorsed by the IMF, the OECD, the European Commission, ratings agencies and UK business organisations. We have always said that recovery would be choppy and our plans would necessarily incorporate a degree of flexibility. This Bill further delivers our commitment to improve our competitiveness, encourage investment and support our businesses, large and small. At the same time, it removes hundreds of thousands of individuals from income tax and helps reduce the cost of living for families across the country, and makes these changes in a way that is fairer and more consultative than any Finance Bill before. I commend this Bill to the House.
Financial Services Bill
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Baroness Noakes
I may be able to help the noble Lord, Lord Peston, with his last question. In two groups’ time, we will be discussing precisely the nature of the procedure that will accompany these new tools. The noble Lord might like to wait until then.
The Commercial Secretary to the Treasury (Lord Sassoon)
I am always grateful to my noble friend or anyone else who wants to take the heat on challenging questions. We will come back to the nature of orders.
On the question of what the experiment is here, the experiment that has failed is that of creating the FSA, and we now need to go back to putting the Bank of England at the heart of matters, which is what this is all about. I rather preferred the noble Lord, Lord Eatwell, referring to a “project”, which he did at the end of his speech, rather than an “experiment”. It is indeed a major project.
To dispose of the not entirely relevant question about the Joint Committee on banking ethics and standards, the procedural Motion to set up that committee will be before us very shortly. There is not much more that I can usefully add. I do not think it is directly relevant to these amendments, but I am sure that that Motion will come forward very soon.
Lord Peston
It is directly relevant because the Minister has argued constantly that these are times of crisis and that we need to act quickly. He keeps arguing that and blaming the previous Government for the crisis rather than his own Government’s continued mistakes. It is therefore very relevant for us to know when this committee is going to be set up and who will be on it.
Lord Sassoon
I am sure that we will not have to wait for very long. I shall address what is more directly the subject of these amendments and the question about possible conflicts between the FPC and the MPC. While it is conceivable that the two committees might seemingly appear to be taking conflicting action, I do not actually believe that that is likely to be the case as each committee’s actions will be designed to address very different aspects of the economy and the financial system. That said, there are mechanisms in place to ensure that conflict does not arise. The committees will share information and briefing in order to aid co-ordination, and the Bill makes provision for joint meetings of the two policy committees if at any time that is required. The Bank has also said that it agrees with the Treasury Committee’s recommendation on this question and that the governor should consult the chairman of court if a conflict arises. It is unlikely, but the Bill makes provision through joint meetings and the consultation with the chairman of court.
I turn to the specifics of Amendments 54 and 55. These amendments seek to require the Treasury to consult the public before making any order which makes macroprudential tools available to the FPC. I agree with the noble Lord, Lord Eatwell, that effective consultation on macroprudential tools is essential, but this amendment is not the best way to achieve it. The practice of public consultation on important matters of policy and legislation is now well established and is engrained in good government practice. My honourable friend the Financial Secretary said in another place:
“As a matter of course and as part of the usual statutory instrument process, I expect that the Treasury will consult on macro-prudential tools”.—[Official Report, Commons, 28/2/12; col.46.]
The Government have already committed to a consultation on their proposals for the FPC’s initial toolkit and will produce a draft statutory instrument as a part of that consultation. The Bill as currently drafted does not prevent the Treasury from consulting the public. The Government have already shown their willingness to consult on macroprudential tools and demonstrated their commitment to transparency by asking the interim FPC to make public recommendations regarding its tools.
I do not quibble with the term “public”. From what the noble Lord said, I suspect that he might have been expecting me to come back and say that this is not for the public, but for consultation with the industry. I accept the context in which he uses the word “public”. That is not my objection. It is good practice to do it. We are doing it. The FPC has been asked to make public its recommendations regarding tools. However, it may not always be appropriate to consult the public, which is why this requirement should not be in the legislation. Not all macroprudential orders will make large changes to the FPC’s direction powers. It is possible that some orders will contain only minor and technical changes and in this instance a three-month public consultation would be unnecessary. The previous Government rightly recognised the risks of undertaking full public consultation in cases where it is not necessary. Their own code of consultation listed seven criteria, one of which stated:
“Keeping the burden of consultation to a minimum is essential if consultations are to be effective and if consultees’ buy-in to the process is to be obtained”.
The Government have stated that they will, in compliance with the principles of good government, consult the public when material changes to the FPC’s direction powers are proposed and in non-urgent cases. I hope that that provides reassurance which the Committee seeks.
Lord Eatwell
My Lords, while we are on this point and before the noble Lord, Lord Sassoon, moves on to other elements, I am grateful for his clarification on this issue of consultation. I heard that we expect the Treasury to consult and there is nothing to prevent it consulting. I was seeking that the Treasury be required to consult.
Turning to the point which the noble Lord has just raised about the consultation criteria, which is enormously helpful, would it not be appropriate to write the criteria in to the conditionality with respect to when the Treasury should consult? Then we will not have simply an expectation or a desire and we will not be saying that there is nothing to prevent consultation. We will be saying that the Treasury should consult in all circumstances other than those specified under the consultation criteria. Would that not be helpful?
Lord Sassoon
My Lords, of course that could be done, but I make the point again that it is now engrained in the principles of good government that there should normally be three months’ public consultation. There is a code of consultation that the previous Government put out. It sets it all out very clearly, including the point about burdens and so on that I read out. In its full richness, it cannot easily be drafted in legislation. Indeed, if we were going to do it in this Bill, I imagine there could be hundreds of other Bills in which it could be spelled out. I suggest that the Committee should not only take comfort from the standard governmental practice but from the fact that we have already indicated what we are going to do with the FPC toolkit. I believe we have covered it all and do not need to burden this Bill with a lot of detail any more than other Bills are burdened with it.
Amendment 57 seeks to provide that the reasons for making an order without consulting the FPC or the public be subject to scrutiny by the Treasury Select Committee. While I agree that accountability to Parliament will be important and the provisions within the Bill reflect that, I believe, as I have said on other occasions, that it is for parliamentary committees themselves to decide what they will scrutinise. I would expect the Treasury Committee to take a great interest in any circumstances where the Treasury felt it necessary to create a new macroprudential tool on an urgent and therefore possibly not-consulted basis.
I suggest to the Committee that it would be inappropriate for the Government to use primary legislation to force the Treasury Select Committee to scrutinise something. It must be a decision for the committee itself. The committee has already taken great interest in the interim FPC and I hope that this will continue. For those reasons I believe that Amendment 57 is neither appropriate nor necessary.
We then get to Amendment 58—I was going to say “the dangerous amendment”. It seeks to deal with what the noble Lord says is a potentially dangerous situation. He was entirely clear in his reasoning. The amendment seeks to remove the FPC’s ability to confer discretion on the PRA and the FCA as part of a direction.
Lord Sassoon
The noble Lord says that it is the Treasury’s ability to confer discretion. Whoever’s ability to confer discretion it is—I am just turning back to the drafting of the amendment, which really means looking at the clause as well. I will do that as I speak. I believe it is the FPC’s ability to confer discretion, but whether it is the FPC or the Treasury, the purpose of the provision is to allow the direction-making entity to take advantage of the expertise of the PRA and the FCA. Indeed, the noble Lord is completely right. I have now checked the text and it is the Treasury. However, the point is the same. We need to take advantage of the expertise of the PRA and the FCA which hold the expert knowledge relating to the supervision of individual firms. This provision allows the Treasury to take advantage of that expertise in its directions. For example, if the direction required the PRA to require firms with large exposures to hold additional capital, it would be for the PRA to decide which firms had large exposures. That would be something for the supervisor—the regulator—to do. Therefore, I believe that the amendment would unnecessarily hamper the ability of the direction to have proper effect.
Lord Eatwell
Shall we deal with it as I go along? It would be easier for the Committee if we deal with Amendment 58.
There is a mistake here. The text of the Bill says that the Treasury may make an order which,
“may confer a discretion on … the FCA or the PRA”.
In other words, the Treasury has direct macroprudential tool access to the FCA or PRA, not via the FPC. Proposed new Section 9G(5) describes the correct procedure, in that a discretion that could be given to the PRA or the FCA comes via the FPC. In other words, it comes via the macroprudential authority—the institution that is responsible for macroprudential measures. The example given by the noble Lord is particularly pertinent in this case. If there were a requirement to increase the capital that is relative, let us say, to large exposures or to other risk-weighted measures, then that must be a decision of the FPC. I do not see how the Treasury could give that macroprudential role in any shape or form directly to the FCA or the PRA.
If the provision’s wording was that an order may confer a discretion on the Financial Policy Committee, which may then be transferred to the FCA or the PRA at the will of the Financial Policy Committee, the point that the noble Lord has just made about expertise would be entirely well taken. However, if we are to maintain the integrity of this experiment, or indeed project, then we must maintain the FPC as the focus for macroprudential regulatory management. That is why I referred to this element as dangerous, in the sense that it undermines that clear structure within the Bill.
Lord Sassoon
My Lords, according to these provisions, when the Treasury specifies what macroprudential measures the FPC may exercise, the Treasury may, in relation to those macroprudential measures, confer functions on the regulator. It is intended that this is likely to be used for minor matters such as definitions. For example, the Treasury could provide that the FPC may impose additional capital requirements on exposures to residential property, and that the PRA, as the microregulator, would define the meaning of “residential property”.
There is, therefore, a web of interlocking provisions here, which I fear I did not do justice to in my first attempt to cut through this. Would it help the noble Lord if I take this one away, write to him and copy it to the other Members of the Committee who are here, to try to explain how these provisions will work together? I do not believe that there is any gap here, because it is ancillary to the basic directions that will come via the macroprudentials of the FPC. But there may be some ancillary matters, particularly definitional ones, where the expertise of the PRA or the FCA would be operative and for which we need therefore to keep this element and not to close this off in the way that Amendment 58 seeks to do. I will write to try to set that out more clearly. I am grateful to the noble Lord for that.
Amendment 61 would require the FPC to publish a policy statement within 10 days of a direction being made in relation to a measure made before the FPC had been able to issue a statement of policy under new Section 9L to be inserted into the Bank of England Act 1998 under Clause 3. Again, the Government agree that transparency and openness will be vital to ensure sufficient accountability for the FPC and the use of its tools. However, I believe that this amendment is not appropriate.
The Bill already provides that a policy statement is produced and maintained for each of the Bank’s macroprudential tools. This would also apply to those measures granted using the emergency procedure. However, if a situation were urgent, it would be counterproductive to require the FPC to wait until it has drafted and published a statement of policy before it could use that tool.
We would expect the FPC to produce a statement of policy for the tool as soon as reasonably practical afterwards, assuming that the tool remains in the FPC’s toolkit. I suggest that the requirement in Amendment 61 would be excessively restrictive.
Lord Peston
I am very puzzled by the Minister’s answer. That may be because I do not understand what a macroprudential measure is. Macro normally means economy-wide: it does not mean dealing with a specific bank in trouble or anything like that. I would take it to mean that the whole financial intermediation process was in danger of going wrong. I am finding it very hard to believe that, as a matter of urgency if the FPC was acting to deal with that, it would not immediately draft a statement. The idea that it will take time to say, “We have got a crisis on our hands and we are acting” is preposterous. It rather takes us back to the amendment tabled by the noble Lord, Lord Flight, which carried the same kind of message. Surely, the point for the Minister to emphasise is that he wishes to make it clear that all of us take it for granted that the relevant decision-making body should do exactly what my noble friend says.
Lord Sassoon
My Lords, the requirement is there for the statement to be made. Indeed, it would be the full expectation that a statement would be made. We believe that the Bill does not need any extra amendment in relation to statements that relate to macroprudential measures where they are exercised as a matter of urgency. The statement has to be made in any case.
Lord Eatwell
Perhaps I may help the noble Lord. I think that there was a slight misunderstanding in what he said in his initial answer on this amendment. He said that if there were an urgent situation, it would be inappropriate to wait for a statement to be made. That is not what this amendment says. It in no way prevents urgent measures being taken immediately. It simply says that if that is the case—as the noble Lord said, as soon as possible, and as I say, within 10 days—a statement should be produced. Surely, it is appropriate to give confidence and comfort to the markets that they can have some degree of expectation that a measure taken in urgency would be subject to a statement within a timeframe which is known to the markets and therefore provides them with appropriate comfort.
Lord Sassoon
My Lords, I do not believe that any additional requirement needs to be put in. The FPC already has transparency requirements at the heart of what it does. I completely agree that in certain cases, if it was an urgent matter, 10 days would not be the answer. It would make a statement based on the merits of the case either immediately, or on some other timescale. The Treasury would need to lay secondary legislation on an urgent basis to create the new tools required. Regardless of this provision, the laying of this secondary legislation would involve a public statement about the need for the tool and how it would be used. There is another backstop. If the new tool was required to be created, Parliament would immediately have a statement in front of it to back up the secondary legislation.
For a variety of reasons, Amendment 61 is redundant. On the basis of some partial explanations, and my commitment to write to him—particularly to explain in more detail how I believe the matters around Amendment 58 will operate—I ask if the noble Lord will withdraw his amendment.
Lord Eatwell
I am grateful to the noble Lord. Having a committee process where we go backwards and forwards on each particular amendment is helpful and removes the need for me to make a long summing-up speech. I will simply focus on Amendment 58, which has been the main matter of substance within this group which has exercised us, especially after the noble Lord clarified the issues of the consultations so well. Amendment 58 is still a serious problem, and I look forward to the noble Lord writing to me about it. Once I have his views in writing, perhaps we can consult further to find an appropriate way of sustaining the position of the FPC in the way that I have described. In the mean time, I beg leave to withdraw the amendment.
Lord Eatwell
And now, my Lords, for something completely different. One of the objects relating to the governance of the Bank of England which we discussed in the first two days in Committee, and which is now coming up again, is to increase the collegiality of decision-making within the Bank, particularly with respect to this project. It seems that the deputy governor for financial stability is going to have an important role in the development of the FPC, the development of its activities and, indeed, its overall credibility and acceptance. It therefore seems entirely appropriate in these circumstances that the deputy governor for financial stability should be given a special status within the legislation, both in respect to consultation with the Treasury when an emergency order is introduced, and with respect to the discussions with the Chancellor of the Exchequer after the publication of the Financial Stability Report.
Amendment 56 seeks to place the deputy governor for financial stability within the framework of consultation when there is an emergency order. Overall responsibility rests with the governor. However, surely the deputy governor, who has the prime responsibility, should be consulted when there is likely to be an emergency order. Moreover, when the Treasury and the Bank have their formal discussions, which are required by the Bill, following the publication of the Financial Stability Report, it is surely appropriate that the person responsible for that report—the deputy governor for financial stability is the acting element in this respect—should be part of those conversations, as we require in Amendment 79.
If the Government accepted these amendments, we would feel much more comfortable about the overall governance structure of the Bank. It would acquire a more collegial framework, which we strongly feel is very appropriate to the development of these new measures. I beg to move.
Lord Sassoon
My Lords, these amendments reprise an argument that was raised by the shadow Chancellor during the Bill’s Second Reading in another place.
As the noble Lord, Lord Eatwell, said, Amendment 56 would require the Treasury to inform not only the governor but the deputy governor for financial stability when it considers that there is insufficient time for the FPC to be consulted on the introduction of a new macroprudential tool.
Amendment 79 would place in the Bill a requirement for the deputy governor for financial stability to attend the biannual meetings between the Chancellor and the governor following the publication of the FPC’s annual stability report.
Clearly the Bank plays a crucial role not only in relation to the management of the UK’s economy but specifically, under the Bill, in relation to macroprudential and microprudential regulation. In fulfilling these very important responsibilities, we expect the Bank to act as the serious and respected organisation that it is. This means that the senior executives of the Bank will work as a team to determine the best course of action to achieve the Bank’s objectives and comply with the legal obligations placed upon it. The governor is the leader of that team and, working closely with his senior executives, will ultimately take the key decisions within the Bank.
It is clear that the success of the new regulatory structure, which, rightly, we are spending so much time debating, relies heavily on the relationship between the Treasury and the Bank of England, and I believe that the Bill provides the necessary clarity of responsibilities. However, it also depends on the personal relationships at play here, particularly between the most senior leaders of the two bodies—the Chancellor of the Exchequer and the Governor of the Bank of England. One of the major problems leading up to the financial crisis was that the tripartite committee did not meet at principals level during the previous decade.
Therefore, there are clearly things that need to be legislated for, and this is not what the noble Lord is in any way seeking to argue against, but it is important background to this discussion. The Chancellor and the governor must meet regularly to discuss financial stability. That is why the Bill and the regulatory structure that it establishes place at the heart of the matter the institutional relationship between the Treasury and the Bank, and the personal relationship between the Chancellor and the governor.
I do not see any reason to attempt to insert into that relationship a further statutory channel of communication. First, I just do not believe that it is needed. The Treasury ministerial team regularly meets the current deputy governor for financial stability and the chief executive of the FSA. There is also a constant dialogue between the deputy governor and senior Treasury officials via meetings, phone calls and e-mails. The same was true under the previous Government, as I know, since I was part of it for three years, and it was very effective at working level. That has not changed and it will not change under the new structure. In practice, the deputy governor may well attend the biannual meetings between the two principals. If the Treasury notified the governor that a new macroprudential instrument needed to be introduced on an urgent basis, the deputy governor would be well aware of that.
I will just point out one slight correction that is relevant to this, which is that the FPC is responsible for the financial stability report to the deputy governor. That is relevant to the discussion of this amendment because it shows that we should not excessively personalise the relationships or draw attention to particular individuals if that risks, as it may do in this instance, causing confusion about who is responsible for what. I agree that the relationship with the two leaders of the bodies, the Treasury and the Bank of England, should be hard-wired in, as we have done. In practice, the deputy governor is, and will be, very much involved in all the relevant discussions. Amendments 79 and 56 are not necessary and go too far.
There is a strong argument here that such a provision could be positively unhelpful by opening the door to the possibility that the Bank may be divided and encouraged to speak with more than one voice. There is a risk of recreating elements of dysfunctionality that were in the system as it used to exist. I do not want to overplay this, since the main argument is the earlier one. However, I do see a slight but secondary danger that this provision could be built on in the wrong circumstances. On the basis of the earlier explanations, I hope the noble Lord, Lord Eatwell, will withdraw this amendment.
Lord Eatwell
My Lords, the noble Lord’s comments have been very valuable. The Government have continuously argued that the tripartite system set out by the previous Government did not work because of its structure. He has now admitted that it did not work because the principals did not work it and did not meet. That is a very different issue. The fact that the principals did not meet, and that we now find the need for them to meet in primary legislation, illustrates that it was not the structure that was wrong but the people working in it that went wrong.
I agree with the noble Lord that the Bank should work as a team. I am very much in favour of that. However, we have to distinguish between the captain of the team and those who take the penalty kicks. We may want Martin Johnson to be the captain but we want Jonny Wilkinson to take the kicks. In those circumstances, the particular specialist role of the deputy governor for financial stability seems to be an important element in effective communication between the Treasury and the Bank. Moreover, the noble Lord expressed, in a careful way, that this might expose differences in the Bank’s position and suggested that this might create dysfunctionality. There are differences in this Committee, but this Committee is not dysfunctional. It is making progress. The differences between us are highlighting, as it is their role to highlight, some problems in the Bill that can make it a better Bill, which is our entire objective. I do not accept that differences within a reasonably run organisation necessarily lead to dysfunctionality. That seems to be Sir Humphrey rampant, determined that there is a singular position.
The whole issue of governance of the Bank is still somewhat in the air. This is one element that we wished to put in the Bill and felt would be enormously helpful. Now the noble Lord has recognised that the tripartite system did not fail because of its structure, but because of the personalities who failed to work it, I hope that he will consider the value of these amendments when we return to them on Report.
Lord Myners
My Lords, I have considerable sympathy with the amendment. I declare my interest as a former member of the court from 2004 to 2008. I fully support the creation of the Financial Policy Committee—I think that it will become the most important committee in the Bank—but I am deeply anxious about the governance of the Bank and the lack of appropriate oversight from the court, the oversight committee as envisaged or, indeed, Parliament.
The Minister is in many ways the architect of this restructuring of regulation, as part of a project which he led for the Opposition, having ceased to work in the Treasury. I understand his thinking in evolving the proposals, but events have moved on. In the light of what we now know about the Bank of England, we must ask whether it is still right to put so much authority in the hands of the Bank without appropriate accountability.
When I was a member of the court, I sat in on a meeting of the Financial Stability Committee. That would have been in 2006 or 2007. At that meeting, one of the governors proposed that as a mechanism to cope with the crisis, the Bank should buy half a dozen or a dozen bicycles in order that members of the Bank could move swiftly and anonymously around the City. That tells us a huge amount about where the Bank sits in terms of its understanding of the complexity of financial markets. Some of the things that we have seen over the past few weeks have simply raised more questions about the wisdom of putting so much power in the hands of the Bank.
We are also about to have a piece of legislation to implement the recommendations of the Independent Commission on Banking. Having been intimately involved in the Government’s response to the banking crisis from 2008 onwards, I would point out that the losses incurred in the British banking system—at HBOS, Lloyds and Royal Bank of Scotland—largely occurred within the ring-fence. The losses of $5 billion which we have seen recently reported in London from JP Morgan took place within the ring-fence as envisaged by the Vickers report. The noble Baroness, Lady Kramer, looks somewhat sceptical about that. Those losses occurred within the treasury operations, or the investment office, of JP Morgan, and as such lay within the ring-fence rather than outside it. In being sympathetic to this amendment, and hoping that at the very least the Minister will go away and reflect on that, I think that the Minister will have to rethink some of the fundamental building blocks of this legislation—in particular the great powers and responsibilities that we are placing in the hands of the Bank of England—before we reach its next stage. These are powers and responsibilities that the Bank of England has historically not had and, in my judgment, is still not equipped to exercise.
If we are to do this then, at the very minimum, we must ensure that the Bank and its various agencies, including the Financial Policy Committee, are properly accountable to a court which is clear about its functions and clear about who it reports to. As a former member of the court I know that it was never clear who we reported to. It must also be clear about its parliamentary accountability.
Lord Sassoon
It is always entertaining to have one of the Second Reading speeches of the noble Lord, Lord Myners. I am not sure what it had to do with this particular amendment—which is to do with super-affirmative procedures in respect of orders made by the Treasury—but, anyway, we did talk extensively about governance of the Bank of England over the last couple of sessions, and there will no doubt be other opportunities to talk about them. Here we are talking about an amendment that seeks to require macroprudential orders to be subject to the so-called super-affirmative procedure. Although I was not going to question the competence of Parliament to get into the detail of the macroprudential tools, my noble friend Lady Kramer did make a powerful point about the level of scrutiny that is appropriate to tools that are—yes—very important but also highly technical.
I say that in the context of believing that proper parliamentary scrutiny of these tools will be important to the overall accountability. That is why the Bill, as has been noted, requires the macroprudential orders to be subject to the affirmative procedure. As the Committee would expect, the Government maintain that that strikes the right balance between accountability and timeliness. Orders cannot be made unless a draft is laid before and approved by resolution of each House of Parliament.
I will of course draw attention to what the Delegated Powers and Regulatory Reform Committee had to say, although my noble friend Lady Noakes dismisses its remarks as “interesting but not conclusive”. As a statement of fact, it is clear that its remarks are not conclusive. However, I take issue with her when she dismisses its remarks as “interesting”, because I think that we should take the consideration of the DPRRC very seriously on matters such as this. For the help of the Committee I shall quote the relevant paragraph, because I think that it shows that the DPRRC has thought about this matter in detail. It states:
“The importance of the power is recognised by the application of the draft affirmative procedure or, in urgent cases, the 28-day ‘made affirmative’ procedure … The Joint Committee on the Draft Bill and the House of Commons Treasury Select Committee have recommended an enhanced affirmative procedure for the non-urgent orders, based on that in the Public Bodies Act 2011. But the affirmative procedure provided for in the Bill should be a sufficient safeguard against inappropriate use of these powers.”
I really do not think that we should dismiss what the committee has said.
Lord Peston
My Lords, one of our difficulties in discussing this matter is that no one has mentioned a specific macroprudential measure. We are discussing them totally in the abstract, so perhaps I might mention a couple and say why the positive approach might well be relevant. If we look back to the corrupt practices of the past on the part of financial intermediaries, I suppose the worst of them was the mixing up of a package of toxic and non-toxic assets and then marketing them as if they were non-toxic. I would assume that for the relevant body here, if it was confronted with this, it would be relevant to introduce a macroprudential measure to say that that is simply not going to happen. It would describe the measure and intervene. The Minister shakes his head. Is he saying that that is not an example of a macroprudential measure?
Lord Sassoon
I would say that examples of macroprudential measures are things such as leveraged ratios. If we are talking about the mis-selling of products, that is generally not going to be a question of macroprudential tools but a conduct matter that the FCA would deal with. They would not be the sorts of things covered in the macro toolkit of the Financial Policy Committee, as the noble Lord describes it.
Lord Peston
Speaking as an economist, that sounds complete nonsense to me. I point out to the Minister that the measure I have just described was at the centre of the collapse of both the British and American financial systems in the post-2007 era. This is precisely what these financial intermediaries were up to and precisely what led to the enormous damage that all the economies have suffered. How the Minister can possibly say that that is not a relevant tool is completely beyond me. I could give him some more examples, but let us leave it at that one.
The only question then is whether the noble Baroness, Lady Kramer, is right that if it were introduced as an order we could not debate it in a way to be able to say that the Government’s method of dealing with this problem could be bettered. That is the only point at issue here. I would not like us to do this all the time. I would simply like us—and I mean the other place at least as much as us—to have the power to be able to say, “We can see that you’ve identified the problem and that you’ve got a solution, which you’re introducing by this order, but we think you could do it better this way”. That is all I am arguing and I cannot see what is unreasonable about it.
Baroness Noakes
Perhaps I might intervene on whether there is the power to amend or not. Debating under super-affirmative procedure is not like considering a Bill. There are no amendments tabled and voted on but there is the ability of either House to pass a resolution saying what it thinks. Much as the noble Lord, Lord Peston, articulated, either House would be able to consider whether it thought that the tools were up to the job. More importantly, as I tried to explain in my opening remarks, Parliament could consider the potential impact of using those tools and say to the Government whether it thought the tools appropriate in the context of the wider impact, not simply the narrow impact, on the regulation of financial institutions. The super-affirmative procedure does not allow a specific amendment process but it allows Parliament to say, “Government, we think you have got this wrong”. It is in contradistinction to any of the other procedures where we have the nuclear option: we either accept the order or we do not accept it. It is a more deliberative and amenable process, in particular for considering these very new tools which are being talked about. I hope that helps the Committee.
Lord Sassoon
My Lords, this has been a helpful additional go-round of the tracks because it illustrates, I suggest, that with the procedures already in the Bill and the commitment that my right honourable friend the Chancellor has made to debate the toolkit on the Floor in another place—the same could apply here, clearly, subject to the usual channels agreeing it—we have in substance exactly what my noble friend wants to achieve. We have that without locking ourselves into the difficulty that goes with the 124 days, plus Recess time, which we can get locked into in cases that may be either minor ones where none of this is warranted or, more particularly, ones that started off not being urgent but then became more so. Having had this useful go-round and with the reassurance I have given of what the Chancellor has committed to, I ask my noble friend if she will withdraw her amendment.
Baroness Noakes
My Lords, the Minister has not appreciated the difference between the affirmative procedure and the super-affirmative procedure. Simply having a debate can have only one outcome, of approving or not approving the order, and that is the fundamental flaw. It is the thing that we all learn in opposition and that all Governments forget. Whether or not additional time is allowed or whether a different procedure is adopted in the other place may well improve the quality of debate but it cannot change its outcome. In your Lordships’ House, it is always open to us to have a debate on a draft order on the Floor of the House by the simple mechanism of any noble Lord tabling some kind of Motion disagreeing with it. That will automatically bring it into the Chamber. That is not the problem; the issue is the outcome.
The super-affirmative procedure is a more deliberative procedure; it allows views to be expressed without going so far as to say, “We are not having it”—the outcome of which is usually described as very harmful. That is why the House has a general practice of not voting orders down, because it is such a dangerous thing to do. That is why this super-affirmative procedure gives each House of Parliament more opportunity to debate all the issues contained within the order. It may be that we need a greater range of ways of handling this; however, all the methods of handling an order other than the super-affirmative can allow only acceptance or rejection of the whole. That is a difficult thing for the House to do—to put itself in the position of disagreeing with the whole.
The other issue is delay, although I do not see an issue here. The issue is about whether we take the right amount of time to get the thing right. The Government have available in the Bill, unaffected by my amendment, the ability to put something through on an urgent basis. Nobody would dream of circumscribing that power, because it may well be necessary. Even in the middle of the process to get a new measure through, if it was suddenly decided that it was so important that it had to come in urgently, the Government could default to that procedure. As I said earlier, the timing issue is therefore a red herring. The issue is about whether government can give the proper amount of time and consideration to these important new measures.
I will consider carefully what my noble friend has said, but my first instincts are that he has not said enough to convince me that the super-affirmative procedure is not the appropriate procedure for these new measures. I beg leave to withdraw the amendment.
Lord Sassoon
“Review9QB Duty to review directions and recommendations
(1) The Financial Policy Committee must—
(a) before the end of each review period, review each direction given by it under section 9G, other than a direction revoked before the end of the review period, and(b) prepare a summary of its conclusions.(2) A review period is—
(a) in relation to the first review, the period of 12 months beginning with the day on which the direction was given, and(b) in relation to subsequent reviews, the period of 12 months beginning with the day on which the previous review was completed.(3) The Financial Policy Committee must maintain arrangements for the review at regular intervals of any recommendations that it has made under any of sections 9N to 9Q and are of continuing relevance.”
Lord Sassoon
Lord Sassoon
“(4A) If during the reporting period the Committee has made any decision in relation to which section 9QA requires the preparation of an explanation, the financial stability report must include the required explanation.”
Lord Sassoon
Lord Liddle
My Lords, I rise briefly to support my noble friend Lady Hayter’s amendment. She has drawn attention to a crucial issue for the United Kingdom. The fact is that we benefit greatly from the existence of the European single financial market. I believe that one of the reasons why so many overseas banks base themselves in London is that we are part of a single regulated market. There are grave dangers for us in going down the road of separating ourselves from that single market.
It is important that we keep very closely in touch with European developments at all times. It is a very fast-moving scene. As we understand the results of the last European Council, banking supervision within the eurozone will be put under the European Central Bank by the end of this year. I noted with interest the Governor’s comment, as reported in the Financial Times at any rate, that this would make it easier for the Bank of England to deal with regulatory issues because there would be, as it were, a single telephone number to ring in the European Central Bank. It is also the case that the UK has a critically important influence in the European Systemic Risk Board. It is vital that we play a crucial role in that board, of which the Governor of the Bank of England is the deputy chair.
Lord Liddle
Britain’s position is given a special status given that we are the financial centre of the European single market. The governors of the central banks who make up that body are alive to London’s concerns at all times. It is very important that we play a major role there. It is therefore crucial that we keep these issues under review. I do not think that the way in which the Government have handled the proposals for a banking union is in the UK national interest. It is a bit rich to say, “It is none of our business because this is to do with the eurozone”, but then to complain that the creation of this thing might mean that there was an inbuilt majority against Britain on all financial regulatory decision-making. It is rather contradictory.
The position we have to adopt is that although we are not in the eurozone and will not be in the eurozone, we have to sustain the single financial market. That involves us having the closest possible relationship with the relevant European bodies and keeping abreast, in terms of our own arrangements, with developments there. For those reasons, I strongly support my noble friend’s amendment.
Lord Neill of Bladen
My Lords, I have one comment to make on the text of the amendment. Just to have a report for one year seems such a limited objective. If it is worth doing at all, I do not understand why there is no language allowing for continuity. It was said that the noble Baroness, Lady Hayter, was providing for that. However, the actual language is:
“Within a year of commencement… the Bank of England shall publish a review”,
et cetera. It is to be a one-off. The idea is a good one. Have a regular review, and you can see whether things change. Whether it is going to be embarrassing for the governor, representing the Bank, to say what his relations are with all the other regulatory bodies outside the UK, I do not know. A case could be made for an independent body to produce this. However, the governor and the Bank probably have the information that is needed.
I add as a footnote that we need to keep in mind the terrible damage that has been done by the LIBOR scandal. There was an article in the Independent last week deploring the damage that it will do to the good name of the financial industry in this country. They are the sort of factors that are rather important.
Lord Sassoon
My Lords, we have had an interesting run-around this issue. There have been quite a few divergent voices about the way of handling the challenge that is the subject of this amendment.
First, I certainly did not read this amendment as relating to the mapping of the UK structure as it will be against the European structure, because the start of this amendment talks about,
“a review of the effectiveness of coordination… and their relations with, the European Supervisory Authorities”.
This seems to go very much with the responsibilities under the co-ordination memorandum. I have a bit of trouble in my mind matching this up with the substantive concern of the noble Baroness, Lady Hayter of Kentish Town, which I understand.
I start with the question as to whether the UK architecture does or should adequately map against the new European supervisory authorities. I do not believe it is necessary for the responsibilities of domestic regulators to exactly map on to the corresponding ESA for engagement with them to be effective and well co-ordinated. The regulatory systems of other EU member states do not match up with the activities-based structure of the ESAs. Of course, as has been discussed already, the European architecture is itself likely to be moving around, so that we are probably not going to be aiming at a fixed target. Although it has been stated that the City has had some concerns about the mapping, the broad consensus in the evidence given to the Joint Committee was that having a different regulatory structure to that of the ESAs, will not present any issues for the UK authorities in representing the UK’s interests. The Government have accepted the recommendation of the Joint Committee, and the Bill requires that the international organisations’ MOU establishes an international co-ordination committee, so we have fully responded to the concerns of the Joint Committee in this area.
Lord Sassoon
“(8A) After paragraph 12 insert—
“Publication of record of meetings12A (1) The Bank must publish a record of each meeting of the court—
(a) before the end of the period of 6 weeks beginning with the day of the meeting, or(b) if no meeting of the court is subsequently held during that period, before the end of the period of 2 weeks beginning with the day of the next meeting.(2) The record must specify any decisions taken at the meeting (including decisions to take no action) and must set out, in relation to each decision, a summary of the court’s deliberations.
(3) Sub-paragraphs (1) and (2) do not require the publication of information whose publication within the time required by sub-paragraph (1) would in the opinion of the court be against the public interest.
(4) Publication under this section is to be in such manner as the Bank thinks fit.””
Baroness Kramer
My Lords, I think that I can be very brief in moving this amendment. Its purpose is to close a gap between the Government’s clearly stated intent and the language in the Bill. I am sympathetic to those who have drafted the language, because the complexities of the Bank of England Act 1998, as amended by the Banking Act 2009, make it quite hard to follow through a single train of thought, and I suspect that that is what has caused a trip-up in the language in this instance.
On the first day in Committee on this Bill on 26 June, the Minister was absolutely clear that the oversight committee—whose existence and procedures he put forward and the Committee accepted—should be made up of non-executive members of the Court of the Bank of England, and that its chair should also be a non-executive member. However, the language in the Bill does not allow that train of thought to follow through. It would permit the Chancellor to appoint the governor or deputy governor to the role of chair of the court and hence see that individual put into the position of chair of the oversight committee. I shall not bore the Committee at this point by trying to track through that but I assure noble Lords that that is the consequence of the current language. I simply say to the Government that I hope that someone can go away and fix this more elegantly than I have been able to do and, on that basis, I shall not be pressing the amendment.
Lord Sassoon
My Lords, I do not know whether anyone else wants to come in on this but it may be helpful if I speak now. This amendment in the name of my noble friend Lady Kramer returns us, as she says, to the territory of not only Bank of England governance but nomenclature, which we discussed at some length two weeks ago. As my noble friend says, one of the changes made in the Banking Act 2009 was intended to amend the Bank of England Act to require the court to be chaired by a director, which, as we established two weeks ago, means a non-executive member—again, as my noble friend pointed out. However, she has gone further because it is only my noble friend, with her razor-sharp eye, who has noticed that the relevant provision inserted into the Bank of England Act 1998, while allowing the court to be chaired by a director, does not require that it be so. That is clearly not correct.
Therefore, although I cannot accept the amendment as drafted because it does not cover all the necessary ground to give full effect to this change, I assure my noble friend and the Committee that we will go away and draft the necessary changes. I thank my noble friend for bringing this to the Committee’s attention.
More generally, I am aware from the discussion that we had two weeks ago that there are some irregularities in the terminology in the Bank of England Act which I certainly had difficulties with and I think that other Members of the Committee did too. A prime example of this is that the so-called Court of Directors includes the executive members of the court who are not, and cannot be, directors. This is plainly absurd. To say that this is all justified because the Bank has been in existence for 300 years so we just have to live with it is not the right approach. As I think I wrote following the first day in Committee, I will consider further whether any other changes might be made to the 1998 Act to clarify these terms, making them more consistent with current usage. We cannot proof the legislation against further changes over 300 years but we can at least try to update a few things.
With thanks to my noble friend, I ask her to withdraw her amendment, as she has already indicated she will do.
Lord Sassoon
Lord Sassoon
Lord Sassoon
My Lords, this is a large group of minor and technical government amendments that I hope we can dispatch very quickly. The amendments address a number of technical issues such as updating the Bill to accommodate changes in European law made since the Bill was introduced, amending some rogue references to the FSA in FiSMA, making consequential amendments to enactments that have been passed since the Bill was introduced and making other technical improvements. I am happy to discuss them, or write in more detail, if any Member of the Committee would like to discuss them. I beg to move.
Baroness Hayter of Kentish Town
I will just say that I am very happy to accept the assurances from the Minister that, first, these are technical amendments and, secondly, that he would be very brief in what he said today. I have tried to see whether I could speak for longer than he did. I have not been through every amendment but did look at a sample. Each one I sampled was, indeed, technical and minor.
Lord Sassoon
Lord Eatwell
My Lords, I have an amendment in this group of a slightly different variety but I have enormous sympathy with what the noble Baroness, Lady Noakes, has said about the strategic objective. When I first read the Bill, my note in the margin said “vacuous”. This notion that “relevant markets … function well” really is gamma minus stuff. It is pathetic and does not mean anything at all. One immediately asks for a definition of “function well”. We find that the objectives for competition, integrity and consumer protection are all defined, but there is no definition of what “function well” might mean.
Moreover, not only is this expression vacuous but it has no separate life. Whenever the FCA’s objectives are referred to in the Bill, it is the other objectives—the consumer objective, the integrity objective, the competition objective and the operational objectives—that are referred to. This strategic objective only has coherent life in other references in the Bill in so far as it lives through these more concrete proposals. If it is to be left as it is, it adds nothing other than spurious solidity and real complexity to the structure of objectives for the FCA. I have tried to give it some life. In our Amendment 101D in this group, my noble friend Lady Hayter and I have added the phrase,
“in the best interests of society as a whole”,
to the term “functions well”. That phrase captures the concept of the social optimum as defined in classical welfare economics. One does not want the technicalities of welfare economics within the definition of the Bill, but serving the best interests of society as a whole is the sort of expression that is used by Professor Amartya Sen in his discussions of evaluations of philosophical propositions relative to the social good. By adding,
“in the best interests of society as a whole”,
I would hope to provide this previously vacuous statement with some structure that could be referred to as a mission statement. Although I take on board the objections of the noble Baroness, Lady Noakes, to mission statements, I must say that I tend to agree with them. A mission statement could provide some framework within which the other operational objectives could be seen. For example, on the competition objective, one would look at the objective of stimulating competition in terms of the best interests of society as a whole. There may be circumstances in which the stimulation of competition is not in the best interests of society as a whole perhaps because it causes some distortion to the operation of the market, but, more generally, we would expect the encouragement of competition to act in the best interests of society as a whole.
We have a simple binary choice. Either we must give this vacuous statement some substance or we should remove it from the Bill, as proposed by the noble Baroness, Lady Noakes. What we should not do is leave this statement, which can do no good other than cause a bit of innocent amusement about how silly some clauses in the Bill might be.
Lord Sassoon
My Lords, I was not quick in getting to my feet because I am not sure whether Amendment 101D was moved, taken separately, or where we are.
Lord Sassoon
I wanted to be clear whether that amendment had been spoken to and on whether we should have something with substance in the provision or take it out all together.
It will not surprise the Committee if I say at the outset that, unlike my previous responses when I have been very accommodating or have tidied things up, I cannot support this group of amendments to delete the FCA’s strategic objective. The Government recognise the importance of getting the objectives of the FCA right. As my noble friend Lady Noakes said, there has now been a considerable period in which we have made substantial changes on the objective question since the first proposal, so we are, and have been, listening. It is perhaps worth going over where the suggestions for improvement have come from.
The Government took note of calls from the Independent Commission on Banking and others on the objective proposed in the draft Bill that,
“protecting and enhancing confidence in the UK’s financial system”,
needed to be changed. The Bill now provides that the FCA’s strategic objective, as has been noted, is,
“ensuring that the relevant markets function well”.
That change has been broadly welcomed, by the Independent Commission on Banking, and by consumer and industry stakeholders alike. Even the Treasury Committee considers that the revised drafting is,
“a significant improvement on the proposal in the draft Bill”,
as in its report of 31 May this year.
Let me attempt to reprise the argument, without delving into classical welfare economics and areas that are a bit beyond me. The Treasury Committee may assert that a mission statement has no place in primary legislation but the Government believe that it is right to enshrine something as important as the FCA’s overall purpose in primary legislation, whether or not we call it a mission statement. It is the FCA’s overall purpose.
Lord Eatwell
Will the noble Lord indulge me? What does function well mean? “Function well” for whom? Does it mean functioning well for a consumer? Does it mean functioning well for a trader? Does it mean functioning well in terms of working smoothly without any hiccups but not allocating resources terribly well? Does it mean allocating resources efficiently? All those things come under the term “function well” but contradict one another. What does it mean, and for whom?
Lord Sassoon
My Lords, in giving those four examples the noble Lord knows very well that the first and fourth of his examples very much fit the bill, and the second and third very much do not. This is all about markets that work essentially to assist the end user of those markets. It has nothing within it to do with working well for a trader or something superficial that all looks smooth on the surface but does not provide the end result of liquidity, price discovery or choice for consumers. The noble Lord knows very well that it would be impossible within the compass of such a piece of legislation to try to define the well working of a market, but the Bill spells out the main ways in which the FCA will seek to promote the well functioning of markets—those operational objectives that I touched on.
Those operational objectives give clues and pointers to the FCA. It will be for the FCA’s board to consider if and when it needs to consider these questions of well functioning markets. I believe that it will be well equipped with its expertise to consider market by market what well functioning means. I see absolutely no problem with this. However, there needs to be something that brings together the FCA’s very diverse and individual functions, roles and responsibilities.
That relates to one of the questions asked by my noble friend Lady Noakes, who asked why the FPC and the PRA do not have strategic objectives. It is precisely because they have much more narrowly focused objectives that they do not need the overall strategic objectives that the FCA needs because of the breadth of its responsibilities. I agree with my noble friend and others that we have not provided this strategic objective for the FCA on some whim. We have not put it in for the FPC and the PRA because it is not necessary. It is precisely because of the diversity and the potentially conflicting nature of the objectives of the other bodies that we believe it is right to have it in the case of the FCA.
By the same logic, the strategic objective will act as a check and balance. If, say, the FCA seeks to advance its consumer protection objective by placing detailed requirements on firms, we want it always to ask itself whether what it is doing contributes to the ultimate end goal of ensuring that markets function well. What functioning well means will be determined with some commonality across all markets, but some of it will be market-specific, particularly depending on whether it is a consumer or a wholesale market. This is no afterthought. It reflects the Government’s desire to enshrine regulation which seeks to ensure that markets can do their job.
My noble friend also asked a question about how the FCA could act in a way that was not compatible with its objectives. There are examples which we need to take into account, one of which might be a short-selling ban which is, arguably, in the interests of end-consumers but is a measure which is not normally thought to be compatible with a well functioning market.
Baroness Noakes
I thank my noble friend for that example, in which a short-selling ban could be introduced because it was compatible with one of the operational objectives yet was incompatible with the strategic objective. What, then, is the point of having the strategic objective sitting in this Bill?
Lord Sassoon
My Lords, I have explained why a strategic objective is necessary in order to tie together the very disparate responsibilities of the FCA. Nevertheless, in answer to my noble friend’s question about the “in as far as reasonably possible” carve-out, I give her an example of why there will be circumstances where those words are necessary. It is entirely compatible with the need for the general, overarching statement to admit and allow for the possibility that there will occasionally be instances of conflict with that overarching objective. We have done that in the Bill and this does not in any way invalidate it.
I turn briefly to Amendment 101D in the name of the noble Lord, Lord Eatwell. This seeks to extend the FCA’s strategic objective to ensure that markets function in the best interests of society as a whole. Consistent with what I have already said about the well functioning of markets, I support the sentiment underpinning the amendment. We want markets which serve the wider economy, underpin growth and contribute to a more prosperous society as a whole. We are not talking about markets that are working exclusively for those who are operating in them. This sentiment is very much part of what drives this whole programme of financial services reform.
Having said that, I am conscious about the amendment for two reasons. First, it is not the FCA’s job to decide what is ultimately in the best interests of society. The FCA is being set up as a focused, tough and proactive conduct-of-business regulator. If its new style of conduct regulation contributes to ensuring that the financial sector serves the wider economy, that is good and what we want to see. However, I suggest that deciding what benefits society as a whole cannot be the role of a financial services regulator.
Secondly, and linked to that, is an important question of expectations. The FCA will have some important powers but it is questionable whether we could argue that it has all the powers to deliver a market that benefits all of society all of the time.
There are difficult judgments to be made here, not least because there will always be trade-offs between policy choices. It is my strong belief that these societal choices are, ultimately, for the governor and not the regulator. I cannot, therefore, support Amendment 101D. I may be proved wrong in just a moment, but I sense that I have not completely won over my noble friend—no, I will not be proved wrong. However, she is always very reasonable about these things and she recognises the very considerable way that the Government have moved on the FCA’s strategic objective. I ask her to withdraw her amendment.
Lord Eatwell
Before the Minister sits down, did I hear him correctly when he said that the choice of the benefit to society as a whole was not a matter for the regulator but a matter for the governor? Or did he say Government? I did not quite hear him properly.
Lord Sassoon
I said the Government. I hope he would agree that it was for the Government, not the governor. Good.
Baroness Noakes
My Lords, I am glad that my noble friend has cleared that up because I heard him say “governor” too. Perhaps there was a small slip, but Hansard will doubtless make sure that what he intended to say is recorded as having been said.
I thank the noble Lord, Lord Eatwell, for his support for my amendments and I agree with him that the current drafting is not much more than a vacuous statement. The Minister said that this is going to be an overarching goal, that it is going to be a check and balance but the first example he gave me, of short-selling, means that it can be ignored. This seems to be some form of window dressing. It is trying to appear that the Government agree with as many people as possible. It probably has no meaning whatever and it is therefore possibly something that we do not need to get overexcited about. It certainly does not add to clarity in the Bill. I shall think further on what my noble friend has said before we return to this on Report. For now, I beg leave to withdraw the amendment.
Financial Services Bill
Lord Sassoon Excerpts(12 years, 4 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Baroness Hayter of Kentish Town
My Lords, this side of the House has already acknowledged the role of competition in serving the consumer. Indeed, we could do with rather more of it in the retail banking sector. A rather more creative vision of competition could address some of our concerns in that regard. For example, Age UK has suggested shared branches which offer a perfectly competitive environment, ease of comparison, and switching from one customer to another within the same location. We are wholly in favour of a competitive environment for the benefit of consumers.
That being so, I obviously support most of the amendments in this group. However, I ask the noble Lord, Lord Flight, why the first amendment is needed, given that it seems to put competition as a brake on the FCA. I worry what the driver is behind this. I hope it is not to protect bankers’ bonuses, given there are still some in the City who seem to believe that high wages and bonuses are a vital aspect of what makes the UK competitive in this sector. I would instead call on the coalition programme, which says the Government will bring forward detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector. Amen to that, although I am rather sad that—I think it is today—the Chancellor of the Exchequer is in Brussels voting against such an amendment.
Or is the amendment drafted because there is a feeling that regulation is too burdensome? I hope it is not for that reason, but the Prime Minister has form in this regard. In 2008, he said he thought that the problem of the past decade was too much regulation. The current Chancellor also said, in 2006, that financial regulation was,
“burdensome, complex and makes cross-border market penetration more difficult … and it threatens the global competitiveness of the City of London”.
I hope that the Prime Minister and the Chancellor of the Exchequer are now grown up enough to accept that it was too little rather than too much regulation from which we suffered.
I hope it is not—maybe we can get some assurance on this—the idea that international competitiveness should trump consumer protection. The noble Baroness, Lady Noakes, was much more concerned about the wholesale market. I think she will also understand the concern of consumers that this might trump the consumer protection aspects. Although we very much want this to be an internationally competitive industry, we do not want it at any price. We do not want a race to the bottom for moving wherever regulation is cheapest or less obvious.
In respect of Amendment 104A in the name of the noble Baroness, Lady Noakes, I know that Martin Wheatley, the CEO designate of the FCA, is very unkeen to have this duty. He does not think that in its intervention it is the function of a regulator to have to have regard to that as well as to consumer protection, and is concerned that it would create a set of conflicts. He said that,
“to have a specific UK competitiveness competition point can only lead to compromises in regulation”.
Perhaps the Minister can indicate whether the Government have the same concerns. Perhaps the “no regard” comment of the noble Baroness, Lady Noakes, is a better way of describing this, rather than making it trump some of the other aspects. I imagine the Minister will say something similar, because I know the Government, in responding to the Treasury Select Committee on this issue, while recognising the importance of a competitive sector, do not feel that these words would add much to the Bill.
Amendment 129 in the name of the noble Lord, Lord Flight, is rather easier. It requires the PRA to consider the desirability of promoting the UK’s competitive position within financial services. We have no argument with that. London First I know is particularly supportive of this, stressing also the stability of regulation in financial services, which means no more change after this.
Amendment 110 in the name of my noble friend Lord McFall refines the FCA’s objective so that the integrity of the UK’s financial system includes the confidence that it generates within the UK, as well as in foreign financial markets. This would encompass consumer confidence, which would clearly be vital in rebuilding trust in savings and investment, so we are happy to support this amendment.
Finally, Amendment 139A in the names of the noble Baroness, Lady Noakes, and my noble friends Lord McFall and Lady Cohen of Pimlico provides that the objectives of both the PRA and the FCA should include consideration of the capacity of the sector to contribute to the UK’s economic growth, also supported by the CBI. As the coalition programme said:
“We want the banking system to serve business, not the other way round. We will bring forward detailed proposals to … create a more competitive banking industry”.
I am pleased to say that this is one element of the coalition programme that, again, we are very happy to endorse. Given that, sadly, growth continues to flatline under this Government, if ever there was a time to ensure that these new and powerful institutions focused on job creation, this surely is it, and we happily support that.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, this group of amendments seeks to ensure that the FCA and the PRA consider the impact that their actions could have on the competitiveness of the UK financial services sector or on the growth of the wider economy. We clearly all recognise the importance of a thriving financial services sector to the wider UK economy. Equally, we all agree that the financial services sector needs an appropriate level of regulation, and I recognise that this is a difficult balance to achieve. I hope we would all agree that in the run-up to the financial crisis this balance was wrong.
In resolving the balance, I listened very carefully to the concerns raised at Second Reading and I have also carefully considered the representations from the industry, including from the London Stock Exchange. I am going to explain why I feel that these amendments go too far, but I want to make it clear to the Committee that we are looking at alternative options to address noble Lords’ concerns that excessive regulatory action may unduly impact on the ability of the financial services sector to contribute towards the prosperity of the wider economy, and we will conclude on this ahead of Report. I see one puzzled face. I always try to be helpful to the Committee, and we brought forward some major concessions on each of the first two days. This is a very difficult area. I cannot accommodate all the concerns but I say up front that we want to see what we can do on this ahead of Report.
As these are important amendments, I shall try to do justice to them by talking through each of them relatively briefly. First, Amendment 104A, in the name of my noble friend Lady Noakes, would require the FCA to have regard to the same competitiveness principle as the FSA is currently required to do. The FSA’s report into the failure of the Royal Bank of Scotland made it clear that this competitiveness principle severely impacted on its ability appropriately to regulate the financial services sector. I have said this before but I hope that the Committee will understand why we cannot similarly constrain the FCA, and for this principal reason I am unable to accept this amendment.
Amendment 101A, tabled by my noble friend Lord Flight, would go further by requiring the FCA to carry out its general functions in a way that did not harm the competitive position of the UK financial services markets. As identified by the noble Baroness, Lady Hayter of Kentish Town, this would operate as a brake on the FCA’s actions—along similar lines to the economic growth brake on the FPC, which we have already discussed. It would prevent the FCA from taking any action if that action could be seen as damaging to the UK’s competitiveness. I have already raised the negative impact of the FSA’s competitiveness “have regard”, so it would be impossible to accept an amendment that went even further in preventing the FCA from taking regulatory action to protect consumers, enhance competition and ensure integrity.
Baroness Hayter of Kentish Town
I think the noble Lord, Lord Turner, and other noble Lords have made the point about how often this particular definition of risk and reward did not align with the interests of consumers, or, indeed, often with employing organisations. There is nothing wrong with rewarding risk, but when that is not aligned to other people’s interests, that is to the detriment.
Lord Sassoon
I completely agree, which is why we only very recently brought forward proposals including mandatory shareholder votes on board pay. There is, and will continue to be, a big agenda here on which this Government have been working very actively but which the European Parliament proposal would, I suggest, work against. That is why we are fighting hard in Europe, as we do on all matters, to get a result that is more desirable for the health of our industry.
I will just say a few words about Amendment 139A, which is another very important one. It would require both the PRA and FCA to consider the impact on the financial sector’s ability to contribute to the UK economy in the medium or long term, having regard to the principle of proportionality. The PRA and FCA must consider whether their actions are proportionate. That will act as a check on the FCA acting in a way that is excessively burdensome, which would prevent a subsequent negative impact on economic growth if there was not a greater benefit from taking the action. Similarly, if the PRA is being proportionate, it would be difficult to envisage a situation where the firms that it supervises could be required to be too safe or too sound.
I have listened to the valid points made by my noble friends Lady Noakes and Lady Kramer, and the noble Baroness, Lady Cohen of Pimlico, and I understand their concerns. It is essential that the UK financial services sector is not excessively constrained in its ability to contribute to economic growth. As I said at the beginning, in advance of Report, I will consider whether a more explicit consideration of the wider economic impact of the actions of the regulators should be included in the Bill. I should stress that in making changes there must be nothing that would seriously encroach on the regulators’ ability to take the action that may be necessary in furtherance of their objectives. Particularly in the light of that assurance I ask my noble friend to withdraw his amendment.
Lord Flight
For the sake of clarity I thought the point that I was making regarding the FCA was that domestic competition is what matters for the consumer. The international institutional aspects which the FCA regulates are quite substantial.
The area that has been the real problem in the PRA and which has brought disgrace on the UK has been the banking sector, which has been largely the result of a cartel. That cartel was the result of regulation. Following Barings, it was made clear that the lender of last resort facilities were available only for banks judged otherwise too big to fail. Lots of lesser banks, such as Hambros, found that they were uncompetitive, so they closed and went away. We were left with a cartel, and when you have a cartel bad things always happen. In terms of the PRA’s ability to regulate and oversee the banking system satisfactorily, it is blindingly obvious that the UK needs a great deal more competition. It is not the sole cure of everything but it is very necessary.
The Government have taken the point and there is no point in putting the amendment to a vote. I hope that they will take note particularly of the need for greater competition in the banking industry as part of the vehicle by which the PRA can regulate better. I beg leave to withdraw the amendment.
Lord Sassoon
My Lords, I share many of the concerns raised in this debate. Access to financial services and access to lending for individuals and businesses are vital to our society. The question we have to ask is: who should be charged with tackling access issues? The FCA will be a conduct of business regulator with a clear objective concerned with creating the right conditions in which well functioning markets can meet the needs of consumers. Ultimately, the menu of products and services they offer to whom and at what price is a decision for firms themselves. The FCA is there to regulate the market, not to ensure that the market delivers a particular set of services or products.
Where the market fails to provide the services that consumers need, there may well be a case for intervention in the market to promote consumers’ access to financial services. The noble Baroness mentioned that issue in connection with the previous Government’s drive on basic bank accounts. That is rightly the province of government and action needs to be taken. However, I do believe that it is not a matter of regulation. It is a matter of social policy and it is therefore the responsibility of the Government. It is not the job of the FCA to prescribe that there should be universal provision and who should be required to deliver it. That is for the Government.
I will not detain the Committee with the great detail that I could go into of the actions we are taking to promote and extend access to financial services: to boost lending, particularly to small businesses; to nurture and encourage the mutual sector; and to help increase consumers’ capabilities and work with industry to make access to simple products possible. We have touched on some of these issues in considerable detail in the past. There are some areas which my noble friend Lord Sharkey specifically raised, such as bank charges. I draw his attention to the agreement we announced with the banks last November, under which the major personal customer account providers came forward with a new agreement to send text alerts when balances fall below a certain level, and to provide buffer zones and so on. The action there has been significant.
The provision of data is another area which has needed and continues to need attention. It has had some attention. Information is already regularly published concerning lending and the provision of loans and other services in deprived communities. For example, the banks that are members of the British lending task force have publicly committed to continue to publish subregional lending data on an annual basis through the BBA. I could point to a significant number of initiatives. These are things that the Government will continue to work on but they are outside the ambit of the Bill.
Baroness Kramer
Is the Minister aware of the mechanism that has been successful in the United States and how much that is tied to action by the regulator under the Community Reinvestment Act? It is the regulator that has driven that process forward, because only when conditions are met does it give permission for the banks to act in ways for which they need the regulator’s permission. Is he abandoning a tool that we know has been successful?
Lord Sassoon
No, we are not abandoning a tool; partly because in this country, of course, we do not have the tool. However, I think it would be perfectly feasible for the Government, essentially as a matter of social policy, to decide on any number of actions that might require the regulators to play a part in implementing them. I do not believe that anything in the Bill would rule that out. That is quite different.
The American example shows that the right way to go is through a focused decision by the Government or a specific piece of legislation that tackles this issue, which may then impose responsibilities on the regulator. That is quite a different matter from giving the FCA a very general power to take on itself a responsibility that is rightly the responsibility of the Government.
It will not surprise the Committee if I say, in respect of Amendments 102, 118AA and 121, which seek to give the FCA this new deprived communities objective, that for the reasons I have given I do not think they are appropriate and I cannot support them.
Amendment 104AA also seeks to ensure that the FCA has regard to the issue of consumers’ ability to access affordable and appropriate products that meet their needs. It does that by seeking to add access to the list of matters to which the FCA must have regard in discharging its general functions. The “have regard” provisions that are currently listed there include only financial crime and the regulatory principles. That is why I cannot support the amendment. I cannot agree that the FCA should be required to have regard to something that it is not responsible for. This is the important distinction between financial crime, for which the FCA is responsible and which is listed in proposed new Section 1B, and access, which is not.
Amendments 108A and 108B seek to ensure that the FCA considers access when advancing its consumer protection objective by adding,
“the ease with which consumers can access regulated financial services that meet their needs”,
to the list of matters to which it must have regard in assessing what constitutes,
“an appropriate degree of protection for consumers”.
I have already set out why I cannot support these amendments, which seek to give the FCA a formal role in promoting access, but I will remind the Committee of the kind of considerations that the FCA will take into account when advancing its consumer protection objective to help consumers. The FCA must have regard to consumers’ differing experience and expertise and to their needs for timely, accurate and fit-for-purpose information. The FCA must therefore consider whether vulnerable or marginalised consumers engaging with financial services may need additional information, protection or support. The FCA’s consumer protection operational objective provides the mandate for the regulator to design a regulatory regime that delivers this.
Amendment 117A seeks to make sure that the FCA takes into account consumers’ ability to access financial services in advancing its effective competition objective. Again, I cannot accept this as I am absolutely clear that it is neither necessary nor appropriate for such a have regard provision to be added to the competition objective.
I turn to Amendment 118A. I have explained why I do not think it right to give the FCA an access mandate. Where there may be a case for action beyond the FCA’s objectives, this is a matter for government, but that does not mean that the Treasury should be able to direct the regulator on how it should interpret and indeed advance its objectives, as Amendment 118A seeks to provide. This would fundamentally go against the Government’s intention that the FCA should be an independent regulator and would, I suggest, blur the boundaries between regulatory and social policies. I also do not think it would be appropriate to have a power in statute, as proposed here, to allow the Treasury to give the FCA greater powers to act in an area that is rightly a matter for the Government to deliver, or indeed to give the Treasury the power to impose requirements directly on industry. We would be blurring the lines of responsibility. As I have explained, there is a lot we can do and are doing to advance some of these important social policy issues. If it came to legislation that impinged on the regulator’s prerogative, it is right that any powers in this area should be considered as part of that legislation and Parliament should consider the consequences for the regulator at that time.
Finally, Amendment 112A seeks to add “and products” to the regulated financial services for which the FCA will promote effective competition. I will briefly try to reassure the Committee that this amendment is not necessary. We agree that products are important. In fact, the focus on the design and governance of products will be one of the key ways in which the FCA will be different from the FSA. The Bill contains enhanced powers for the FCA to regulate products and I look forward to discussing in due course the new product intervention power, which is provided for in Clause 22. However, the outcome which this amendment seeks to deliver is already reflected in the Bill. A product in the context of financial services is ultimately an agreement under which one person agrees to provide a service of some kind to another person, so products are captured in the definition of “regulated financial services” as used in the Bill.
In summary, we are sympathetic to the aims of my noble friend’s amendment and to a wide range of the concerns that have come up in this debate. We are taking action on a significant number of fronts in this area. However, these are not matters for the financial regulator in the way that they have been drafted and I ask my noble friend to consider withdrawing his amendment.
Lord Sharkey
I thank all those who have spoken in support of the amendments in my name or in support of their general intent. At the beginning of his response the Minister said that the FCA is a conduct of business regulator. I say to him that it is precisely the inadequate conduct of the banking businesses that we want the FCA to regulate. I note that in the Bill the FCA is already required to take account of the needs of different consumers. All the amendments do is make this more explicit and more directed. I am disappointed by what seems to me to be a very narrow perspective in the Minister’s response. I do not agree that responsibility for helping funding into deprived areas is not a matter for this Bill. I will withdraw my amendment but I will return to the matter on Report. I beg leave to withdraw the amendment.
Lord Lucas
My Lords, one of the reasons why the likes of Wonga charges high rates of interest is that its formula for doing business is mechanical. What is required in order to be able to offer proper rates of interest on small amounts of money to people who are not well off is trust, knowledge and community. That is what this sector sets out to provide. Armed with that, it is capable of giving a much better deal to borrowers without imperilling those who are lending money. It is a thoroughly worthwhile sector of the financial industry.
We need to ask the FCA not to promote it but, as the noble Baroness, Lady Hayter, says in her late revision, to enable it. The Government and regulation stand in the way. They give the big banks privileges which are not extended to small lenders. Some of them probably cannot be. I do not know that there is any way in which the £85,000 guarantee can be got down to these sorts of institutions. But they impose immense tax differentials so that you can end up not being able to offset losses if you have made them in community lending. As the noble Baroness, Lady Kramer, says, you can end up not knowing as a financial adviser whether you are allowed to mention these sorts of investments. We need a financial regulatory structure that gets out of the way, levels the playing field and gives these businesses a fair opportunity.
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 Hodgson of Astley Abbotts
I am sorry. The hour is late, but that simply cannot be the construction. As I explained in my remarks, I could not support the amendments of the noble Baroness, Lady Hayter, because it said “promote”. The four that I have signed up to, and the only four, are the ones which are entirely neutral, and all they are is enabling. With the greatest respect to my noble friend, who has dealt with us with courtesy and kept smiling despite the most enormous amount of provocation, the fact of the matter is that a lot of what he is saying is about investor protection in conventional investments. We are not talking about conventional investments here; we are talking about social investments, where the parameters are entirely different. The Treasury will persist in seeing it as a profit-making type of investment, as opposed to a profit and a social return. It simply cannot get it into its head that this is a different type of investment. It keeps writing for my noble friend speaking notes that do not recognise that difference.
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 Hodgson of Astley Abbotts
The FSA currently has responsibility for one particular sector of the social enterprise movement—the industrial and provident societies. I suggest that the Minister asks his officials in the morning to ring the FSA and ask how many people are working in the industrial and provident society section. The answer is half.
Lord Sassoon
I am not quite sure what happens to the other half of this unfortunate person.
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?