Financial Services Bill

Lord Sharkey Excerpts

Tuesday 10th July 2012 Lords Chamber

Moved by

[Lord Sharkey]

102: Clause 5, page 16, line 3, at end insert—
“(d) the deprived communities objective (see section 1F).”

[Lord Sharkey]

My Lords, in moving Amendment 102, I shall speak to Amendments 118AA and 121. They are aimed at addressing three financial problems in our deprived communities. The problems are significant and so is the size of our deprived communities. The last indices of deprivation report published by the Government notes that more than 5 million people in England lived in the most deprived areas in 2008; 56% of local authorities contained at least one area among the most deprived; and 88% of the most deprived areas in 2008 were also among those most deprived in 2007.

The first problem that the amendment seeks to address is that many individuals in these communities face very great difficulty with financial services. In August 2010 a report to the Treasury called Realising Banking Inclusion: The Achievements and Challenges summarised the situation. The report concluded:

“Efforts on banking inclusion have moved 1.1 million into banking but the benefits appear to be unevenly distributed and barriers to banking remain”.

The report found that penalty charges had been a harsh reality of the banking experience for many. Around half of the newly banked had been hit by penalty fees and individuals who incurred these charges tended to be charged multiple times, averaging nearly six times per year each. Although there had been savings gains for some, the tendency to cash management and the impact of penalty charges had undermined overall gains. Worse, there had been a significant increase in debt among the newly banked, resulting in an overall increase in spending on debt servicing. Perhaps not surprisingly, in view of all this, there has been a relatively high degree of account failure. Net account failures are close to one in five. The report concluded that there is a case to be made that a penalty charge system constitutes an effective market failure in the provision of banking services to those on low incomes. This market failure is the first problem which the amendments seek to address.

The second financial problem in our deprived communities relates to the funding of SMEs. It is generally accepted that the health and supply of SMEs is critical to the health of our economy, but there is even more to it than that. Data from the Kauffman Foundation study published in July 2010, The Importance of Startups in Job Creation and Job Destruction, suggest that the role of start-ups is absolutely critical among SMEs. The study found that, on average, and for all but seven of the 28 years between 1997 and 2005, in the USA, existing firms were net job destroyers. All net new jobs came from start-ups and job creation in start-ups during recessionary years remained stable while net job losses in existing firms were highly sensitive to the business cycle. This is probably true for the UK too, and is undoubtedly why the Government announced its start-up loan scheme, four weeks ago, offering loans of £2,500 to people aged between 18 and 24. It is a clear indication of both an unmet need and a failure of the banks to supply this need.

This is all very small-scale stuff and marginal. The fact is that the SME sector as a whole has significant funding difficulty. The Breedon report of March this year estimates that, by 2016, there will be a shortfall of between £26 billion and £59 billion in finance needed by SMEs for working capital and growth. As the latest quarterly report from the Federation of Small Businesses shows, the situation is not improving. It is not just that the banks are not helping; they may actually have made the situation worse. We now know that they have mis-sold hedging products to around 28,000 small businesses. Andrew Tyrie said that the FSA’s investigation into this mis-selling is a damning indictment of the banks’ behaviour, that such products took advantage of small businesses and that this behaviour is completely unacceptable. This is just the national picture: it would conceal areas where there are more significant problems. The deprived communities will suffer more. According to a 2012 report by the Centre for Responsible Credit, only 4% of all lending goes to businesses in deprived areas. It is clear that the banks are failing in this area and this is the second problem the amendments address.

The third problem addressed by the amendments is related to the other two. It is not possible, at the moment, to have an accurate picture of what the banks are actually up to in our deprived communities. The data provided by the largest banks concerning their lending to SMEs are provided on an aggregated basis. This means that there is no information to allow local economic development agencies, including local enterprise partnerships and community development finance initiatives, to enter into an effective dialogue with the banks. There is no way of assessing performance, suggesting improvement, or of knowing which banks are performing better than others; there is no way of telling the terms on which credit is being made available in these deprived areas or of telling the extent, if any, to which banks are supporting the third sector to take advantage of their new rights under the Localism Act. We need access to disaggregated data and postcode level data so we can see clearly which banks are doing what in the deprived areas. This is what our amendment proposes.

--- Later in debate ---

[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.

Amendment 102 withdrawn.