Financial Services Bill

Lord Sharkey Excerpts

Wednesday 18th July 2012 Lords Chamber

Moved by

[Lord Sharkey]

106A: Clause 5, page 17, line 2, at end insert “and having regard to the general duty to provide those services honestly, fairly and professionally in accordance with the best interests of the consumers in question”

[Lord Sharkey]

My Lords, I shall also speak to Amendment 138A. Amendment 106A adds to what the FCA must “have regard to” when considering the degree of consumer protection. It adds the requirement to have regard to the general duty of providers of financial services,

“to provide those services honestly, fairly and professionally in accordance with the best interests of the consumers in question”.

Amendment 138A adds to the regulatory principles to be applied by both the PRA and the FCA. It adds the principles that,

“authorised persons should act honestly, fairly, and … in accordance with the best interests of consumers who are their clients”,

and that,

“authorised persons should manage conflicts of interest fairly, both between itself and its clients and between clients”.

These provisions, or something very like them, already exist as FSA principles 6 and 8 in section PRIN 2.1.1 of the FSA Handbook, but crucially those are principles and do not have the force of law directly. Perhaps 30 years or so ago, that would have been a satisfactory situation. If the culture and current practices of our financial institutions were robust, morally sound and possessed of a sense of the common good then the amendments I propose would probably not be necessary. However, the culture and current practices of many of our financial institutions are not robust, not morally sound, and certainly not possessed of a sense of the common good.

As the noble Baroness, Lady Liddell of Coatdyke, said an hour or so ago, there have been numerous scandals. There was the mortgage endowment scandal, for example. There was the selling of precipice bonds to pensioners. There was the payment protection insurance scandal. Most recently, there was the mis-selling of interest rate swaps to SMEs. Every day seems to bring news of yet another gigantic scandal. Yesterday HSBC apologised to the US Congress for, among other things, breaches of US anti-money-laundering regulations and poor record keeping. It turns out that 41% of the bank’s accounts in the Cayman Islands had no customer information attached to them at all. Senator Levin described the bank’s culture as “pervasively polluted”.

It is no wonder that confidence in financial institutions has fallen most dramatically here in the UK. The recent Ernst and Young survey on global consumer banking reports that 63% of UK consumers say that their confidence in the banking system has fallen. That is the highest fall in Europe, and higher than in the USA. It seems to be the case that statements of principle promoted by the FSA no longer command either the respect or the compliance of some of our largest financial institutions.

Over the past few weeks, there has been much public discussion of the moral and cultural failures in significant parts of our system. I do not believe that these failures can be addressed by exhortation. I believe it requires legislation to begin to change these moral and cultural failures, and to encourage the emergence of more responsible and ethical behaviour. I do not believe that we can rely on the banks to change in an appropriate and timely way without specifying what some of those changes should be. That is what these amendments are designed to do, by proposing to put into the Bill what is essentially a duty of care—not, perhaps, the most popular concept this afternoon—for the financial services industry in respect of its dealings with ordinary consumers. We may regret that it has come to this, but it has. It is plain that our trust in much of our financial system to behave ethically was grossly misplaced. These amendments try, in some small way, to correct some of that. I beg to move.

--- Later in debate ---

[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.

Amendment 106A withdrawn.