Financial Services Bill

Lord Sharkey Excerpts

Report stage
Wednesday 24th March 2021 Lords Chamber

[Lord Stevenson of Balmacara (Lab) [V]]

My Lords, Amendment 1 is in my name and that of my noble friend Lord Eatwell. I thank the noble Lord, Lord Sharkey, and the noble Baroness, Lady Bennett of Manor Castle, for adding their cross-party support on this important issue and look forward to their contributions to the debate. I also thank the noble Baroness, Lady Penn, the Deputy Leader of the House, the noble Earl, Lord Howe, the noble Lord, Lord True, and their officials for making time to discuss this issue after Committee, which has helped us considerably and shed some light on the complex set of consultations that the FCA and the Treasury itself are conducting over the next few months, all of which are happening, of course, during the pandemic and at a time of significant change in duties and responsibilities in all quarters.

In his excellent speech in Committee, my noble friend Lord Eatwell set out the case for the introduction of a duty of consumer care to be placed on financial services providers, which he argued would strengthen the FCA’s consumer protection objective and introduce requirements to ensure that firms operating in the financial sector should not profit from exploiting a consumer’s vulnerability, behavioural biases or constrained choices. I can do little better than rehearse his main points again. Markets in financial products sold to individuals, households and small businesses are seriously inefficient, mainly because of asymmetric information, as the seller of the product typically knows much more about the risks involved in making a particular investment or other financial transaction than does the consumer.

Secondly, given that the FCA’s strategic objective is about promoting competition in the market, thereby improving consumer outcomes, it can either regulate each individual financial product to ensure that the consumer is probably informed, or it could adopt the principle enshrined in Amendment 1 and make general rules, including the power to introduce a duty of care owed by authorised persons to their consumers. The case for a duty of care for consumers was argued very strongly at the time the current regulatory structure was set up; indeed, I was present in many of those debates. But, absent primary legislation or changes to it, the FCA has, perforce, adopted the first option and attempted to deal with each consumer detriment issue as it arises. However, by its own admission, this has not gone very well. From its consultation entitled, Our Future Approach to Consumers in 2017, through to the feedback statement published in April 2019, the FCA has wrestled with the issue of duty of care and is still wrestling today, with a review scheduled to start, we understand, in May 2021.

My noble friend’s case was that the status quo is failing and a new approach is urgently required for two main reasons. First, new products are always coming on to the market, which means that the FCA is always playing catch-up to introduce new rules and has to take time for appropriate consultation and so on to deal with the new threats to consumers. The rush to get a handle on “buy now, pay later” products in this legislation speaks volumes about that approach. Secondly, financial products are now available with one click via the internet, with all that that implies about the failure of the conventional approaches of “know your customer” and the need for careful concern about going through the paperwork and understanding the terms and conditions of what you may be signing up to. In short, fintech, with all the benefits it can bring—well argued by the noble Lord, Lord Holmes— signals the end of the current FCA regulation as we know it. The case for a duty of care approach is unanswerable.

Amendment 1 provides the FCA with the means to end its failure to meet its consumer protection duty through dogged adherence to a failing competition objective. The enactment of the power to introduce a duty of care for consumers would rightly place responsibility for ensuring that markets function well firmly on the shoulders of those who have the information required to attain that goal. If the FCA has the power to introduce a duty of care for consumers, it could finally begin to live up to its strategic objective.

Far too many consumers are being treated inappropriately, whether by the mis-selling of products, by the denial of rights or by obstruction of responses to complaints and so on. If the Government wish to improve on the consumer protections previously enshrined in EU legislation, the introduction of a duty of care on consumers is a safe and sure way forward. It is a way to ensure that markets function well for the benefit of the consumer, as it should be.

I am sure that, in responding to this debate, the noble Baroness, Lady Penn, will try to persuade us that there is no need for this amendment, as future consultations to be carried out by the FCA and the Treasury will cover all these points in detail and so all will be well. Indeed, either or both of these exercises may require primary legislation—that is quite likely—and we will be back again in a few months’ time debating the same issues all over again, when the Treasury has decided on its responses to the consultations and brings forward legislation to implement another generation of regulatory frameworks. I put it to the Government that, while the wording of the amendment may not be perfect, the intent—particularly the wording of subsection (2),

“that firms should not be profiting from exploiting a consumer’s vulnerability, behavioural biases or constrained choices”—

is worth holding on to and action should be taken now. I give notice that, in the absence of a positive response today, I am minded to test the opinion of the House on the amendment. However, if the Minister is prepared to commit to bring this back at Third Reading, with an agreed wording, we could work with her to settle this issue. I beg to move.

[Lord Sharkey (LD) [V]]

It is a pleasure to follow the noble Lord, Lord Stevenson of Balmacara, and to support this amendment. The noble Lord has made a strong and compelling case for both parts of the amendment. The case for and against a duty of care was discussed extensively in Grand Committee and I do not propose to revisit the arguments in detail.

In his speech in Grand Committee, the noble Lord, Lord Davies of Brixton, made a simple but important point:

“The truth is that the industry has a systemic tendency to malfeasance.”—[Official Report, 22/2/21; col. GC 112.]


I listed in Committee some of the many serious instances of malfeasance over the last couple of decades—I am sure that they are familiar to us all—which amply demonstrate the truth of the observation made by the noble Lord, Lord Davies. There can be no doubt that the temptation to malfeasance and the opportunities for malfeasance grow, and are deeply rooted, in the huge inequality of arms. The noble Lord, Lord Eatwell, emphasised that in Committee, as the noble Lord, Lord Stevenson, has just noted. There can be no doubt either that the culture within parts of the financial services industry is, to say the least, not oriented to serving the best interests of consumers. John Lanchester has graphically described the industry as treating its customers as “an extractive resource”. All this is true in an industry that is highly regulated. This inevitably leads to the conclusion that the regulatory regime is obviously and severely deficient.

The FCA has consulted on the duty of care at least eight times in the last five years and is about to do so again, starting in May, apparently. It is not clear, given the Treasury’s current consultation on the FSFRF, why we need two consultations covering the same ground. I know that some respondents to the HMT consultation have already proposed a new duty of best interest or duty of care. There is no reason to suppose that this new, and much delayed, FCA consultation will come up with anything more than equivocation, fence-sitting or long grass, if its previous efforts are anything to go by. Last time round, the FCA found that most respondents considered levels of consumer harm to be high and that change was needed to protect consumers. None of the financial services respondents wanted a duty of care, but 92% of consumers did, in a popular survey commissioned by the FCA’s own consumer panel.

The industry resists a duty of care for obvious reasons of self-interest, sometimes presented as a concern that such a duty would increase costs ultimately to the consumer. This does not say much for our financial services’ belief in competition, nor does it acknowledge the fact that, for example, PPI was sold at a commission rate of 87% or that the industry has had to find the funds to pay over £50 billion in redress for PPI alone.