Financial Services Bill

Lord Stevenson of Balmacara Excerpts

Monday 8th October 2012 Lords Chamber

Moved by

[Lord Stevenson of Balmacara]

147L: Clause 6, page 39, line 9, at end insert—
“(4A) After paragraph 23B insert—
“Contracts for debt management services23C (1) Rights under a contract for debt adjustment or debt management services.
(2) Debt-adjusting is, in relation to debts due under regulated credit agreements or contracts for the hire of goods, negotiating with the creditor or owner, on behalf of the debtor or hirer, terms for the discharge of a debt, or taking over, in return for payments by the debtor or hirer, his obligation to discharge a debt, or any similar activity concerned with the liquidation of a debt.
(3) Debt management is the giving of advice to debtors or hirers about the liquidation of debts including those due under regulated credit agreements or contracts for the hire of goods.””

[Lord Stevenson of Balmacara]

My Lords, I declare an interest as chair of the Consumer Credit Counselling Service, a leading debt advice and debt provision charity. Currently, Clause 6 extends the scope of FiSMA by including credit information services. They are already regulated under the Consumer Credit Act 1974, but an amendment is needed to bring them into FiSMA. Clause 6 also changes the current definition of credit contracts to include both unsecured and secured loans, and other forms of credit, and includes hire agreements as a regulated activity.

Our Amendment 147L seeks to include debt adjustment and debt management services in the Bill. This issue has already been raised several times during the passage of the Bill, and we will return to it on subsequent Committee days. The Government have given reassurances that the existing text allows debt management to be included and that they intend it to be included. Perhaps the Minister will confirm this again when he comes to respond. However, this is a permissive approach and we feel that it might not be sufficient in this case. There is a case for debt management to be mentioned in the Bill, and I will run over one or two points in support of that.

The UK’s free, independent debt advice and charity sector helps to ensure that clients pay less and are able to repay their debts more quickly compared to those clients who choose a fee-charging route. Recent figures on this are illustrative. A fee-charging company will typically involve total payments of about £35,900 on a £30,000 debt, including up-front fees and a monthly administration charge. It will therefore take nearly 10 years to wipe out the debt. On the other hand, a debt charity will repay the full amount of £30,000 in full, with no additional charges made to the client, in just over eight years.

Now, the OFT has recently looked at the practices of debt management companies in this area in relation to the guidance that it already issues. It regards misleading advertising by fee chargers as the most significant area of non-compliance with its guidance. In its 2010 review of the sector, it highlighted the fact that many firms claim their services to be free when they are patently not free. We believe that regulation is urgently needed here so that there is transparency about charges. At the same time, we also think that there should be an obligation for fee-charging services to inform potential clients of the availability of free advice services. This, again, is mentioned in the OFT’s debt management guidance; it is not thought to be widely adhered to.

The practice of charging up-front fees itself supports a business model that has pernicious consequences for people trying to repay their debts. Fees undermine the capacity of borrowers to make repayments and, as I have tried to show, that extends the timescales. Advice provided by fee-charging companies is inevitably—and, I suppose, naturally—skewed towards debt management plans and individual voluntary arrangements that generate a revenue stream for those companies. As a result, people struggling with debt often end up with the wrong solution.

The Government have proposed a DMP protocol setting out what all parties can expect from a debt management plan, and the hope is that this will ensure that debtors are treated more consistently, both by creditors and by fee-charging DMP providers. However, progress on this seems to have stalled. In any case, it is no real substitute for the strong regulation that this sector now needs.

Amendment 147M would add claim management regulation to the scope of the FCA. No one—in this House, particularly—will have failed to notice the growth in CMCs recently, particularly those touting for business in relation to financial services, such as claims for mis-sold PPI in particular. I have never taken out PPI, but ironically I had a text just before I came into the Chamber this afternoon explaining that I was missing out on £2,737, which was waiting for me simply by return through a text service. Indeed, I have had several phone calls in the past week or two.

It might just be a temporary phenomenon, and existing arrangements might well be the same, but I have my doubts. The problems that are often reported to us are aggressive or illegal marketing practices such as cold calling and unsolicited text marketing; persuading people to divulge their payment card details and then using this to take unauthorised payments for service; and failing to inform people that a claim might actually be settled on a non-cash basis, where there is an offset against a remainder debt, leaving that person with no money to pay the fees that are going to be charged.

Claims management companies are not currently unregulated; they are already covered by the claims management regulator, which is part of the Ministry of Justice. There is a statutory scheme set out in the Compensation Act 2006, and regulations and rules are made under this. Quite apart from the need to question why this area is being retained within government when we are actually setting up a new regulatory structure, there is also a question about why the Ministry of Justice has not been able to get on top of the problems that I mentioned earlier. The claims management regulator within the MoJ is actually currently consulting on current practices, but there is a long way to go.

While it may be possible for these issues to be dealt with, possibly through an order such as the regulated activities order, quite serious points continue to operate to the detriment of the consumers who are involved in this area. Bringing the CMCs, as with the debt management companies, under the supervision of the FCA is surely the right way forward. I beg to move.

[Baroness Sherlock]

I will ask a couple of questions on Amendment 147M, and in doing so I remind the House of my registered interest as a senior independent director of the Financial Ombudsman Service. I am grateful to my noble friend for raising the question of claims management companies and their regulation, something that we have come to in this House once or twice in recent months.

The problem is significant. I ask two questions, one of my noble friend and one of the Minister. Can my noble friend reflect on what would happen if and when claims management companies might move on from their current obsession with the financial services sector? As he has, I have certainly received many texts. At the moment, claims management companies are focusing on financial services, primarily because of the widespread mis-selling of payment protection insurance that has created significant consumer detriment. Therefore, there is a significant problem at the moment, and that is what they are focusing on.

However, in the past the companies have focused, for example, on people who have—or fancy that they might have—sustained personal injuries such as whiplash in car accidents. In future, they might move on to other areas. I wonder, therefore, whether we could reflect on what the best way might be to regulate this industry when in fact the target could move. It is the activity itself that needs regulation, rather than necessarily the sector.

This highlights the particular problem that we have: that the activity of claims management companies—particularly the bad activity of the minority that are doing the kind of things described by my noble friend—needs addressing. In this I wonder whether the Minister could help us out. Could he tell the House very quickly what steps the Government are taking to improve the regulation of CMCs? For as long as this activity remains within the Ministry of Justice, can he assure the House that adequate resources and powers will be made available to those doing this job to redress the kind of unpleasant practices and considerable detriment that has been created on top of the original detriment that has been done?

--- Later in debate ---

[Lord Sassoon]

I am not satisfied with the conduct in the industry, which is why in August, since we last debated these matters, as the noble Baroness I am sure is aware, the Ministry of Justice announced that, from April 2013, claims management companies will be banned from offering financial rewards or similar benefits as an inducement to make a claim. I understand why there are concerns but, since we last discussed these matters, there has been significant progress.

As has already been noted in this debate, proposals have been consulted on to tighten the conduct rules with which all claims management companies must comply as a condition of their licence. The consultation closed on 3 October and the responses are now being considered. Again, the target date for implementation is April 2013. Also from 2013, the Government intend to extend the Legal Ombudsman’s jurisdiction to provide an independent complaints and redress service for clients dissatisfied with the service provided to them by the claims management companies with which they have contracted.

I believe that significant and important work is going on, and that that is the right approach. I hope I have been clear on why I cannot support proposals to make the FCA responsible for claims management regulation, which applies as much now as it will in future. The Government will therefore not be including the activities of claims management companies in the enabling provisions in Clause 6. With reassurance on the first amendment and the explanation of all the work going on more generally, I hope that the noble Lord will feel able to withdraw his amendment.

[Lord Stevenson of Balmacara]

I thank the Minister for his response. I accept his assurances on Amendment 147L, and I am grateful to him for making it very explicit that the intention and the practice will be that debt management companies will clearly come under the scope of FiSMA and therefore the FCA. Perhaps I may leave with him the thought that there may be a slight divergence of view, unlikely as that may seem, within the Government. As I mentioned in my introductory speech, there is still an ongoing commitment by the Department for Business, Innovation and Skills to produce some sort of protocol which will affect all DMPs. I may write to the Minister about this but it seems to me that where we have an assurance on his behalf that there will be full coverage of DMPs within the scope of the current Bill, as he mentioned, it is not quite clear where BIS and its draft protocol will lie. I should like some assurance on that but I will not contest this on that point.

If I understood the Minister correctly, I think he was making three points on Amendment 147M. The first is that, in a way that is clear to him but not, I am afraid, to me, claims management companies are not financial services companies. If they are dealing with claims, they are dealing in some sense with a form of financial service. The examples we have had, which move away from pure financial services, concerned whiplash injuries. It seems to me that these companies would not be involved if there was no money somewhere in the circuit. Therefore, if that money is available to an individual who wishes to claim for it and is being assisted by a CMC, under a very broad definition, that would be a financial service.

[Lord Sassoon]

I do not want to be picky on this point but would the noble Lord, Lord Stevenson of Balmacara, contend that the legal profession, which deals with claims all day every day to recover money for people, should be brought within the regulation of the FCA? I clearly said that at the moment it is dealing with some very important matters which are financial services matters but that is very different from defining a claims management company as a financial service. Is the noble Lord suggesting that lawyers and all sorts of other people who deal with money should be defined as such?

[Lord Stevenson of Balmacara]

It is not for me to suggest anything. I simply wish to draw out that, simply because of the name or the fact that, on occasion, these companies do not deal strictly with financial services, they are somehow excluded from any regulatory oversight of their activities. Yes, to extend the point as the Minister does makes it seem unlikely, but they deal with financial services at the moment and are unregulated in that sense. I just want to make clear our feeling that this is something to which we may have to return.

My second point is that the Minister said that detrimental practices exist in the sector and that he was not satisfied with the situation, yet he has decided that there is no need for any further action in the Bill. That seems a little unrelated to the facts as we understand them.

Thirdly, he made the point, which we accept, that there are other activities going on here. Indeed, we hear that there will be a report shortly on the result of the consultation done by the Ministry of Justice and we may be able to look forward to action in April 2013. Therefore, I think that we need to keep this under review to see whether the movement is in the direction that we wish it to be to focus more clearly on where claims management companies are operating within the financial sector, and that the detrimental practices get sorted out. With those thoughts in mind, I beg leave to withdraw the amendment.

Amendment 147L withdrawn.

--- Later in debate ---

Moved by

[Lord Stevenson of Balmacara]

165DA: Clause 14, page 64, line 8, at end insert—
“(3A) In section 73(1), at the end insert—
“(g) to foster ethical corporate behaviour, including respect for internationally-recognised human rights”.”

[Lord Stevenson of Balmacara]

My Lords, the purpose of this group of amendments is to demonstrate that government recognises that business has a responsibility to respect human rights and sustainable development, to focus corporate behaviour on its wider social and environmental impact, to provide information to affected individuals and communities, and to inform better the investor community.

The Government have said that in discharging its general functions the FCA must act in a way that is compatible with its strategic objective—ensuring that relevant markets function well—and in a way that advances one or more of its operational objectives. I argue that these amendments would be entirely compatible with both the FCA’s strategic and operational objectives, as it would uphold the integrity of the Stock Exchange and ensure that businesses take into consideration the full impact of their operations. This approach is supported by a wide range of organisations, including Aviva Investors, the Carbon Disclosure Project, Save the Children, the Co-operative and the World Wildlife Fund.

There is of course a legal case for this. In June last year, along with every other member of the UN Human Rights Council, the UK endorsed the UN framework on human rights and transnational corporations, which enshrines the state duty to protect alongside the corporate responsibility to respect human rights. The Government, including the Prime Minister, have been enthusiastic in their support for these principles, but so far they have not spelt out how they intend to fulfil them. Listing requirements specifically relating to human rights and sustainable development would be a strong first step. The UK has a duty to protect human rights under international conventions to which it is a signatory. The human rights obligations of states under international law include the taking of effective measures to prevent human rights abuses by third parties, including companies.

The Combined Code on Corporate Governance, issued by the Financial Reporting Council, gives guidance to companies on reporting CSR-related matters. The listing rules of the London Stock Exchange require companies incorporated in the UK and listed on the main market of the exchange to report on how they have applied the combined code in their annual report and accounts. Overseas companies listed on the main market are required to disclose the significant ways in which their corporate governance practices differ from those set out in the code. The reporting obligations in the Companies Act 2006 extend to everything of relevance to the company within the terms of Section 417 of the Act. There are no geographical restrictions on what information is relevant or may be disclosed. Markets are driven by information. If the information they receive is short term and thin, these characteristics will define our markets. These amendments would serve to improve the information available to investors and all external stakeholders.

A recent survey of global stock exchanges conducted by Aviva Investors revealed that 57% of respondents agreed that strong sustainability requirements for listed companies made good business sense for the exchange. Only 14% of respondents disagreed. A lack of regulatory support was highlighted by over half the respondents as a factor that discouraged them from undertaking sustainability initiatives.

Stock exchanges play a vital role in economic development as one of the primary tools for the allocation of capital in both emerging economies and developed ones. Yet at present there is no requirement on applicants to the London Stock Exchange to provide information on their social or environmental impact, which means there are no sanctions available to the UK Listing Authority, even if a company listed on its main market is found guilty of the most grievous human rights abuses.

London is already behind the curve in this area and we suffer reputational risk if we do not act. For instance, the Hong Kong stock exchange mandates that mineral companies must: divulge the likely,

“impact on sustainability of mineral and/or exploration projects”;

reveal the,

“claims that may exist over the land on which exploration or mining activity is being carried out, including ancestral or native claims”;

and state the company’s,

“historical experience of dealing with concerns of local governments and communities on the sites of its mines”

and,

“exploration properties”.

The Shanghai stock exchange requires listed companies to commit to environmental protection and community development while pursuing economic goals and protecting shareholders’ interests. In Luxembourg, listed companies must have “high standards of integrity”, and behave in a “responsible manner”. In Malaysia, listing rules include provisions on CSR reporting, and the stock exchange has also developed a CSR framework with accompanying guidance for directors. Human rights are also referenced throughout guidance materials elaborating on the framework, most recently in a training tool for directors.

The business case for human rights and sustainable development reporting is therefore robust. The current listing requirements are in place to allow investors to make good and informed decisions about the merits of investing. Arguably, this would be impossible without information on the social and environmental impact and responsibility of a company. The UK’s largest institutional investor, Aviva Investors, has called for a,

“listing environment that requires companies to consider how responsible and sustainable their business model is, and also encourages them to put a forward looking sustainability strategy to the vote at their AGM”.

It is widely accepted that environmental and social governance performance can have a significant impact on shareholder value and should therefore be taken into full consideration by companies in their reporting and financial disclosure.

When a similar amendment to the Bill was raised in the other place, the then Minister said that the proposers,

“have raised some very important issues and there is a lot of truth in what they say. The reputation of the UK listing regime depends partly on the behaviour of companies, and we need to think about that quite carefully”.

He also said:

“Matters of stewardship and corporate behaviour are predominantly the responsibility of the Financial Reporting Council, which is responsible for the stewardship code and corporate governance issues”.—[Official Report, Commons, 22/5/12; col. 1028.]

However, as the FRC recently explained to the Treasury Select Committee, its role is about implementation and not about applying sanctions.

A gap is developing between what we would all agree is best practice and what needs to be done to ensure that the rules are followed; effective sanctions must be available. There is currently no single body responsible for all aspects of company behaviour, including the raising of finance. Under the current regime, the listing process provides the funds that companies need to invest and grow, and shareholders have the primary responsibility for holding business to account for its behaviour. However, there is no regulatory body responsible for both sides of that equation with sufficient powers to intervene. I believe that the FCA should take the lead as it has the authority, the expertise, the personnel and the funding to enable it to exercise vigilance over all UK listed companies. I beg to move.

[Lord Sassoon]

My Lords, Amendment 165DA would require the FCA to have regard to fostering ethical corporate behaviour when exercising its listing functions. While we would all agree on the importance of corporate ethics, the issue here is whether we should make changes to the Bill to give the FCA specific roles or responsibilities in relation to them. The Government consider that the answer to that question is no.

The objective of our reforms is to put in place a new regulatory system with properly focused regulators who have clear responsibilities and objectives. This, of course, replaces a regulatory system which was not sufficiently focused and failed when the point came to protect consumers adequately. However important additional, worthy objectives might be, we need to be mindful at all times of the need for focus on the new bodies which we are creating. In this particular case, there are of course already other bodies or agencies engaged in these important matters. In particular, as the noble Lord, Lord Stevenson of Balmacara, knows, the Financial Reporting Council is responsible for the corporate governance code and the stewardship code to which he referred. That is where I believe we should leave this responsibility, rather than blurring or muddling the lines.

Amendment 167E is more specific. It would require the FCA to make listing rules to require all listed energy and mining companies to carry out human rights due diligence and then require the companies concerned to make annual human rights impact reports to the exchange. Again, I can appreciate what is behind Amendment 167E but do not believe that it is necessary.

First, the FSA currently—and the FCA in future—is already able to make listing rules covering both points made by the amendment if it considers it appropriate to do so. I see that the noble Lord is nodding. We do not need to give new powers in this respect to the FCA, or to include new requirements in FiSMA. However, I know that the noble Lord will come back and say it is one thing that it has the ability to do it, and another thing if we think it to be sufficiently important. I understand that, but it does have that ability.

Secondly, we see the way forward to be encouraging transparency and supporting action in the countries in which mining and other extractive activity takes place. That is why the Government support the EU proposals to improve transparency in the extractive—oil, gas and mining—and forestry sectors. We are already engaged in the EU negotiations on this issue. The Government also support the extractive industries transparency initiative and encourage resource-rich countries to sign up to it. Under that initiative, companies publish the payments they make to Governments of resource-rich countries, and these Governments publish the payments they receive from extractives so that the benefits from extractives can be seen by all. Therefore, while I appreciate that the noble Lord wishes to go harder on this, I believe that the Government are being active on the case. These are important issues and it is better to leave it to the FRC through the code on the one hand, and to push forward with these important international initiatives on the other. On that basis, I ask the noble Lord to withdraw his amendment.

[Lord Stevenson of Balmacara]

My Lords, I thank the Minister for his comments. I understand where he is coming from and indeed he answered for me in some senses by explaining what he thought I might say in response, so I will not add to that. At the heart of this there are just two points. It is true that the bodies he mentioned have responsibilities. However, because there is no single body with the clear authority to act, it is a bit of a muddle and it is something that in future we may have to come back to. As the Minister said himself, the current FSA has, and the future FCA will have, the powers to set down rules, but the fact that the FSA has not done so is obviously relevant. I was grateful to the Minister for his comments about the EU initiatives in this area. These are important, and certainly the transparency that he has sought is at the heart of what I have been saying. That said, I beg leave to withdraw my amendment.

Amendment 165DA withdrawn.