Financial Services Bill

Debate between Lord Stevenson of Balmacara and Lord Sassoon

Tuesday 20th November 2012 Lords Chamber

[Lord Sassoon]

My Lords, I thank the noble Lord for one or two focused questions on this. First, I repeat what I think I said before in answer to my noble friend Lord Flight and his concerns. I have nothing new to add in this area, but the question of the transition is an important one. I will say again what I have said before—that the Government will consult on their proposals for the transition in early 2013 and no final decisions have been taken. The Government are very much aware of the need to allow the FCA and firms time to manage a smooth transition. In that context, we are considering options for phasing the implementation of the new FCA rulebook as well as interim arrangements for existing licence holders. So I can only repeat that my noble friend’s concerns are perfectly fair and reasonable, and the Government are reflecting on them as we speak. Well, I am not—but wiser heads than mine are beavering away on this very topic this afternoon.

I come to the issues brought up by the noble Lord, Lord Stevenson of Balmacara. The reason why we are coming forward with these amendments now, having already dealt with the substantive matter of the transfer, is that, perfectly properly in the process of scrutinising legislation, the Opposition, Peers on the government Benches and all sorts of interested parties come up with points, reflected in many amendments, which are making this a better Bill as we carry on with our deliberations. These are issues that have been brought to the Government’s attention during the ongoing discussions with stakeholders, so I make no apology for bringing them forward now as an improvement to the legislation, giving better and more seamless protection to consumers but also treating firms in a proportionate way. I assure the noble Lord that the FCA will certainly have the means and resources at its disposal to carry out its new responsibilities in this area.

I do not wish to get too deeply into the general question of debt management and claims management companies, because we are talking about a narrow and specific but important area of the transition here. We could open up a debate that is not directly relevant to these amendments about debt and claims management companies. But I address the specific question about the new criminal offence applying to credit situations and not debt management, because it is right that the new criminal offence should be targeted proportionately at areas where there is the greatest risk of detriment caused by unscrupulous people selling dubious product. In that context, there is a great distinction between the provision of unsuitable credit and debt advice. In any cases where a firm engages in debt activity without the right permission, it would be a breach of FiSMA and the FCA will act.

On the appointed representative regime and the way it will work with the authorisation regime, I do not think that the noble Lord was challenging the basic premise behind the carve-out, but he is quite right that we need to get the way in which the two regimes mesh in together to work appropriately. To that end, as part of the 2013 consultation early next year, we will address that point and specifically ask who those firms should be. However, we will be putting forward a presumption that the firms to which this applies will be low-risk firms and all those whose primary business activity does not relate to consumer credit. The Government think that it is important that legislative provision is made now so that this option is available in the future, and that will help design a proportionate and appropriate regime. Nevertheless, I recognise that we should and will consult to make sure that we draw the line in the right place. Of course, if concerns emerge in future, the Treasury can change the class of people to whom the carve-out applies by order, and may in fact decide not to make it available to any firms at all if it thought it appropriate. I hope that that has addressed the main issues.

[Lord Stevenson of Balmacara]

My Lords, may I press the Minister on the point that I made earlier in my remarks about receiving a number of representations on this issue? Indeed, some of the points that he made reflected the fact that thinking is still going on. He mentioned that people were working on things as he spoke. In the circumstances, will he accept that it might be appropriate to have a further debate on this at Third Reading?

[Lord Sassoon]

My Lords, I was referring to people working on the transitional arrangements that come out of this. I have not been made aware of any further concerns or issues that would merit a debate at Third Reading; if I had, I would have brought forward amendments at this stage. So I am not aware of any concerns, but, as the noble Lord was kind enough to say, the Treasury team and I will be open to him and to anybody else if further issues come up. However, I do not anticipate them and I can think of nothing of a Third Reading magnitude—if I may put it that way—that is likely to detain your Lordships.

Financial Services Bill

Debate between Lord Stevenson of Balmacara and Lord Sassoon

Wednesday 24th October 2012 Lords Chamber

[Lord Stevenson of Balmacara]

My Lords, as we have heard, this amendment would ensure that a decision by the OFT to suspend a consumer credit licence could take effect before an appeal process ends. This follows widespread concerns that appeals from consumer credit licence holders can take up to two years, as the noble Lord said, and the current law allows the trader to continue with any bad practice while the appeal is pending. We warmly welcome these amendments and are very grateful for them. The consultation paper that came out only yesterday is a very useful contribution to the debate.

However, perhaps the Minister could answer two questions—one small point and a larger one. The amendment sets up the legislation so that the OFT would suspend the whole licence; in other words, all activity covered by the licence. That generally makes sense. However, there may be circumstances where the OFT has concerns with a particular feature of a credit licence holder’s business activities—say, a lender whose lending practices are all right but who perhaps has problems with debt collection practices—and the right decision might be to close down one part of the business. The noble Lord may be able to point me to where these powers already exist or, if necessary, perhaps he would reflect on this point. There may be a slight issue here, but it is not a major one. If in doubt, the right thing is to withdraw the licence.

The second point is slightly broader. To date, the OFT has done a very good job in this area, and perhaps does not receive as much thanks as it should for that. It seems to us that the main problem is that it has never had the resources that it needs to do the job it wants to do. There is little point in providing powers to a body, as in this amendment, if the resources to do the job are not also provided. So my second question is about the transition: the OFT will probably have jurisdiction on credit in this relationship for only another 18 months or so. What will happen over the transition? I would be grateful if the Minister can give us a reassurance that the transfer arrangements will be such that this amendment will survive the transfer, and that the FCA will be willing and able to provide the necessary resources so that there is a seamless handover.

[Lord Sassoon]

My Lords, I am very grateful to the noble Lord, Lord Borrie, for giving his clear welcome to this provision. It is always gratifying to have his agreement on such things, as he has immense background experience in this area.

I turn to the two points made by the noble Lord, Lord Stevenson of Balmacara. I believe that there is no way of partly suspending a licence; it is an all-or-nothing situation. I note his suggestion to reflect on this, and I will check that it has been taken fully into account, as I suspect it has. It reinforces the point made by the noble Lord, Lord Borrie, that it is hoped that this power is not used very often and that it will be used in what are clearly extremely egregious cases.

On the second point, I can certainly assure the noble Lord that the planning relates to the transfer being seamless and appropriate—not only that the appropriate powers are taken into account but also the appropriate resources. My understanding is that people are clearly working to ensure that we achieve the objective that he and I share in this area.

Financial Services Bill

Debate between Lord Stevenson of Balmacara and Lord Sassoon

Monday 15th October 2012 Lords Chamber

[Lord Stevenson of Balmacara]

My Lords, I shall speak also to Amendments 190ZZB, 190ZZC and 190ZCA. Mutual and building societies and the friendly society sector have played an important part in the organisation of savings and investments and the provision of credit in this country for centuries. Their existence, against all the odds on some occasions, has sometimes been a close-run thing and their constitutions and management structures are redolent of an earlier age of prudence and sobriety in financial matters. Many people regret that we do not do more to support this sector. There have been reports and initiatives aplenty in recent years, but not too much action. I am sure that all noble Lords will share our concern that the Bill should not disadvantage these important organisations.

Our amendments therefore have three purposes. The first is to invite the Minister to update us on the question raised in another place about the need to modernise the register of these bodies. As was indicated during the Committee stage debates, credit must be given to the FSA for bringing the registry out of the 19th century and into its present form, but unlike Companies House, where all filings can be done online, at the Registry of Friendly Societies, located at the FSA, it still takes 48 hours to get a search of certain records of a mutual society. In comparison, a search at Companies House is a simple process which takes minutes, if not seconds. Mutual societies deserve a modern registry which can support and promote the mutual society model. The amendments would provide for any function of the FSA in respect of the Registry of Friendly Societies to be transferred to a register established at Companies House, though, of course, we would be happy if the location of the registry could be unchanged. If the Minister could confirm that a modern registry can be established within the FCA, that would satisfy us.

Secondly, this part of the Bill empowers the Treasury to amend by order legislation on mutual societies for a number of different purposes. When this was raised in the other place the issue seemed to be whether the FCA and PRA responsibilities for the functions that we are discussing are broadly the same as those for the plc sector and that there are no anomalies for the mutual sector as opposed to the non-mutual sector. Unfortunately, it is not clear from Hansard whether the Minister was able to clarify whether or not this was the case, so it might be useful if the Minister could outline how the clause affects the mutual sector and confirm that it is simply a technical matter with no new provisions.

Thirdly, Clause 47 introduces provisions for credit unions in Northern Ireland. Credit unions play a very important part in the organisation of savings and the provision of credit in the Province. As I am sure the Minister is aware, some attention was paid to this issue when the matter was debated in Committee in the other place. Subsection (2)(g) lists the Credits Unions (Northern Ireland) Order 1985 as legislation that the Treasury may amend by order. As was raised in the other place, the 1985 order is specifically included in the Northern Ireland Act 1998, established by the Good Friday agreement. Again, therefore, it would be helpful if the Minister could clarify the general position, particularly that subsection (4) is purely an enabling provision that will allow the transfer of functions on an agreed and acceptable basis and will not automatically dictate such.

I take this opportunity to invite the Minister to update us on the outcome of the consultation on the draft mutuals order, and particularly on whether it has now been agreed which matters will go to which body. The Minister will recall that the draft mutuals order talked about transfers to the FCA or the PRA as though the question of which regulator will actually step in at which moment had been left as a rather grey area. As was said when this issue was discussed in another place, surely that ambivalence suggests uncertainty as to what will happen in future, at a time when we should be encouraging the sector to have confidence and to grow. It also seems to run contrary to the commitment on page 9 of the coalition agreement, which states that the Government,

“will bring forward detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry”.

Given that we are talking about transferring responsibilities between regulators, which regulator will be the champion for the mutuals model; who will actively encourage the benefits that can flow from a non-plc corporate form; and will either of the regulators have any responsibilities for such matters or none? I beg to move.

[Lord Sassoon]

My Lords, the draft mutuals order has been published this evening. My officials will send the noble Lord a link to it in the morning so he can be completely up to date. That cuts through that point: the draft order confirms that the Government are moving steadily ahead with lots of action, and I will briefly remind the Committee of some of it. The order is the next thing that is due to make progress in the Government’s important objective of promoting diversity. As we have discussed before, the important thing, as the noble Lord said, is that we want a level playing field. The Government do not see this Bill as the vehicle through which to promote particular sectors of the financial services industry—I think that the noble Lord understands that—but I will sketch out some of the other things that we are doing.

To reassure the Committee why in my view Amendment 190ZZA is not necessary, the Government have demonstrated a clear commitment to promote mutuality and to diversify and strengthen the mutual sector. We are taking action to give concrete effect to this commitment, including the new requirement in the Bill for the regulators to analyse the impact of proposed rules on mutuals and building societies, so helping with the local level playing field; the protection given to members of Northern Ireland’s credit unions; and legislation to reduce restrictions on the growth of credit unions. The Government are committed to ensuring that building societies continue to operate on a level playing field with banks while maintaining their unique identity—for example, in the draft Banking Reform Bill published last week, we proposed to exempt building societies entirely from the definition of a ring-fenced bank, although changes will be made to the Building Societies Act 1986 to bring it into line with the ring-fencing provisions of the draft Bill, which was the proposal supported by most respondents.

Financial Services Bill

Debate between Lord Stevenson of Balmacara and Lord Sassoon

Monday 8th October 2012 Lords Chamber

[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.

--- Later in debate ---

[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.

Financial Services Bill

Debate between Lord Stevenson of Balmacara and Lord Sassoon

Wednesday 18th July 2012 Lords Chamber

[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.

Financial Services Bill

Debate between Lord Stevenson of Balmacara and Lord Sassoon

Wednesday 18th July 2012 Lords Chamber

[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.