Financial Services Bill

Andrew Love Excerpts

Tuesday 22nd May 2012 Commons Chamber

[Mr Hoban]

The hon. Lady makes a good point, and if my colleagues in the Foreign and Commonwealth Office are not reading this debate carefully I shall certainly raise the matter with them and ensure that they think carefully about their role. I encourage her to speak to the FRC about these issues.

[Mr Andrew Love (Edmonton) (Lab/Co-op)]

The Treasury Committee interviewed members of the Financial Reporting Council this morning. They explained to us that their powers are about implementing or explaining and that they do not have powers to deal with companies that break the rules in this regard. Would it not therefore be appropriate to involve a body such as the FCA, which really could deal with implementation?

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[Mr Hoban]

I am always loth to offer meetings on behalf of colleagues, because it has happened to me, but the hon. Gentleman may wish to approach the Minister with responsibility for consumer affairs, who is also responsible for corporate governance and the role of the FRC. That might be the most productive furrow to plough.

On amendment 38, the hon. Member for Nottingham East (Chris Leslie) is absolutely right that we have heard it before. It is identical to amendment 150, which we discussed at some length in Committee before rejecting it. I do not think his arguments today were any more persuasive than they were a few months ago. I know that he will find that personally disappointing but I am sure he will get over it. In short, the objectives of each authority are broad enough to enable them to make the rules suggested in the amendment.

More generally, these issues are better considered in other forums, including those concerned with governance across the corporate sector. I also point out gently to the hon. Member for Nottingham East that the Department for Business, Innovation and Skills recently consulted quite widely on executive remuneration and that it included in that consultation both the suggestions that have been made, neither of which received significant support. [Interruption.] The hon. Member for Nottingham East says that it depends whom we consulted but it was an open consultation. Views were encouraged from across a wide range of bodies, including investor organisations, and I am sure that institutions such as the TUC and others would have taken part. I know that the Treasury Committee is also looking into this matter, so perhaps the hon. Member for Edmonton (Mr Love) can illuminate us about the conversations he has had this afternoon with Baroness Hogg.

[Mr Love]

I thank the Minister. What we were told today was that remuneration committees draw from a very select pool and are heavily influenced by the argument that their chief executive has to be at or above the average of all chief executives and that comparisons are made directly with the United States, which may be inappropriate. It was also made clear to us that we should widen that pool. One suggestion of how that could be done was to put an employee on the remuneration committee. If that is not acceptable, how is the Minister going to address this problem?

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[Mr Hoban]

There are two issues here. There is a route through the courts that any type of consumer, whether retail or a business, can use if they have been mis-sold a product. That is a normal commercial right. What the FSA has identified as a consequence of the number of complaints on the issue that it has received from businesses is that it needed to undertake more work. It started that work in mid-March. It was looking at products that were sold in the run-up to the financial crisis, and as a consequence of its investigations it believed that more work was needed to establish the scale of the problem and to determine what action should be taken.

There is nothing contradictory about the letter that the FSA sent. Thanks to the efforts of a number of hon. Members who raised with the FSA the concerns of businesses in their constituency, it recognised that they were not just isolated examples and that there was a wider issue that needed to be addressed. Its powers under FSMA enable it to address the problem in the right way. That is a welcome step forward by the FSA.

[Mr Love]

Looking at the issue from a small business perspective, small businesses are not allowed, as the amendment proposes, to take collective action on these matters through the courts, which is frustrating. They feel that the FSA is not responding to them adequately. There are great delays in the system. The Minister has commented on the legal aspect of collective actions currently going through. May we have some reassurance today that the FSA will act more promptly in dealing with these matters?

[Mr Hoban]

As a consequence of the reforms that we are introducing, we are giving the FSA, and now the FCA, tougher powers to tackle these problems. The FSA has a much-reduced appetite for risk and a more interventionist approach to tackling matters where there appears to be consumer detriment. Some people feel very uncomfortable with this, but it is right for the FSA to act vigorously in defence of consumers and to take the necessary action to ensure that consumers get a fair deal. The Bill takes that one step forward and that is why we have been keen to ensure that we give the FCA more powers, which it has demonstrated the appetite to use.

Amendments 5 and 6 require the FCA and the PRA to publish a statement explaining how they consider making the proposed rules compatible with the principles of regulation set out in new section 3B. Given the important framing role of these principles, I agreed with the suggestion made by the hon. Member for Nottingham East in Committee that the Bill should be explicit about the regulator’s duty in that regard, and I committed to tabling the appropriate amendments when the Bill returned to the House. I am sure that the hon. Gentleman will be keen to support them.

Amendments 13 and 14 are minor and technical and are designed to maintain a position currently provided for in FSMA whereby the FSA is not required to make rules for the FSCS that provide cover over all regulated activities. The amendments ensure consistency with section 214(1)(g), which provides that the scheme may in particular provide for a claim to be entertained only if it is the type of claim specified by the scheme. These are technical changes and I hope that hon. Members will support the Government amendments and reject those tabled by the Opposition.

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[Mr Cash]

The Opposition spokesman says, “Hear, hear”, but I do not want to give him too much encouragement. We need to understand, however, that the objective behind the Opposition’s amendment is important, not because of party politics but because it is about having a stable, good and fair society. That is what we should all be seeking.

[Mr Love]

It is a great pleasure to follow the hon. Member for Stone (Mr Cash), whose strictures I shall try to address. First, however, I want to appeal to the Minister, who, I know, is personally sympathetic to mutuals: this will be a modest contribution that tries to reflect his own coalition manifesto commitment to foster diversity and promote mutuals. In answer to the hon. Member for Wycombe (Steve Baker), I say that the amendment seeks to do that by trying to measure the strength and complexity of the mutual movement using the regulator.

No one has said why we would want to foster diversity and promote mutuals. I want to address that question, because it goes to the crux of what the hon. Member for Stone talked about. First, members benefit greatly from membership of mutuals. The tables of the best savings rates or lowest mortgage rates are populated by mutuals, which provide basic but risk-averse financial services—exactly what the ordinary consumer is looking for. Of course, the reason they can provide such services is that they do not have any shareholders and, therefore, no demands for dividends each year, allowing them to deliver their services efficiently.

Perhaps even more importantly, mutuals provide a consumer benefit by offering a competitive spur in the marketplace. The hon. Member for Stone says he believes in capitalism. I believe in a market system, and competition is a very good spur, and that is exactly what the mutual movement provides. The reduction in the number of building societies has meant that they have not been able to provide a stronger spur, which provides another reason for the amendment.

Mutuals provide choice in financial services. Does someone want a mutual member benefit or to contribute to shareholder value? People will make that choice in all sorts of ways, for all sorts of reasons, but it is important in a marketplace to have choice. We are confident that people will choose mutuals, because all the studies and polling of consumers of financial service show that mutuals are more popular and, perhaps more importantly, more trusted than their plc rivals. That is a very important consideration.

Why move the amendment now, other than to reflect the coalition agreement? Currently, the marketplace is dominated by the plc model, which is unhealthy. We all know what happened in the lead-up to 2007 and 2008: heightened risk, and the search for yield followed by the credit crunch. I am not suggesting that the Government are not taking steps, including in this Bill and forthcoming legislation this Session, to address some of these problems. I am saying that there developed a monoculture—group-think—in which everybody thought exactly the same. We need to avoid that. This modest amendment will help us to do so.

The amendment will also address the danger of the one-size-fits-all attitude displayed in recent years by the regulator, who did not deal effectively with life funds for friendly societies and mutual insurers. At the heart of the ongoing dispute is the failure to understand the essential difference between a mutual and a plc. The amendment would go some way to address that. The regulator now admits that the Financial Services Compensation Scheme, which was introduced some years ago, got it wrong by basing what each organisation had to pay on deposits, discriminating directly against building societies. There was no understanding or empathy in the regulator to address the issue. The Minister will say to me, “But the FSA has now updated its regulatory role. It’s opened a department to deal with these specific matters.” That is all to be welcomed; however, I hope that the Government will welcome this amendment, which represents a small step towards creating greater understanding and trust in the regulator’s dealings on these matters.

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[Mr Hoban]

The new duty in the Bill goes beyond what the FSA currently does. It imposes a requirement separately to identify the impact of regulation on mutuals. Let me continue my remarks and set out some of the other things we have done to promote mutuality. As I was saying, the regulatory principle of proportionality also bites in this regard. If the regulators are taking action that impacts on one type of firm more than another, it should be done on the basis that the action is necessary and proportionate.

Let me highlight a number of ways in which the Government are promoting mutuality outside of this Bill. In January this year, the relevant provisions of our Legislative Reform (Industrial and Provident Societies and Credit Unions) Order 2011 came into effect, allowing credit unions to grow faster and compete better by offering interest on deposits and admitting corporate bodies like local charities and firms as members.

My colleagues in the Department for Work and Pensions recently commissioned and published a report on enhancing the sustainability of the credit union sector. It looked at some of the initiatives undertaken by the previous Government, how they have helped the credit union sector and how best to take that work forward. Important recommendations were made to the Government that will help to enhance the sustainability of credit unions and ensure that if there is further public sector investment in them it will be used to expand their base and ensure that they are sustainable.

The capital requirements directive, CRD4, includes a capital instrument that is available for use by mutuals and building societies. That was not on the agenda when we came into office two years ago. It is a consequence of the work that this Government have done with their European partners to ensure that that instrument can enable building societies to issue capital instruments so that they can expand and deal with some of the challenges they face. A number of Members of the European Parliament, as well as the Government, have been working to ensure that within CRD4 a particular capital instrument is available for the Co-op, which, because of the nature of its ownership, falls outside the instrument that is available to building societies.

The Prime Minister announced earlier this year that we intend to bring forward a Bill to consolidate most legislation governing co-operatives and mutuals. The industry greeted the announcement of this Bill warmly, and I believe it is important to bring forward this consolidation. Ed Mayo, the secretary-general of Co-operatives UK, stressed the importance of bringing together a series of nearly 20 Bills or Acts of Parliament, which will make it easier and cheaper to establish co-operatives and remove some of the ambiguity in the sector. Co-operatives UK is looking forward to working with the Government to bring forward this consolidation Bill.

[Mr Love]

The Minister has already admitted that credit union deregulation goes back many years. I was frustrated by the lack of progress under the previous Government; it has taken us a long time to get here. As for a consolidation Bill, I asked the Secretary of State for Business, Innovation and Skills why it was not included in the Queen’s Speech, given that it is a relatively modest and non-controversial measure—yet the Government could not give enough priority to it. Is there not some concern—

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[Mr Hoban]

The FPC’s remit does not cover the consideration of competition in the system. Its role is to consider stability and the threats to it. On the question of the Prudential Regulatory Authority, one of the challenges we need to accept is that, for a host of reasons, the failure of a bank is costly and expensive. We saw that in the UK with the response to the banking problems during the crisis, when a huge amount of public money was pumped into banks to prevent some of the problems that bank failure would create. Part of the responsibility for tackling the problem lies with the previous Government, who introduced living wills through recovery and resolution plans in the Banking Act 2009, work which is now being taken forward.

Of course, the Vickers report includes in its recommendations ways in which it will be easier to allow the orderly failure of a bank. Helping a bank to have an orderly failure where there is a problem will help to tackle the problem with barriers to entry. At the moment, the cost of failure is so high that the barriers to entry are proportionately higher. The regulators want to know that a bank is safe and to have huge confidence in that bank and they will require it to have high levels of capital because the cost of failure is so high. If we can tackle the barriers to exit from the banking sector, it will be easier to tackle the barriers to entry. That will help enormously in improving competition.

We have also given the Financial Conduct Authority an explicit objective of improving competition in markets. We have strengthened that objective, taking into account the work of the Treasury Committee and the representations of others, and I believe, as I think my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) does, that competition plays an important role in improving outcomes for consumers. That is why we see competition as one of the key new roles for the FCA, which will be a specialist regulator of conduct and will have strategic objectives not just to promote competition but to focus on consumer protection and to ensure that markets function well and have integrity.

We have also listened to the widespread concerns about the regulation of consumer credit. The Bill gives us powers to transfer the responsibility for regulating consumer credit from the Office of Fair Trading to the FCA. That will bring significant benefits and will ensure that consumer credit is well regulated. The FCA has a wider range of penalties than the OFT and can take a wider range of enforcement action, which will help to reassure our constituents that we are tackling the issue of consumer credit properly and sensibly.

[Mr Love]

The Minister will recognise the continuing concerns about the powers given to the Governor of the Bank of England and, indeed, to the Bank. What changes is he likely to make to address the governance arrangements to ensure that those powers are used wisely?

[Mr Hoban]

The hon. Gentleman makes an important point. I emphasise that it is the Bank of England that is getting more powers, as I do not think we should be personalising matters in the context of who within the Bank will get more power. It is the institution that will get more power. We have taken steps in the Bill to increase the accountability and transparency of the Bank. It is very important, for example, that the FPC, in explaining its actions, uses the financial stability report to communicate the risks it identifies and what its responses should be. I expect that the FPC will be held to account by business, the banking sector and this House. That is important but, as I said on our first day on Report, the Treasury Committee has raised a number of issues—I pay tribute to the work of the Committee and its Chair in highlighting them—and we will return to them in the other place.

It is important to get the arrangements for the governance of the Bank right. I believe that accountability and transparency should be at the heart of the regulatory system, which applies not just to the regulators but to some of the tools that we have given to them, which I think will help. For example, at the moment no one knows when a financial promotion has been withdrawn at the direction of the regulator, but that information will now be made public, which will help consumers to know which financial services firms push the boundaries with promotions. That is why we want to see the publication of warning letters. I know that that is controversial, but it is right that consumers should know when enforcement action is being proceeded with and that that information should be in the public domain. The powers we are giving to the FCA to ban toxic products are also an important strengthening of that regime. In a range of areas, we are changing not only the structure of the regulatory organisation of this country but the approach. Transparency and accountability are part of that, as are the increase in competition and the new powers that we are giving to the FCA.

The process of scrutiny has been constructive, I think, and I pay tribute to the Treasury Committee for its work. We also had pre-legislative scrutiny of the Bill by a Joint Committee of both Houses chaired by my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley). As we have developed the Bill, the way in which we have listened to the arguments being made inside and outside Parliament has demonstrated that we listen carefully to what is said and will amend the legislation as appropriate. We passed a number of Government amendments on Report that reflected comments that were made—even those made by the hon. Member for Nottingham East (Chris Leslie). That just shows that we are prepared to listen. The fact that there has been such widespread support for the Bill in the Commons demonstrates that our aim to ensure that there is widespread consensus behind our reforms to the structure and approach of regulation was achieved through the consultation process we adopted. That consensus is important. It demonstrates confidence in our proposed changes and shows that this Bill should receive its Third Reading.

I hope that the Opposition are not going to oppose Third Reading. If they do, it will demonstrate that they have not learned the lesson of the past—[Interruption.] The deputy Opposition Chief Whip says, “You never know,” from a sedentary position, but if the Opposition vote against this Bill on Third Reading people will wonder whether they are so wedded to the constructs of the past that they cannot move on. People will think that they are so wedded to the system put in place by the shadow Chancellor that they cannot move on and that they cannot recognise the flaws in both its structure and approach. If they choose to vote in such a way, the world will know that they have not moved on and that they have not learned those lessons.

The Government have looked at the financial crisis and the reforms that must be made. The structure we are proposing today will help to deliver better outcomes for consumers and to strengthen and improve the resilience of the financial system in the future. I commend the Bill to the House.