Consumer Rights Bill

Baroness Drake Excerpts

Wednesday 22nd October 2014 Grand Committee

[Baroness Hayter of Kentish Town]

I was just checking that the Chair is awake. I rise to move Amendment 46A in my name and that of my noble friend, Lord Stevenson. We have given him the day off today, so I fear that you are going to hear rather a lot of my voice.

Amendment 46A is, of course, of central importance to users of services, as it would ensure that they have access to the remedies laid out in the Bill, should a service fail to deliver on the promised or anticipated outcome. The amendment would bring the regime for services into line with that for goods and digital content. That is important for the clarity of the Bill, but it would also ensure that the Bill lives up to what customers expect, which is that a service should do what it is supposed to do, rather than being measured simply on whether the service provider used “reasonable care and skill”.

The amendment would also do what the BIS Select Committee in another place recommended, which is that the Bill should apply an outcomes-based standard to how we measure services. Thus, whether a service has been satisfactorily delivered should be measured against what it was meant to do, not the attributes of the provider.

We might note that the Solicitors Regulation Authority has moved to outcomes-based regulation. It places the emphasis not simply on compliance with rules, but on achieving the required outcome for clients. Many of the excuses given for the Bill not adopting this outcomes-based standard have cited lawyers, but they are the very people who have accepted that standard. Given that we have these very welcome statutory remedies in the Bill for substandard services, we fear that they will not properly protect consumers if they only test whether the trader exercised reasonable care and skill, with no consideration of the outcome.

Let us take the example of a householder getting their windows cleaned. Were the windows cleaned properly? No, but the company said it used reasonable care and skill, so the customer may have no remedy for the late arrival of the window-cleaner, one window overlooked or a few smears left on the door. They would have no chance of a price reduction, or even a rewash, as the firm used skilled window-cleaners who said that they took reasonable care.

With many services, particularly those provided by the professions, it would be difficult, if not impossible, for a client to prove that the service had not been performed with reasonable care and skill, even when it is very obvious that the result is unsatisfactory. Furthermore, I understand that there is no general definition of “reasonable care and skill”, so we will have to await case law in due course to set out what will be taken into consideration when judging whether a service has met the required standard. It will be hard for the consumer to know, therefore, whether they have the right to a remedy if they are not satisfied with a job. By contrast, a professional trader or service provider is far more likely to know, and therefore be able to advise in advance, what outcome can be anticipated. It is, after all, the outcome that matters to the customer.

The organisation Which? told us that the majority of complaints it sees are about services, particularly about broadband, mobile phones and energy. Its research showed that consumers do not feel well protected when they are buying services and they are not confident that they will be treated fairly. Indeed, one-third of the consumers who failed to complain even when unsatisfied did not bother to do so because they simply did not believe that anything would be done. They have no knowledge of how a satisfactory service is to be measured at the moment, nor would they under the Bill.

Amendment 46A would also address the problem that, without it, the Bill sets two different standards for goods and services—that goods must be “of satisfactory quality” whereas services need be delivered only with “reasonable care and skill”. Perhaps we can revert to a discussion that we had earlier in Committee of the sort of transactions in which both those elements are involved. For example, our kitchen is purchased as a good, but its installation is a service. Surely, it would be to the advantage of both the consumer and the trader if the definition of what is satisfactory was the same for both. Also earlier in Committee we discussed botched plumbing and the problems of divvying up the elements of the contract. That would be made even worse if different standards applied to the different parts of the final service. So, just as we may not know whether the flooding of the kitchen has been caused by a faulty sink or by poor installation, it will be even harder if the test on the reasonable outcome, if there was a leak, is different for the two elements of goods and service.

In another place, the Government claimed that Clause 50 requires traders to comply with any information that they have given before the contract started and that, therefore, the concept of outcome is embedded in the legislation. However, that contract may well not specify outcomes in the terms of, “Well, we’ll install a bath and taps such that water flows into the bath rather than down the side of the bath and on to the floor”. No consumer is going to check whether the pre-work contract specifies such expectations, which they rather take for granted. They may read very carefully, for example, whether the old bath is to be taken away, but they will hardly check that the plumbing and the electrics will work and that the place will be left clean and tidy afterwards. Yet these are reasonable expectations to have of a service.

Amendment 46A places the consumer’s experience of the service—that is, its outcome—as a part of the definition of satisfaction rather than its simply being a matter of the provider’s claim to have used skill and care. I beg to move.

[Baroness Drake (Lab)]

My Lords, I support Amendment 46A, which covers a matter that I raised in Second Reading. The Government’s reasoning in strengthening consumer law through this Bill is that empowered consumers will make markets work more effectively and drive economic growth. However, I fear that the failure in this Bill to align the statutory rights of the consumer as between the sale of goods and the sale of services will weaken the protection of the consumer and result in less efficient markets in the provision of services.

As we know, goods supplied must be “of satisfactory quality” whereas services have to meet only a requirement of being provided with “reasonable care and skill”. In effect, the standard for services is based on fault rather than on satisfactory quality, as my noble friend Lady Hayter said, which is an outcome measure. It may prove more difficult for consumers to prove that a service has not been provided with reasonable care and skill because the focus is on the way in which the service was carried out rather than the quality of the end product. So there will still be many circumstances in which the consumer has not received what they paid for but will not be entitled to a remedy because the trader has exercised “reasonable care and skill”, because that measure focuses on compliance rather than on outcomes. That is a two-tiered standard of approach to consumer protection, and this amendment goes some way towards trying to address that problem.

In certain sectors and markets, the asymmetry of knowledge and understanding between trader and consumer is extensive—we know that. It should be remembered that the scale number of complaints come from consumers in sectors such as energy, broadband, mobile phones and—a sector close to my heart—financial services. Furthermore, the challenge of inertia and consumer behavioural bias, with which we are all familiar, can be used quite systematically by some service providers to deliver a poorer service or sustain profitable inefficiencies. That strengthens the need for consumer protection. However, I feel that in this Bill there is a lost opportunity by constraining to “reasonable care and skill” the statutory standard in respect of the provision of services.

--- Later in debate ---

[The Earl of Lytton (CB)]

My Lords, I had not intended to intervene and before doing so I ought to explain that, as a latecomer to the issues in this Bill, I have various interests to declare, not least in this instance that I am a chartered surveyor and, by dint of my professional activities, a registered valuer.

I pick up the point made by the noble Baroness, Lady Hayter, in connection with negative equity, for example, and I think of the circumstances that arose when the wheels, if I can term it thus, came off the banking situation and mortgage lending in 2008. That resulted in the mortgage lenders—I will not say to a man, but certainly in large numbers—pointing the finger at valuer members of my profession. I should make it clear that the mortgage lenders select whom they will have on their panel of valuers, they set out the form in which the report is to be made, they determine the fee and the timescale over which the report will be produced and, in the past, they have not been averse to leaning on members of my profession if they think that not enough money is being lent or the volume is not enough, because they are looking retrospectively at what are provable data from concluded evidence in the market.

It is my experience that mortgage lenders and banks generally are very adroit at passing the buck back to members of my profession. I do not set out to defend property valuers from whatever mistakes they might make. However, I counsel caution because there are some very big players who are very in tune with passing back to some other sector what would otherwise be their duty of care to the consumer. I will be developing aspects of this when we get to my amendments.

I wonder how one can ring-fence out the question of what we might call the contractor or the service provider and their subcontractor arrangements in those circumstances. I do not have a solution to this issue. Professional bodies, such as the Royal Institution of Chartered Surveyors, are there for the purposes of providing education, continuing professional development and ensuring the ethical conduct of their members. The RICS is not a consumer protection organisation as such, nor does it have the ability to scrutinise and quality control the hundreds of thousands of different reports and valuations that are being produced by its members. This is a matter of concern because of the net result that occurs.

The Royal Institution of Chartered Surveyors introduced a valuer registration scheme—and I am a registered valuer—in response to the very large number of claims that have been made against valuer members of the RICS following 2008. Quite a number of people who were previously in that field have left it. As a result, the cost of getting regulated purpose valuations has fallen to fewer people and costs have gone up. That has reduced competition and increased costs. I am not sure that that is in anybody’s long-term interest—certainly not if, as we now perceive, the market might be subject to a revitalisation. We need this volume: we need those willing persons to come forward and do this valuation work.

So I counsel caution. As I said before, I do not have a solution, but I hope that perhaps the Minister will be able to throw some light on that.

[Baroness Drake]

My Lords, I support Amendment 46B. I have spoken frequently on the issue of fiduciary duty and the strengthening of the duty of care in the financial services sector, and I suspect there are some other pieces of legislation and changes taking place where I may deliver the same emotive plea. I feel that Governments—I stress “Governments”—consistently fail to address the systemic challenge that exists in the financial services market.

I was looking up some old debates, reminding myself how I can iterate at great length about my concerns on standards of duty in the financial services sector. I turned to the speech that the noble Lord, Lord Turner, made when we debated the Pensions Bill that came through the House earlier this year. At that time he had just ceased to be chair of the FSA. I knew from the past that he had had reasonably strong views about the efficiencies or inefficiencies of the financial market. When I reread it yesterday, I remembered the power of his remarks when he referred to,

“the fundamental inefficiency of the market … It is a system absolutely shot through with market failure where the process of trying to provide in a competitive fashion simply does not work well”.—[Official Report, 15/1/14; col. GC160.]

That is why the argument for strengthening the duty of care and fiduciary duty in the financial services sector is so compelling. There have been so many recent reports on different sections of the financial services sector which have identified parts of the market that could not be expected to self-remedy and there is an urgent need to strengthen the position of the consumer and to intrude.

I welcome the strengthenings in the Bill, but there is still an avoidance of strengthening the duty, particularly in the financial services sector, towards the consumer. Parts of the sector are characterised by systemic conflicts of interest. We have complexities that are debated endlessly in both Houses. We have asymmetry of knowledge and understanding and inertia and behavioural bias in the customer. Those all combine to build inefficiencies in the financial services market that are profitable to the provider but detrimental to the consumer. Regulatory reliance on compliance with rules, rather than placing responsibility on the financial service provider to act in the consumer’s interests, consistently fails to deliver not only for the consumer but for the economy as a whole. The financial sector is such a large part of that economy. If that sector has market inefficiencies, that is a pretty large chunk of the economy as a whole.

I frequently say to myself, “How many reports on failure in the financial services market do the Government have to receive before they do not just write another set of rules?” They have a game changer in terms of the rules of the game. How many considered views, such as those from the Kay review or the Law Commission, do they need before the Government accept that a strengthened duty of care is needed in this sector? My noble friend Lady Hayter said, shortly before we came into the Moses Room, “I hope you have lots of examples, Jeannie”. I thought, “If I go down that road, I could entertain the Committee for about four hours”.

Let me headline some of them. There are excessive foreign exchange charges when investing in assets overseas. There are heavy exit charges from financial contracts, which will be a big issue given the new freedom for pensions when people trot along to say, “Can I have my cash please?”, and get slapped down. The Government have identified that as a problem, but it is still there. There are hidden investment charges. Not all investment products are pensions; plenty are not and they will not all be covered by the new quality standards in the pensions Bill. A lot of transfers will take place; transfer charges are unlikely to be covered by the pensions Bill, but we know that that is one of the high-charging areas. Everyone knows that income drawdown charges are high. I have no idea how the Government are going to control income drawdown products to make them fair to the consumer in the new freedom regime. There is the mis-selling of PPI, harsh mortgage contracts and the miserable, mean activity of interest swap arrangements sold to small businesses to protect them against interest rate rises, when those policies became so burdensome that it threatened their survival. The list is endless.

I thought that I would illustrate the point with a pensions example, which is a personal one. My daughter is a lawyer, so you would expect her to be reasonably cerebrally functioning—if I can be generous to the profession. She changed her job from one employer to another. She had a DC pot and I suggested that she should get organised to transfer her DC pot from her previous to her new employer. Her way of dealing with that was to put all the paperwork on my desk and say, “You sort it out, Mum, and I’ll sign”. As all mothers do, I sat down with the paperwork. The pension scheme she was leaving was provided by a leading, reputable financial company, as was the one she was going to. Both were blue-chip companies. I read all the paperwork of the one she was leaving and of the one she was going to. Not a single piece of paper set out the charges for any part of the investment, any part of the administration or any part of the transfer charges. Tucked away was an invite to apply at a certain point if you wanted the detail of those charges. That was just one example where the market is just not working.

I do not suppose that in the Committee today I have the slightest chance of persuading the Government that they at some point need to change the rules of the game to place a greater duty of care on the financial services sector, but otherwise we will go on receiving endless reports of market failures and inefficiencies. We have a big juggernaut coming down the line with pension freedoms. When people take their cash, they will not necessarily be trotting off to the regulated products covered by the FCA; they will also be operating in the unregulated part of the market. I put the case again that there is really a need to strengthen the duty of care in the sector so that the consumer can truly be protected.

[Baroness Neville-Rolfe]

My Lords, I thank the noble Baroness, Lady Hayter, for her knowledge and for her experience of the Financial Services Consumer Panel, albeit that that was from some time ago. Since then, of course, many, many changes have been made to the financial regulatory regimes following the financial crisis, which occurred after many years of the Labour Government.

Having said that, I appreciate the concerns that lie behind the amendment. I think we are all agreed that consumers—and, for that matter, society as a whole—need a better deal from our banks. The question is how we achieve that, and I can see why some would think that this amendment would help. However, the Government do not consider that it would make a real difference for consumers or add very much to what the Government are already doing. I shall explain why and begin with what this Government have done to strengthen bank regulation and the protection of customers.

First, we replaced the flawed system of financial regulation. The Financial Services Act 2012 put in place two new, properly focused financial regulators: the Prudential Regulation Authority, which is a subsidiary of the Bank of England, and the Financial Conduct Authority. These reforms mean that the PRA can concentrate on ensuring that our banks are prudently and competently managed, reducing the risk of serious financial failure. That may not seem to be of immediate relevance to consumers; none the less, it goes right to the heart of part of this amendment. The PRA seeks to ensure that banks are properly managed and soundly run, so the PRA also contributes to ensuring that the bank’s core services—taking deposits, withdrawing money, making payments or providing overdrafts—to consumers are provided with “reasonable care and skill”. In a sense, therefore, the work of the PRA and its detailed rules already cover the same ground as the amendment.

Of course, this Government are bringing in ring-fencing to ensure that core banking services—in particular, the taking of deposits from individuals and small businesses—are undertaken in a separate legal entity, insulated from wholesale and investment banking activities. This will support continuity of provision of vital services and help to make UK banks sufficiently resilient to withstand excessive financial shocks—surely a vital part of caring for the consumers of core banking services. Therefore, it is not clear to me what imposing the duty of “reasonable care and skill” would add to requiring banks to comply with the ring-fencing and the many other regulatory requirements.

I turn to the FCA and the protection of consumers more directly. The Government’s reforms mean that the FCA can concentrate on ensuring that all financial services businesses conduct themselves properly in their dealings both with ordinary retail customers and in wholesale financial markets. This wide remit is shaped by the FCA’s statutory objectives and delivered through the FCA’s rules. These rules include the 11 FCA principles for businesses. These are high-level requirements which already cover the ground set out in the amendment.

If I may, I shall take the time to run through four of the principles. Principle 2 is:

“A firm must conduct its business with due skill, care and diligence”.

Principle 6 states:

“A firm must pay due regard to the interests of its customers and treat them fairly”.

Principle 8 is:

“A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client”.

I know that the noble Baronesses, Lady Drake and Lady Hayter, rightly feel particularly strongly about this conflict of interest issue. Principle 9 states:

“A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment”.

As many noble Lords will know, there are a very large number of detailed rules to which banks and other financial services firms are subject, each one of which is, in one way or another, an articulation of a duty of care to consumers or to society as a whole. It seems to me that there is a real question about what the amendment would add to these existing duties.

However, I will comment on the amendment in detail. Its first limb seeks to impose a fiduciary duty to provide core services with reasonable care and skill. The term “fiduciary duty” typically describes the kind that a fiduciary owes to a beneficiary, such as a duty of confidentiality, a duty to avoid conflicts of interest and a duty not to profit from his or her position. These are the duties that a director owes to a company, an agent owes to a principal or a trustee owes to a beneficiary. There will be cases in financial services where such a duty will be appropriate and, in those cases, it—or similar duties—tends already to be imposed either as a matter of general law, as obligations under the Financial Services and Markets Act, FiSMA, or in the FCA or PRA rules.

Such a duty would not necessarily be appropriate for the provision of core services, which are subject to a contract between the bank and the customer. Of course, regulatory rules made under FiSMA are there to ensure the fair treatment of customers and the proper conduct of business more generally. I am also not sure whether a duty to perform services with care and skill could be described as a fiduciary duty, but it would already be part of the contractual obligations and will be reflected, where appropriate, in the obligations imposed under FiSMA or in the regulators’ rules. The Government consider, therefore, that in view of the extensive sector-specific legislation in this area and the general position under contract law, imposing the fiduciary duty suggested in the amendment would not give the consumer any additional remedies.

Turning to the wider duty of care proposed in the amendment’s second limb, I suggest that it is far from clear what this could add to the existing obligations or regulatory requirements to which the ring-fenced body is now subject. There are, for example, obligations under FiSMA and the regulators’ rules, some of which are obligations to the bank’s own customers. For example, principle 6 of the FCA’s principles for businesses states:

“A firm must pay due regard to the interests of its customers and treat them fairly”.

Other obligations are in effect obligations to consumers of financial services more generally or to society as a whole. For example, principle 2 of the principles for businesses states:

“A firm must conduct its business with due skill, care and diligence”.

The noble Baroness, Lady Hayter, suggested that the Government were relying on case law to ensure a duty of care. That is not the case. Key obligations are in explicit law: that is, the FCA rules to which I have referred, such as the principles for businesses.

I am grateful to the noble Earl, Lord Lytton, for his early intervention and look forward to discussing his amendment. He asked about banks passing the duty of care back to surveyors. Banks and other financial services firms are subject to rules made by the FCA, as I have emphasised at great length. They cannot avoid those requirements by saying, “It’s the surveyor’s fault”, but surveyors may of course owe appropriate duties to their customers as well.

Perhaps I could mention redress. Regulatory rules give effect in a precise, meaningful way to the duties that banks and other financial services firms owe to their customers and to society as a whole. However, that leaves the question of redress. Surely, it might be argued, the amendment would help consumers to get redress in appropriate cases, either by taking action in the courts or by making use of the Financial Ombudsman Service. I am afraid that that does not seem to be the case. As we have seen, the duties proposed in the amendment would overlap with existing duties under the principles for businesses and cannot be as detailed as the regulators’ other rules, which can be used to bring a complaint to the bank or to the ombudsman. In any case, we have existing machinery to deliver redress for consumers. For example, in 2013-14 the Financial Ombudsman Service resolved more than 500,000 complaints in total, resulting in compensation for consumers in 58% of cases. If there are problems of financial regulation, the financial regulatory framework is a much better place to resolve these problems.

I should perhaps add, in view of what the noble Baronesses, Lady Drake and Lady Hayter, have said about people knowing their rights, that the opportunity will be taken to improve communication when the Bill takes effect. The FCA will be preparing guidance for traders on its site and Citizens Advice will host information for consumers. I noted the point raised by the noble Baroness, Lady Drake, about information on pension transfer. Her daughter is very fortunate to have such a well informed parent to assist her—

[Baroness Drake]

I tell her that frequently.

[Baroness Neville-Rolfe]

However, if I may, I shall think about that one, as it probably goes a little bit beyond today’s discussion.

In conclusion, the Government firmly believe that it is better to impose specific, focused requirements on banks and other financial services firms through the regulatory system. Customers and regulators can more effectively hold the bank to account when they do not comply. I hope, therefore, that the noble Baroness, Lady Hayter, will agree to withdraw this amendment.

--- Later in debate ---

[Baroness Hayter of Kentish Town]

Before the Deputy Chairman arrived, I warned the Committee that it was going to hear an awful lot of my voice today. I have apologised to the rest but maybe I could extend that apology.

Amendment 49B, which is also in the name of my noble friend Lord Stevenson, would ensure that consumers pay only,

“a reasonable price for the service, and no more”,

where the contract does not expressly fix a price,

“for all elements of the service”,

and where consumers subsequently find themselves facing “ongoing costs and charges”. The original clause covers situations such as those where you engage a plumber at short notice, without agreeing a price. It is intended to stop him charging £10,000, or whatever, for a 10-minute job. Our amendment would broaden the idea of a reasonable price to include later prices, when you are already tied into the contract.

I am not going to go to see Paul Simon—I forget what else is happening—but my noble friend Lord Stevenson, who is not in his place, has just flown by Ryanair, which gives me the example I want to give. Ryanair charges customers £20 for each boarding pass printed at the airport. However, if a particular customer, who will be nameless, buys a ticket—often several tickets—he believes that he has accounted for everything. He has paid for the extra luggage and for rapid boarding—I do not know what else one can pay for—then he goes off to have his holiday. He arrives at his holiday accommodation and discovers that there is no access to a printer in the hotel, so he cannot print the return boarding pass to be able to come back home. We think that the boarding card is an intrinsic part of the service and the contract—you cannot get on the flight without one—yet Ryanair exploits the position. Customers must have it and are charged what we would say is an unreasonable fee: it is about £20, so £100 for a family of five. I do not know how many children my noble friend, who went through this, has. He may have many children: it may have been £1,000. However, this is a cost that would not have been anticipated for 30 seconds’ work and a few pieces of paper. It is part of the contract, yet suddenly one has to pay it.

A longer-term issue is where consumers buy financial products and do not have clarity on what they are being charged for the longer-term administration. Sometimes their pension or annuity provider is eating up most of their savings. It is essential that the consumer should know about future costs and be able to decide whether it is a fair price. They need to know what they are paying for, not so much for Ryanair, but especially for services where customers will be for a very long time.

If I read it correctly, the Minister in the Commons agreed with this basic point, but felt that it would be covered by the Consumer Contract Regulations. However, as we have recently heard, they do not seem to have done the job. They make it clear that traders must disclose all costs, which the Government seem to think means unavoidable future costs that the trader could reasonably foresee before the consumer enters the contract. However, as one of the aims of the Bill is to provide consumers and traders with greater clarity on their rights and obligations—preferably all in one place—I urge the Minister to take the opportunity to make those rights clearer by accepting this very small amendment. I beg to move.

[Baroness Drake]

My Lords, I support Amendment 49B. Information and transparency, although not sufficient, are essential ingredients for empowering consumers. Providing good-quality, transparent and clear information to consumers enables them to make good choices and therefore make markets more efficient. This is particularly so, as my noble friend Lady Hayter has pointed out, with services contracts that do not expressly fix a price, where there are many elements to the service provided and where the contract is ongoing over an extended period with ongoing charges being incurred.

The consumer needs the necessary information to enable them to assess whether they are being charged a fair or reasonable price for a particular service, particularly given the issue of ongoing fees and charges. We all know that consumers can suffer from information overload and behavioural bias. Differences of knowledge and understanding between the consumer and trader can be commonplace. This gives rise to particular though not exclusive requirements—that clear information should be provided for all elements of the service contract and over time for ongoing costs and charges and that the prices for all those elements must be reasonable. This amendment would lock in all elements of the service provided into the reasonable price requirement.