Consumer Rights Bill

Baroness Drake Excerpts

Wednesday 19th November 2014 Lords Chamber

Sadly, banks do not always act in the consumer’s interest. They do not always treat customers fairly. The size of the penalties is testimony to that. This disregard of the consumer is bad for the individual consumer and it is one reason that confidence in this sector remains dangerously low. We should grasp this opportunity to improve standards in financial services and make it clear to consumers what their rights are. We need this to be set out in the Consumer Rights Bill, which is where a consumer would look to ascertain what they might expect from a provider. I beg to move.

[Baroness Drake (Lab)]

My Lords, I support Amendment 26. The question of fiduciary duty and the strengthening of the duty of care in the financial services sector is a matter of considerable significance which has attracted much commentary, increasingly so since 2008. Liberalisation was intended to produce efficient markets, but as we discovered, for many parts of the financial services markets it did not. Conduct, culture and conflicts of interest among the providers got in the way. Governments have still to resolve that challenge. The amendment would place in the Bill a requirement that financial services providers would have a fiduciary duty of care in providing services to their consumers, individually and collectively.

There is still ambiguity as to what the law requires from financial services sector providers in terms of their obligations on a duty of care. As my noble friend has said, we continue to see market failure and an increasing need for consumer protection. Parts of the sector are still characterised by systemic conflicts of interest. We see complexities in the design and presentation of products, asymmetries of knowledge and understanding between trader and consumer, and consumer inertia and behavioural bias. All these combine to build inefficiencies into financial services markets that are profitable to the provider but detrimental to the consumer. Regulatory reliance on compliance with rules, rather than placing greater responsibility on the provider very clearly to act in the consumer’s interests, consistently fails to deliver not only for the consumer but for the economy as a whole. UK financial institutions are at risk of becoming unattractive to investors because they are so vulnerable to regulatory fines.

Over the past 10 years or so, there have been 18 separate competition reviews into retail banking and many other investigations into, and thematic reviews of, various parts of the financial sector, but still we are seeing significant inefficiencies in the market and customers being unable to exercise effective control or influence over providers’ behaviour. There have been so many reports on the financial services sector which have identified parts of the market that cannot be expected to self-remedy. We have seen products such as PPI adding 20% to the cost of a loan, sold in vast numbers and to people who could not claim on them. Consumer behaviour and complexity have allowed firms to design products with high profit margins and then sell them aggressively. The regulatory response to protecting consumers against risky products has included mandated disclosure, requiring people to confirm that they had read and understood the terms and conditions. However, in reality, we know most people do not read those terms and conditions; they trust in the good behaviour of the provider selling them the product, but all too often that behaviour is not good.

On terms and conditions, according to the FCA, most people make choices by stripping away information, not adding more detail. This holds true in bank and insurance contracts and the like, many of which are now, to quote Martin Wheatley, “longer than ‘Hamlet’”. But even when information is shortened and prominence given to key facts, many customers still do not absorb or use the information. The recent FCA work on the UK’s cash savings market reveals that some 82% of adults have a savings account but that the large majority pay little or no attention to alternative accounts on offer. These are arguments for why strengthening the fiduciary duty of reasonable care into the financial services sector through this Bill is so compelling.

I was reflecting in preparation for this debate about the failure of regulatory rule compliance to protect the consumer, when into my inbox came the text of the recent speech of John Griffith-Jones, the chair of the FCA, delivered at the Cass Business School, which was trailed with the press headline,

“The FCA’s increase in regulatory rules has failed to prevent misconduct”.

In his speech, he quotes Julie Dickson, previously at the Canadian Office of the Superintendent of Financial Institutions, who said:

“Having lawyers looking at this line or that clause and debating with you about whether something is do-able or not is not the right conversation to have. The right conversation is the principle”.

Mr Griffith-Jones refers to the FCA’s 11 principles, but of the 11,000-plus detailed rules, he asks,

“how many rules do we need as well? … we have made a great many rules already but they don’t seem to prevent further problems arising, and … what starts as an attempt to provide clarity frequently ends up creating complexity”.

He comments on the FCA rulebook, which,

“looks a bit like layers of sedimentary rock, eminently explicable as to how it got there, and extremely hard work to change radically”.

He concludes:

“We regulators have a big job ahead of us, but modest as compared to the changes required of some of the firms we regulate. Their future behaviour will shape the future of regulation, and over time they will get, from Parliament, the regime they merit”.

He is right, of course, but for me the fear is that Governments will take too long to embrace that very simple principle in legislation that the relevant financial service providers should have a fiduciary duty towards their consumers in the operation of core services to provide these with reasonable care and skill as well as in the management of any individual contract to provide services. It is, after all, the providers’ conduct which will determine the integrity and future of the UK’s financial sector.

As my noble friend Lady Hayter has argued, the amendment would extend the Bill’s duty of acting with “reasonable care and skill” to the financial services industry. The first part of the amendment would establish a fiduciary duty that would demand a higher standard of care for direct consumers, and the second part would extend that general duty to all consumers across the sector. The noble Baroness, Lady Neville-Rolfe, replying to the debate on this issue in Committee, said,

“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”,

a comment on which I have reflected. Of course, structural change is very important in contributing to the stability and sustainability of the financial sector, but it will not provide a solution in its own right. It is clear from the pronouncements coming from the FCA that the behavioural and cultural challenge within the sector remains a major issue, requiring innovative ways of understanding the marketplace, influencing its behaviour and strengthening the demand side—the consumer. I doubt whether ring-fencing and current regulatory requirements alone will deliver the conduct change necessary.

In Committee, the noble Baroness, Lady Neville-Rolfe, argued that the FCA’s 11 principles,

“are high-level requirements which already cover the ground set out in the amendment”.—[Official Report, 22/10/14; col. GC 227.]

I refer to the same principles referenced by the Minister in Committee. Principle 2 is:

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

while Principle 6 states:

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

and Principle 8 is:

“A firm must manage conflicts of interest fairly”.

These are relatively modest and soft words from a consumer perspective, when one considers the persistent problems and the imbalance in strength between the supply side, the provider, and the demand side, the consumer, which so often typifies this sector. Achieving cultural change and good conduct in parts of the financial sector remains a challenge, as Mr Griffith-Jones himself confirms, and is the key to the long-term sustainability of the UK financial services sector, in the interests not only of the consumer but of the UK economy, of which it is a significant part. There needs to be an extra push to make financial service providers put their customers’ interests first, and this amendment, with the principle that it enshrines, would begin to make a contribution to that push and restoration of the integrity of the financial services market.