Financial Services Bill

Baroness Hayter of Kentish Town Excerpts

Monday 11th June 2012 Lords Chamber

[Baroness Hayter of Kentish Town]

My Lords, I start by thanking the Joint Committee for its work in scrutinising this legislation. Three of its members spoke in the debate. I join others in welcoming the maiden speech of the noble Lord, Lord O’Donnell. When we come here, we all think that we have joined the most exclusive club in London but there is a more select one—that of former Cabinet Secretaries. In his notable speech today, the noble Lord showed himself a great initiate to that club, and he can now wear the tie.

I also particularly note the speech of my noble friend Lord Barnett, who referred to the “sexy bits” of the Bill. I have to say that I have not yet found these but I will now go back and look a little harder. I particularly thank the right reverend Prelate the Bishop of Durham, the noble Lord, Lord Sharkey, and my noble friend Lord Whitty for reminding us of those people who are denied access to financial services and of the areas where they are not available. We need to remember them.

The aim behind the Bill is laudable. It is to reform the regulatory system to avoid a repeat of the financial crisis. Amen to that, not least because the impact of failures is borne by the taxpayer and the consumer, as the noble Lord, Lord Flight, noted. We need to reduce the risk of failure without stamping out innovation, and to have effective mechanisms for dealing with any crisis or failure. However, the delivery of the Bill is poor. Unless it is amended, it will fail to achieve that end. There are problems with both the architecture and consumer protection.

On the architecture, Europe was noted by the noble Baroness, Lady Valentine, and the noble Viscount, Lord Trenchard. Despite the increasing importance of the new European Systemic Risk Board and the three ESAs having the powers to override our regulators on occasion, our new regulation does not map with theirs. While Europe cuts by area, with one for banking, one for securities and markets, and one for insurance and occupational pensions, the Bill cuts between prudential and conduct. This means that the FCA will sit on one body—that for securities and markets—with the PRA sitting on those for banking and insurance and pensions. No doubt some agenda items will cut across FCA and PRA responsibilities, with different officials sliding into the hot seat at different times.

As AXA has warned:

“There is a significant danger that the new structure will diminish the UK’s capacity to influence European regulators as”,

our,

“new … bodies will be organised along different lines to the European Supervisory Authorities”.

Our European Union Committee warned about this last July but the Government’s response was simply an MoU between the Treasury, the Bank, the PRA and the FCA. There was no recognition of any problem by the Government, despite their commitment to,

“ensuring that the UK authorities … take a leadership role in the ESAs”,

over the problems outlined by the committee.

I turn to the Financial Reporting Council, which gets no mention at all in the Bill, despite its role in the corporate governance of banks, the stewardship code and the setting of standards across much of the financial industry, including on issues that affect the work of accountants, actuaries and auditors, as has been mentioned today. Therefore, we should like to see a requirement for an MoU from the FCA and the PRA to the Financial Reporting Council. The PRA, in particular, will lead in the ESAs on the rulebooks, including binding technical standards.

I turn briefly to the Bank as it has been well covered today. Professor Julia Black has described it as,

“about to become the most powerful central bank in the world”.

The noble Baroness, Lady Kramer, referred to the “sun king” and the noble Lord, Lord Tugendhat, to the lavish powers that it will have. In another place, David Ruffley said:

“Not since the creation of the Bank of England … has its senior management and Governor had so much power … one cannot have enough scrutiny of this big beast that the Bank will become as a result of the Bill”.—[Official Report, Commons, 23/4/12; col. 746.]

The Institute of Chartered Accountants has also called for the greater accountability of the Bank to Parliament and the public. Therefore, we will need the amendments suggested by noble friend Lord Eatwell and foreshadowed by the chair of the Treasury Select Committee in the other place, Andrew Tyrie. That deals with architecture.

Turning to consumers, there are undoubtedly things in the Bill that we welcome, not least the power to ban toxic products; the exposure of misleading financial promotions; the publication of warning notices; the supercomplaints regime; and the move of consumer credit to the FCA. I thank the Government for those. However, there are some problems, one of which is in the architecture of the FCA. To quote the words of Andrew Tyrie again, it will be the poor relation—not least because of the PRA’s power of veto over it.

Secondly, there is insufficient transparency of the FCA. We all want to see its minutes published and its chief executive subject to pre-appointment scrutiny, as was mentioned by the noble Lord, Lord Northbrook, and the Treasury Select Committee. We also need to see retained the FiSMA’s current Section 11 requirement for the FCA to give reasons when it rejects the advice of the consumer panel.

The Prudential Regulation Authority will deal with some issues that will have serious consumer implications, yet there will be no consumer input to it. It will be responsible for with-profits policy and the reattribution of orphan estates; perhaps for reserving for mis-selling with all the implications that that would have for the readiness to make redress; possibly for decisions affecting loan-to-value mortgage rates; and even, possibly, free banking rules in so far as its putative head, Andrew Bailey, has proposed outlawing these. Yet there is no consumer input to the PRA. Why is there no right for the views of the consumer panel to be heard on relevant PRA remit, along the lines suggested by my noble friend Lord Whitty, or even a consumer panel, as recommended by the noble Lord, Lord Northbrook, this evening?

On the content as it affects consumers, the competition objective for the FCA is very welcome but it does not solve all this industry’s shortcomings, because this is a failing market. There is ongoing reliability in the Bill, which was mentioned unfortunately by the noble Lord, Lord Flight, on consumer responsibility, on buyer beware—caveat emptor—and the general principle that consumers should take responsibility for their decisions.

However, there are serious flaws to that. First, if consumers or their representatives have no say in, and cannot know about, the prudential security of a firm, how can consumers take responsibility for their choice of provider and not just of product? Secondly, how can consumers exercise caution over products, given the nature of this market? Recently, in an extraordinary statement, Philip Hammond of the Cabinet said he believes that consumers who borrowed too much during the economic boom must “accept responsibility” for their part in the financial crisis. He said that banks were not the only ones responsible but that those who took out loans, spent on credit cards or accepted large mortgages were “consenting adults”.

Perhaps he needs reminding of those daily, very attractive approaches that we as consumers were getting all the time to extend our credit. Every time our credit card debt got anywhere near the limit, it was automatically revised upwards without our knowledge. Banks sent out credit card cheques and mortgage companies approached borrowers to increase their loans. Now, we learn, bonuses depended on that.

The Financial Services Consumer Panel warned repeatedly about self-cert mortgages. We knew that they were being given to people whose income, encouraged by the lenders, was exaggerated on the application form. These lenders were giving unsustainable loan-to-income, unsustainable loan-to-value and interest-only advances, despite the protests that we were making—I was on the Financial Services Consumer Panel—to the FSA and the culprits. The idea of consumer responsibility taking the blame seems a little wide of the mark.

The other problem about caveat emptor is that it works in a properly functioning market where the informed consumer can make choices. It is not like that in this market where we have vulnerable consumers and new entrants. These are not repeat purchases, so it is very hard for us as consumers to learn about them. There is often long-term outcomes, so we cannot work out which are good products. There is an inability to shop around. We simply do not know enough about prices, risk, assumptions behind the products and the likely outcomes to make informed choices. There is also a real asymmetry of information.

We must make, along the lines mentioned by my noble friend Lord Borrie, real changes to the information supplied to consumers. To make it fair, clear and not misleading is not a bad start, but information is not enough. There are so many imperfections in the market that we simply have to step in. Warm words about treating the customer fairly will not suffice without a fiduciary duty along the lines set out by my noble friend Lady Drake, which would require anyone dealing with a customer to exercise that fiduciary duty—not to be in a situation where personal interest and duty of care to the client conflict, not to profit at the expense of the client, and generally to give undivided loyalty. That has to be accepted and enforced and must enter the culture, training and rules, and it should apply as much to pension investment funds as to the retail market. Indeed, the ICAEW wants the FCA to give as much attention to the conduct of the wholesale markets as it does to consumer protection. So perhaps fiduciary duty should extend far and wide.

On culture, we need regulation focused on consumers and their long-term interests, but that needs a culture change to put consumers centre stage and for them not to be seen as a means of generating high earnings for others. Consumers pay for regulation and compliance, but they also pay for failures—but somehow they never seem to walk away with golden handshakes when all has gone wrong. We need a regulatory regime designed to protect middle and lower-middle income people, because the opportunity for them to get ripped off is so high. We need regulators with the right nose for what is going on—people to interrogate data, listen to the warning and have the right feel for what the risk dashboard is highlighting. The Chartered Insurance Institute said:

“It will be the judgements undertaken by supervisors, and the conduct of firms, that will make the difference between regulatory success or failure”.

The noble Lord, Lord Sassoon, said that the judgments of expert supervisors will be at the heart of the new system. Amen to that—but we need to supervise those supervisors.

That brings me to the questions of transparency and accountability. We need greater accountability and parliamentary scrutiny than is envisaged in this Bill. The proposed macroprudential tools must be via superaffirmative orders, as suggested by the noble Baroness, Lady Noakes, and the noble Lord, Lord Northbrook, and there must be proper input from the Treasury Select Committee and our own House.

We need a successful financial industry. We need it to stimulate innovation and help to create jobs and growth; we need it to facilitate borrowing and to help people to change savings into investment and hence income for their future. That needs confidence as well as good regulation—the latter depending on the culture of an organisation and its participants as well as on the numerical results. A continuation of bankers’ bonuses; excess profit-taking; no care for the clients whose savings drive all this; irresponsible risk-taking; and rewards for failure have surely had their day. We look forward to enabling this Bill, as it aims to do, to make regulation work for the whole country.