Financial Services Bill

Baroness Hayter of Kentish Town Excerpts

Monday 15th October 2012 Lords Chamber

[Lord Hodgson of Astley Abbotts]

My Lords, I rise to support the amendments of my noble friend. In Committee, I said I believe that the regulatory philosophy, culture and approach has shifted and that far from it being an attempt by both sides to achieve the best and right way forward it has become an entirely aggressive, uncontrolled approach by the regulator without any thought to the consequences of how his actions will impact on the firm in question or the City as a whole.

I have also spoken about the increasing use of Section 166; the way that the significant influence function committee has used its powers to damage people’s careers and leave them absolutely no redress at all. They are left in limbo. My noble friend says that people can go for judicial review, but if he believes an individual is going to take on a regulator in this way, he cannot be doing anything other than reading the Treasury briefing note. I cannot believe, with his experience of the City, that he really believes an individual is going to be able to take on an organisation like the FCA, or the FSA as it now is, with its limitless resources, limitless amount of time and limitless access to legal expertise. I believe my noble friend raises a very serious point.

I understand the argument about transparency and it is an attractive one but the fact of the matter is we may be having transparency about inaccurate or wrong information. That cannot be sensible. We owe it to all sides for transparency to be about things that are correct in every sense. When a regulator, with all its authority, is able to put out its view it means that the person about whom the allegations are made never has a chance to obtain proper redress. In the eyes of the public there is no smoke without fire, people will say there must be something or the regulator would not have put the information out there. Even if it is proven in the end to be absolutely wrong, and even if it has not gone bust in the meantime, the firm will be immensely damaged. People will say that there must have been a case to answer because such a great authority, which has all the power of the state behind it, would not put out a notice without a reason.

I really feel that we have to be much clearer about who makes the final call about whether to publish. Judging from the Bill, it seems to me that it is far too cosy and far too easy for the regulator to be making these decisions to publish. There are not nearly enough outside checks and balances to ensure that a proper assessment of the information and evidence is made available and assessed before a very precipitous, potentially exceptionally damaging disclosure is made. I hope the Minister will be able to go a long way to meet my noble friend’s amendments.

[Baroness Hayter of Kentish Town]

My Lords, the starting point for my intervention on this group of amendments is our belief that consumers will benefit from transparency, contrary to the suggestions made by the noble Lords, Lord Deben and Lord Hodgson of Astley Abbotts, to help them make—

[Lord Hodgson of Astley Abbotts]

I do not think my noble friend Lord Deben and I said that we were against transparency. We said—or, at least, I said and I think my noble friend Lord Deben said—that we wanted to make sure that what was made transparent was accurate. Inaccurate transparency does not help anyone.

[Baroness Hayter of Kentish Town]

The assumption is—it has been said a number of times—“What if it is proved wrong?”. However, many, if not most, of these will be proved right, and that transparency surely will be of enormous benefit to consumers and investors in a way that I hope to demonstrate.

[Lord Deben]

Every time it is proved wrong it will undermine the proving of right. Since when have we had a system whereby one says, “Because many people are guilty but have not yet been proved guilty, we shall assume that they are guilty”? That is what will happen if you say it only on the word of the investigator and there is no concept even of a CPS.

[Baroness Hayter of Kentish Town]

Perhaps the noble Lords will let me make my case and explain that. As was suggested by the noble Lord, Lord Flight, the purpose of my amendment in the next group is to address this issue and I hope that it will get support from across the House. It is about a different way of dealing with this and bringing to that independence a much higher hurdle for exactly the reasons that noble Lords have been talking about. I hope that when we come to that amendment it will receive wide support because I share the view about a greater degree of independence and separateness being needed. Nevertheless, transparency is a particularly important issue which we, as consumer representatives, feel was very restricted by Section 348 of FiSMA and the FSA’s interpretation of this. I shall in a moment explain why we do not support the amendments of the noble Lord, Lord Flight, in the present group.

Amendment 185B concerns warning notices in respect of procedures and referrals to tribunals and other issues. It would remove the requirement to consult with those about to be named before any warning notice is published. I find it hard to see why this requirement is in the Bill. It does not affect other walks of life. In criminal cases, ordinary people do not get consulted before they are arrested or charged but their names will be released. “Consultation”, I fear, is code for, “Let the lawyers loose”—I apologise to noble Lords who are lawyers—and risks injunctions, stalling and long legal arguments. Why should the person who is to be named be given special rights? If it is right to publish, why should there be a block on publication? I hope the Minister will be able to justify that, given that tremendous consultation goes on already with the firm involved before one is even at the stage of a warning notice.

On the amendments in the name of the noble Lord, Lord Flight, as I say, we have sympathy with bits of them because of the lack of a second eye, independence and separateness, if you like, from the investigators within the regulation. The Bill empowers the regulators to publish the fact that a warning notice has been issued. This is of particular interest to the issue of misleading financial promotions. For consumers, it is a significant increase in transparency to know which ads have not only been looked at by the regulator but have been seen to be sufficiently misleading for consumers to know that an ad—which they may still have; they may have cut it out of a magazine or remember it from the television and it may still influence their purchase of a product—is under review. There could be considerable consumer detriment if the ad is still in their minds and they have not had a signal that the regulator is worried by it. That is one of the most important things to consumers.

At an earlier stage of the Bill, the Government were not motivated to accept our worries about reliance on “buyer beware”—caveat emptor—but how can consumers shop around if the ads on which they are basing their choice of products are perhaps going through what can be quite a lengthy procedure? It can take very many months, and an advertising campaign can be quite short, and all that time consumers do not know that procedures are taking place that might affect their choice of product.

In other areas, we know fairly quickly. If action is taken against a food factory suspected of contaminating food, we as consumers want to know immediately, and the Food Standards Agency lets us know straightaway when it is taking action. Similarly, if a garage had fixed a coach’s brakes and was accused of doing it less than satisfactorily—some of us are grandparents—I would not want my grandchild to be on a coach where the garage was already up before the Health and Safety Executive for not having done repair work properly. Similarly, as a shareholder, I would want to know whether BP did have some liability for pollution in the Gulf of Mexico before I parted with money to invest in that company.

There can be ongoing detriment if serious accusations are made and the people involved in parting with their money, as consumers or investors, do not know about it. I am not sure it was right that we heard nothing about LIBOR and the behaviour of banks until that first case was settled. Was it right that Equitable Life went on selling products even when there was a case pending? Many of the difficulties that arose were consequences of that ongoing sale. The first time these names came out there would be a lot of coverage in the press, but once we got over that hurdle—once we had got used to it and grown up—consumers are quite able to know the difference between an accusation and a finding. Keeping those hearings in the dark is quite against consumer interest.

We hope that the Government will not accept these amendments, but that in the next group they will be rather more sympathetic to a different approach to dealing with how these decisions are taken. For the moment, I hope that they can support my amendment but hold fire on the others.

[Lord Sassoon]

My Lords, this has been a particularly interesting debate. These are very important matters because we are talking about important new powers that the Bill gives to the regulators.

Of course I have some sympathy with what my noble friends are saying, but we have to recognise that the starting point is that there has been a huge amount of detriment over the years caused by the mis-selling of financial services. To talk in dramatic terms about human rights and people being proved guilty before they had had a chance to go through natural justice and so on is painting the picture from a completely wrong starting point. To be fair to my noble friend Lord Flight, who kicked off this group of amendments, those are not remotely the terms in which he came at this, so I do not bracket him in this. However, we have people who are quite properly setting out their interests but talking as if somehow everything was fine. It was not fine before.

Certainly the regulators equally fell down on the piece, and we may be giving them a power that is difficult for them to handle. I recognise that, and I will deal with that as I go through the argument. However, I think that we must start from a recognition that things need to change and that we have to think whether we can do better than trying to sweep things up after people have lost very significant amounts of money. We need to tilt the balance slightly in these matters, but I completely agree that there need to be safeguards in place and that whenever you create a new power for a regulator, there are dangers if that power is not properly exercised.

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[Lord Sassoon]

My Lords, let me stress again that we are not backtracking at all. Our commitment to the new policy instrument remains extremely firm. It may be that the industry will come to take the view expressed by the noble Lord, Lord Peston. We will see. I have been struck by not only our debate this afternoon but our conversations in the run-up to it that because we are taking such a bold step, which I believe to be the right one and which I believe that the FCA will exercise properly, we should have the reserve power, which we do not have in the Bill, should things not turn out as I and the noble Lord, Lord Peston, expect.

I hope, on the basis of that explanation of our intention, that my noble friend will feel able to withdraw his amendment.

[Baroness Hayter of Kentish Town]

My Lords, would that happen by an order that would come back to this House, or would it just be by Treasury decision? That is a big power to take away without parliamentary scrutiny.

[Lord Sassoon]

My Lords, I said that we intend to come back to the House on Report with a power to reflect the concerns that have been expressed. As to how the power will operate, noble Lords will see a draft of what we are considering in good time before our debate. For a power of this importance, I would expect it to be in secondary legislation subject to the affirmative procedure, so there will be an opportunity to discuss the repeal in this House, but let us see it when it is drafted.

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Moved by

[Baroness Hayter of Kentish Town]

187AA: Schedule 9, page 235, leave out lines 30 and 31 and insert—
“(1) Each regulator will establish and maintain a committee (referred to as the “Determinations Panel”).
(2) Each regulator must appoint a chairman of the Determinations Panel.
(3) The chairman of each Panel must—
(a) decide the number of persons to be appointed as the other members of the Panel; and(b) nominate a person for each of those appointments.(4) Each regulator must then appoint as the other members of the Panel the persons nominated by the chairman of the Panel.
(5) The following are ineligible for appointment as members of the Panel—
(a) any member of the relevant regulator;(b) any member of staff of the regulator;(c) any employee of Her Majesty’s Treasury.(6) Each Panel may establish sub-committees consisting of members of the Panel.
(7) Each Panel will be responsible for the following—”

[Baroness Hayter of Kentish Town]

My Lords, in addition to the reasons that we debated in the last group, there are two main reasons behind this amendment. I hope the Government will consider this amendment seriously, as I believe it will have widespread support across the Committee, as well as from the industry and the wider public.

One reason is to give some certainty that regulatory issues, or discipline, will be dealt with in an open and transparent way and not simply according to procedures chosen and operated within and by the regulators who are themselves bringing cases to a body for determination.

The second reason is to bring some independence to these hearings to give confidence to those against whom regulatory measures are to be taken that they will have a chance for a fair, objective second hearing—a hearing by people who are apart from, and indeed independent of, the regulator’s staff. We know from the FSA’s history that such independence was not always there. Although there is now the Regulatory Decisions Committee, it is not guaranteed in statute. Indeed, I know that, partly thanks to some ideas floated on the FSA website, there has been much concern that the RDC may not even continue under the new architecture. However, surely the existence of such a body should be clearly set out in the Bill so that it cannot simply be abolished or amended by the regulators.

I should add, reflecting what happened in the previous debate, that the fairness of the new power of the FCA to publish its warning notices—a power which, as the Committee will have heard, I strongly support—has been made explicitly contingent on the continuing existence of the RDC’s involvement in decision-making; hence the concern that such a committee might be abolished without parliamentary agreement. In defending the proposal to allow it to publish warning notices before the formal enforcement process had taken place, the FSA noted that all proposals to exercise regulatory powers are currently taken to the RDC to determine whether there is a case to answer. That is just the first stage—having a case to answer. Furthermore, the FSA’s then head of enforcement, Margaret Cole, said that a warning notice is,

“quite some significant way down our process for holding people accountable. It is a moment when we have looked at the case in detail, taken it to an internal committee and reached a conclusion that there is a case to answer”.

That is the process on which I am focusing.

The central role of the Regulatory Decisions Committee in providing an independent source of challenge to the FSA’s executive was regularly cited in evidence to the pre-legislative Joint Committee and to the Treasury Select Committee. The FSA’s current arrangements are, I believe, robust and effective, having been refined by experience and as a result of the Strachan review of its enforcement processes. However, we cannot assume that the protections afforded by the current framework will simply be transposed into the new regulator’s governance arrangements. The current FSA proxies for the new regulators have shown a keen appetite for exercising their judgment and discretion to intervene swiftly and decisively. I welcome that but I am aware that within the industry there are serious concerns that the FSA has, in anticipation of its new powers, begun to exploit the absence of a specific statutory requirement for the RDC.

Any erosion of these profoundly important checks and balances will not benefit consumers and will risk eroding confidence in our regulatory system. Given the explicit significance that has been attached to delivering fairness in respect of the new powers, they should not be left to the discretion of the regulators to carry forward but be embedded in statute and endorsed by Parliament. It is for this reason that I propose that the essence of the FSA’s regulatory decision-making processes should be captured and embodied in legislation.

The proposal in Amendment 187AA, as the observant among the Committee will notice, follows the model of the Pensions Regulator set out in the Pensions Act 2004. Although I was not in the House at the time, I believe that drew partly on the lessons of the slightly less than satisfactory FSA model. I have to declare a past interest as a former member of the Pensions Regulator’s determination panel. However, I know from discussions with present and past RDC members and from one who has served both on that determination panel and the FSA body that the pensions model is seen to offer greater independence and scrutiny of cases brought by the respective regulators. That is partly because it cannot be abolished, partly because its members have to be independent of the regulator and partly because it is in primary legislation.

The exact formulation of the equivalent formats for two such bodies as the PRA and the FCA may need a trifle more perfect drafting than I have managed in this amendment. However, for today, will the Minister consider carefully the principle that these big decisions, which can have great impact on individuals or financial firms, should be taken by a specialist independent panel, albeit appointed by the relevant regulator, to ensure a highly knowledgeable and expert group of decision-makers? I beg to move.

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[Lord Sassoon]

I am sorry that I have not been sufficiently clear. Yes, that is exactly what I am saying. In fact, I am saying more than that. Within the very similar provision for FiSMA, that is exactly what the FSA did. Not only can it do it but it has a track record of having done that. I think we should trust it to do whatever is appropriate again.

[Baroness Hayter of Kentish Town]

My Lords, I am extremely disappointed. We come back to “may” and “must”, which my noble friend mentioned. He has just had a birthday and he is still talking about “may” and “must”. If the FSA had not put on its website that it would not continue with this, perhaps our trust that it would continue with the RDC would be greater.

I confess that I have some form on this. In 1981, I worked on a Royal Commission on criminal procedure which tried to persuade the police that they should take their cases to an independent prosecutor. The Committee will not be surprised to hear that they did not want that to happen. In the Labour Party, it used to be the NEC that took cases against individuals. We were taken to court and told that we could not do that, so I ended up on the disciplinary committee to ensure that that was separate and independent of the National Executive Committee of the Labour Party. The barristers did not get it right and for a time the Bar Council used to use the same body to discipline its members and was taken to court. It had to set up the BSB complaints committee—that is another declaration of interest as my partner was vice chair or something of that—to ensure that there was that independence among the people who were presenting the cases and those hearing them. Whether there are two panels—one to see whether there is a case to answer and one to hold a hearing—is an issue of detail which I did not go into. I think that is for regulator. To trust the regulator, who is, if you like, the prosecutor—I do not like using the word “prosecutor” but perhaps we can bear it for the moment—to decide what sort of committee will challenge its evidence, seems to me not quite the correct way to approach this.

[Lord Deben]

One might go as far as that had it not been for two facts: one, to which the noble Baroness refers, is the website; and the other is the fact that a senior person, who is likely to be a regulator, said that his policy was to shoot first and ask questions later. That severely worries people. Whatever happened in the past, we need to remove doubt. As the Minister suggested that it does not really make any difference because he expects that to happen, I cannot see why it would make any difference if you were sure that would happen.

[Baroness Hayter of Kentish Town]

I could not have put it better, although I quite like to shoot first and ask questions after, but that is just a personal preference. As my noble friend Lord Barnett has said, there is clear support for this around the House. We are obviously going to bring it back at the next stage. If it is easier for the Minister, perhaps someone not from this side but from his side could put his or her name to the amendment. But for confidence in this type of independence it seems clear that the decision cannot be in the hands of the regulator who is also the presenter. There should be some guarantee that it is an independent body. I am extremely worried that someone who has been investigating could also be the decision-maker. That seems to go quite differently from other groups. So I am afraid we will return to this but for the moment I beg leave to withdraw the amendment.

Amendment 187AA withdrawn.

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Moved by

[Baroness Hayter of Kentish Town]

187AB: Clause 35, page 119, line 27, at end insert—
“( ) Within 30 days of the coming into force of this Act, Her Majesty’s Government shall inform the governments of the European Union of the United Kingdom’s desire that the EU limits on financial compensation for charities affected by the loss of retail banking deposits should be reviewed.”

[Baroness Hayter of Kentish Town]

Let us hope I have a little more success with this one, which is completely different. Amendment 187AB concerns the limits—currently £85,000—for compensation which can be awarded by the Financial Services Compensation Fund. As the Committee will know, this is not a complaints-type award for mis-service but compensation following the insolvency or similar of a financial service company. While £85,000 may be suitable as a limit for individuals, since not many of us have that much in our bank accounts, it is clearly insufficient for charities. Charities are greatly at risk but normally being only the holders of cash rather than other sorts of fixed assets they are unable to protect themselves against the risk of losing all their money. Under the Government’s proposed banking reforms in the draft Financial Services (Banking Reform) Bill published on Friday one change would put a significant number of charities at financial disadvantage. The depositor preference principle would ensure that all deposits which are eligible for compensation under the FSCS would be made preferential debts—although most charities will not fall into that category—so that if there was an insolvency of a bank these smaller ones would rank ahead of the claims of other unsecured creditors. This means that charity deposits will rank further down the creditor hierarchy. Thus charities would risk losing a higher proportion of their deposits should a bank go under so, clearly, alternative ways are needed of granting fairer protection for charities.

The NCVO and the Charity Finance Group have considered the matter carefully. Ideally, they would like charities to be preferred creditors—which I recognise would not be an issue for this Bill—or else for there to be a different limit for charities. However, the advice of Her Majesty’s Treasury is that that would break EU fiscal rules—hence the particular wording of Amendment 187AB to ascertain whether that objective could actually be achieved. One way would be to introduce a higher compensation limit for charities. The current £85,000 may be suitable for small charities but clearly it is pretty meaningless for ones such as Oxfam or Save the Children which have millions of pounds in the bank. It is really not big enough. The sector as a whole probably has about £18 billion in cash deposits, so the consequences and impact on beneficiaries would be extremely serious if even a small proportion was lost.

Earlier this year in response to the White Paper on banking reform the voluntary and charity sectors called on Government to grant registered charities preferred creditor status so that charities’ liabilities are prioritised alongside those of the Financial Services Compensation Scheme in the event of a bank failure, but the Government felt unable to accept that proposal. Perhaps there should be no cap at all for charities, although we also understand the effect on levies that that option would have.

Any losses to charities would have a devastating impact on those they support, who are usually the most vulnerable in society. The Icelandic bank experience caused ongoing concern to charities and their trustees. In tabling this amendment we seek to ask the Government to find a way forward to protect this vital part of the big society and the third sector. I beg to move.

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[Lord Newby]

My Lords, it is extremely helpful—and it will be done over the coming months. First, it is a single-market measure, not a eurozone measure. The aim is to establish a level playing field for consumers across the EU that is funded not by the state but by the financial services sector wherever the scheme is in operation. This means that as people move around the EU, as they increasingly do, they will know that they will get broadly the same degree of consumer protection wherever they are. That is a good idea, not a bad one. However, whether it is a good or a bad idea, this is the framework within which the deposit protection level operates in the EU, and therefore in the UK. Within the discussions about the directive that are going on at the moment, the level of compensation and the bodies that are eligible for it are being considered.

I say to the noble Baroness that we have listened very carefully to her concerns, and that the Government will consider whether it is appropriate to review the eligible limit to charities in the context of our overall negotiating priorities on this proposal. This is just one of a number of issues that we are considering in the round and as part of the negotiating posture we will take up. I assure her that we will give careful consideration to whether this is the way of achieving what she wants to achieve.

I move on to Amendment 187CA in the name of the noble Lord, Lord Hodgson of Astley Abbotts. This amendment would amend FiSMA to require the regulators to ensure that levies imposed on a particular class of firm reflect the claims made, or likely to be made, on that class. Before I address this amendment directly I would like to use this opportunity to draw noble Lords’ attention to the fact that a draft of the statutory instrument allocating rule-making responsibility for the FSCS between the two regulators will be published on the Treasury’s website this week as part of a broader consultation on draft secondary legislation required by the Bill. I will place copies of this paper in the Library of the House.

I am not entirely convinced by the case for Amendment 187CA. FiSMA already requires the regulators, as the noble Lord, Lord Hodgson, said, to take account of the desirability of ensuring that the amount of levies imposed on a particular class reflects, so far as practicable, the amount of claims made, or likely to be made, in respect of that class. Ensuring that classes are levied in a way that fully reflects claims, or likely claims, as proposed in the amendment is likely to be an impractical and disproportionate approach to evaluating how the fund should be funded. The current drafting in FiSMA reflects my noble friend’s concern but also leaves sufficient flexibility for the expert regulators to use their judgment.

The FSA’s recent consultation document on its funding model in the new regulatory system gives a good indication of the complexity involved in determining the funding model of the FSCS. I have it here, and its 100-odd pages demonstrate that this issue is somewhat more complex than might immediately be apparent. It demonstrates, among other things, how difficult it would be to ensure, in any strict sense, that levies fully reflect claims, or likely claims, on a particular class while delivering a fair and equitable scheme.

I suggest to the noble Baroness that the correct way to address her concerns is to contribute to the consultation on this document, which is open until 25 October. On that basis I would ask her to withdraw her amendment.

[Baroness Hayter of Kentish Town]

I thank the Minister rather more positively than I did his colleague on the previous amendment. It appears clear that he and the Government have understood the problem and I thank him for agreeing to look at this again. Charities of course, unlike people, do not move around; British charities are only in this country. I thank the Minister for saying that they will look at that. If it is not possible by that method, perhaps he could ask others in the Government if there is another way to assist. That would be extremely helpful. On the basis of that offer I beg leave to withdraw this amendment.

Amendment 187AB withdrawn.