Baroness Hayter of Kentish Town
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Financial Services Bill
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Baroness Hayter of Kentish Town
I shall deal with our own amendment in this group, Amendment 187RZA, which is virtually the same as Amendment 187T. We should clarify that our idea is not to cover everything that the FOS produces. The Financial Ombudsman Newsletter is one of the best publications I have seen; it beautifully describes the cases and gives a lot of guidance, with a small “g”. The intention of our amendment is that any guidance is fully consulted upon where such guidance could lead to a “safe harbour”, and should therefore take account of all relevant interests, including those of the industry and consumer groups.
I turn to some of the other amendments tabled by the noble Lord, Lord Flight. Two major changes are suggested that worry us. One would virtually make non-publication the default option, with the Financial Ombudsman Service having to justify in each “particular case” when it wants to publish, having given the respondent—but not, interestingly, the complainant—the right to argue for non-publication. In our view this is not in line with the Hunt report and would not amount to the transparency and openness to which consumers have a right.
The second issue is the one that my noble friend Lady Sherlock has just been talking about—cases that have wider implications, such as PPI, where it soon became evident to the ombudsman that the mischief went far wider than a particular provider. While we welcome an early alert from the Financial Ombudsman Service to the FCA that something is going amiss and that regulatory action or new guidance might be required, it seems to us quite wrong to put on hold an individual’s claim for compensation when they have clearly been mis-sold a product and might be out of pocket. We do not agree that the individual consumer’s justified complaint should be suspended while a large bureaucracy—I am afraid that that is what the FCA will be, with its need to consult and so on—gets its act together.
As we have heard, the ombudsman’s role is to resolve complaints—speedily, we hope—that have not been satisfactorily dealt with by the service provider, which is of course always the first and best option. If PPI is anything to go by, though, the banks could and should have refunded the money themselves pretty speedily and stopped selling the product unwisely. It is this that would have stopped the consumer detriment, and incidentally saved the banks a lot of money further down the track.
Other amendments from the noble Lord, Lord Flight, in this group seek to include the rationale for each published decision to be explained. However, our fear is that this would add considerably to the process for handling cases and undoubtedly to the costs, and we would be surprised if the industry were in favour of that since it funds all this.
By including “operations, policies and procedures”, Amendment 189P would appear to us, as my noble friend Lady Sherlock said, to risk undermining the independence of the ombudsman service. We hope that that was not the intent, but we have a similar concern about Amendment 187S, which would appear to give the regulator the power to decide not only which complaints the ombudsman can decide on but, worryingly, how the ombudsman should do so. That would undermine the very independence of the ombudsman, which is of course meant to serve as an informal alternative to the courts.
With regard to Amendment 187Q, as my noble friend Lady Sherlock also reminded us, the FSA—or, as it will be, the FCA—is already able to make a redress scheme under Section 4 of FiSMA, the effect of which is to bind the ombudsman, so there is probably no need for it.
Lord Newby
My Lords, I am very tempted to say that I agree with the noble Baroness, Lady Sherlock, and sit down.
Lord Newby
Sadly, however, I ought to explain the Government’s view of these amendments. Amendment 187E would require the FOS to exercise its functions in a manner consistent with the FCA’s strategic and operational objectives and the regulatory principles. Obviously the FCA will have an important role making and approving the rules of the ombudsman scheme, and must comply with its regulatory objectives and principles in doing so, but I do not believe that the regulator and the FOS should share the same objectives or be held to the same regulatory principles.
The FOS is not a regulator and should not be expected to act like one. Its role is to provide an impartial alternative dispute resolution service for consumers and firms. It is not a consumer protection body, and I would be concerned that by giving the ombudsman consumer protection objectives we would put that impartiality at risk. Moreover, in practice such a duty would be burdensome and difficult to interpret.
Amendment 187P is similar to Amendment 187, in that it seeks to hold the FOS to the FCA’s objectives and principles. However, it goes further by giving the FCA a role in ensuring that the FOS complies with those objectives and principles, and in carrying out an annual review of the FOS operations, policies, and procedures. The FSA already has a role in overseeing the FOS, which the FCA will retain—appointing and removing the board of the scheme operator, for example. However, the FOS’s claim to impartiality, and hence its legitimacy in making determinations that are binding on firms, is credible only if it is operationally independent of the regulator. This does not mean that it should be unaccountable or free from scrutiny—this is why we have brought in provisions requiring the FOS to be audited by the NAO. Associated with these new powers, the NAO will be able to launch value-for-money studies of the FOS. However, to require the FCA to ensure that the FOS complies with its objectives would require detailed oversight and control of the FOS’s day-to-day operations, which in our view would not be compatible with the FOS’s independence.
Amendments 187F to 187L relate to the new transparency requirements for FOS, under which the ombudsman scheme operator will have a duty to publish a report of determinations unless, in the opinion of the ombudsman, it would be inappropriate to do so. Amendments 187F, 187G and 187H seek to reverse the proposed new provisions, leaving the scheme operator merely with a power to publish determinations if it decides that it is appropriate, and a duty to explain the rationale for publication in that case.
Previously, ombudsman decisions have been published by one or other of the parties involved, leading to a partial and sometimes misleading picture of the way in which the FOS made decisions. Now that the FOS is subject to the Freedom of Information Act, ombudsman decisions may also be published in response to requests for information under that Act, so there is clearly a need for change.
Amendment 187J seeks to modify the transparency arrangements to provide anonymity for the respondents except where they agree to be identified. However, in many cases it will not be possible to redact all the information by which a firm could be identified without thereby withholding key elements of the substance of the decision—for example, the content of a firm’s advertising material, policy wordings, and product names—and there is no reason to think a firm’s reputation should be unfairly tarnished by the publication of a decision. However, I entirely agree with my noble friend that there is a case for withholding genuinely commercially sensitive information. The FOS will have the power to do that, and has made it clear in its consultation on transparency earlier in the year that it intends to protect commercially sensitive information.
Amendments 187K and 187L would provide for a minimum period of 28 days between the scheme operator considering a determination for publication and its taking the decision to publish, during which the respondent may make representations. It is of course important that firms get a fair hearing but, as I have said, by the time a decision is published, firms have had many opportunities to explain their side of the case already, and the ombudsman scheme rules already provide for firms to be able to provide sensitive information to the ombudsman in confidence. Given that this route already exists for the firm to identify information that it would be inappropriate to make public, I would be concerned that firms may see a process to make further references, as the amendments propose, as an opportunity to appeal the substance of the decision itself. However, I reassure my noble friend that the FOS would be very open to listening to proposals from firms about how best to ensure that it does not publish sensitive material.
Amendment 187N would require the FOS to suspend cases and refer the matter to the FCA when it encounters an issue with wider implications. Obviously the FOS will encounter issues that demand a response from the regulator, and there need to be clear duties and routes for the FOS to raise these issues with the FCA. I draw my noble friend’s attention to the measures in the Bill that provide for this. In future the FOS will be required to share information with the FCA that it considers relevant to the FCA’s objectives. The FCA is in turn required to take account of this information. In addition, the Bill introduces a mechanism whereby the FOS and the firms concerned can refer issues of mass detriment to the FCA, and the FCA will have to publish a response within 90 days, which is a very much improved procedure over what has obtained in the past. The response from the FCA might set out a timetable for regulatory action that would allow the FOS to consider whether or not to place a hold, or stay, on complaints. I reassure my noble friend that the Government share his concerns, and we think that we have taken measures in the Bill to address them.
Amendment 187Q seeks to require a clarification procedure for regulatory matters arising from complaints to be resolved by the FCA or for the FCA to provide guidance. While supporting the spirit of these amendments, my concern about the clarification procedure proposed is that it would be overly bureaucratic and could blur the distinct remits of the regulator and the ombudsman. The FOS’s role is to provide swift and low-cost dispute resolution. In doing so it must of course take into account, among other things, the relevant law and the regulators’ rules and guidance. It cannot, in practical terms, be expected to refer an issue to the regulator every time it encounters regulatory matters, any more than it could be expected to refer a matter to the courts every time it encountered a legal matter. We have included a package of measures in the Bill to improve co-ordination and co-operation between the FCA and the FOS. These include the new information-sharing and co-ordination provisions, as well as a new mechanism for the FOS and firms concerned to refer issues of mass detriment to the FCA.
Amendment 187S would require the FCA to make the detailed procedural rules for the ombudsman scheme rather than approve rules made by the FOS itself as at present; and to define the factors the FOS must take into account in its “fair and reasonable” test in legislation. On the first part of the amendment, the FSA already makes rules concerning key elements of the FOS’s compulsory jurisdiction. The more detailed rules of the ombudsman’s procedures are made by the FOS itself with the FSA’s consent. This strikes the right balance. As part of its operational independence, the FOS is responsible for preparing the detailed procedural rules which the regulator must approve. The alternative would be for the regulator to be directly responsible for running the ombudsman.
“( ) A designated consumer body may make a complaint to the PRA that a feature, or combination of features, of the market for with-profits insurance policies is, or appears to be, significantly damaging the interests of consumers.”
Baroness Hayter of Kentish Town
My Lords, in previous debates on the Bill we strongly welcomed the super-complaints process included in Clause 40. Particularly in a market such as this, it is important that independent consumer bodies, expert in intelligence-gathering and in touch with clients, can bring a complaint about something which is causing general consumer detriment.
However, it is not only the FCA which will regulate issues with the potential to cause consumer detriment. The PRA, via its role over with-profits policies and bank-lending ratios, might also be the regulator to intervene in particular cases of market failure. We are therefore asking that in such cases the super-complaint can be made to the PRA where appropriate. There are 25 million customers in this market, with some £330 billion of with-profits policies, so we are talking about significant consumer questions. The Bill transfers responsibility for these to the Prudential Regulatory Authority but without giving consumer bodies the ability to call conduct issues to account via a super- complaint. Why should the voices of consumers not be properly heard given the size of the market and the chequered history of some of those policies and, indeed, regulatory failures?
In the other place, the then Minister, Mark Hoban, agreed that,
“the super-complaints power should be wide enough to cover complaints about with-profit policies”,
although he did not agree that,
“the PRA should be designated as a recipient of the super-complaints”.—[Official Report, Commons, Financial Services Bill Committee, 15/3/12; col. 519.]
He seemed to think that such super-complaints should be taken to the FCA, even though it had no responsibility in this area. Despite reading that exchange and what he said very carefully, I do not understand how a complaint to one body could affect the regulatory actions of another, no matter how good the dialogue or the MoU between the two. Therefore, we again ask that, for with-profits insurance policies, the super-complaint should be made to the PRA.
On the amendment in the name of the noble Lord, Lord Flight, in this group, we would not want to see the FCA lose this power and are content with the way it is set out in the Bill. I beg to move.
Lord Flight
My Lords, I shall not move Amendment 189A. I am now satisfied that the powers here do not contradict or are not repeated by powers under Section 404 and that the potential arrangements of the ombudsman’s power to refer to the FCA are quite helpful. Similarly, I shall not move Amendment 189B.
Baroness Hayter of Kentish Town
Perhaps we can suggest that the noble Lord, Lord Newby, answers all the amendments. We seem to have slightly more success with him than with his colleague on the Front Bench. Obviously, I am delighted by that assurance and we look forward to seeing exactly how the Bill will do that, but it sounds as though it will meet our aim. With that in mind, I beg leave to withdraw the amendment.
“234H Power of FCA to make request to Competition Commission
The FCA may, subject to subsection (4) of section 131 of the Enterprise Act 2002, make a reference to the Commission if the FCA has reasonable grounds for suspecting that any feature, or combination of features, of a market for financial services in the United Kingdom prevents, restricts or distorts competition in connection with the supply or acquisition of any financial services in the United Kingdom or a part of the United Kingdom.”
Baroness Hayter of Kentish Town
My Lords, I should like to know which Minister is going to respond to this—it may help.
We are pleased that the FCA now has a new competition objective and wider competition powers. However, these powers do not go far enough to enable the FCA to deliver its objectives. As the Bill stands, the FCA will still have to refer cases to the OFT, or its successor body, which will then conduct a market analysis before being able to take further action. This looks like a slow and rather unfair regulatory process, even after the merger of organisations that will take place under another Bill.
We therefore support the view of the Joint Committee that the FCA should have concurrent competition powers in respect of a market investigation reference, together with the OFT. That would empower the FCA to conduct its own economic analysis and deal with distortions in the market without the need for any delay.
We have heard a lot about the lessons learned from PPI, which highlight the need for the FCA to have the market investigation reference powers. In 2005, the FSA signalled its concerns about the PPI market and began an investigation. After the investigation, the FSA took its concerns to the OFT, which had to look at the issues before passing the case on to the Competition Commission. Eventually the Competition Commission passed the issue back to the FSA. The process took far longer than necessary and allowed the banks and other credit providers to continue selling PPI to their unsuspecting customers.
Giving the FCA concurrent MIR powers would allow the FCA to escalate concerns about competition failures quickly and efficiently, with any failures addressed before consumer detriment crystallised. By giving the FCA powers equivalent to the OFT under Section 131 of the Enterprise Act 2002, a single organisation would be able to tackle significant market issues such as PPI without the substantial delay through referral to another body. We therefore seek to amend the Bill accordingly and I beg to move.
Lord Whitty
My Lords, since my noble friend is a bit lonely on the Front Bench just now, I intervene very briefly to support her on this. Quite often in regulatory structures the sector regulator is very nervous of referring anything to the competition authorities because it regards that as part of its failure. Under the terms of this amendment, it would be part of the process that was available—I will not say normally, but if necessary—to the FCA to refer things to the competition authority, having itself examined the structure of the market with its concurrent powers.
I am very mindful of an equivalent sector—namely, energy—where one of the problems has been that Ofgem has always refused in effect to refer the structure of the energy market to the competition authorities, even though, I happen to know, at the time the competition authorities or the members of the Competition Commission were very anxious to look at it. We might have to change the form of words slightly but I think this is the better formulation—that the FCA has concurrent powers but that it is not seen as a complete departure for a case to be referred to the competition authorities themselves and that the process is not prolonged.
Lord Sassoon
My Lords, I can see that the noble Baroness is delighted that I am on my feet. I listened to the very clear and detailed arguments that the noble Baroness, Lady Drake, gave in an earlier session, to which we have come back today. I may not always respond there and then but I listen very carefully to everything that is said. However, I do not want to raise the expectations of the noble Baroness on this one.
This amendment seeks, as we have heard, to give the FCA a power to make a market investigation reference to the Competition Commission. I am sure that the Committee is aware that the Joint Committee that scrutinised the draft Bill recommended that the FCA should be given concurrent market investigation reference powers. However, noble Lords will also be aware that the Treasury Select Committee, in its report on the FCA, concluded that the case for the FCA to have market investigation reference powers has not yet been made, and that the issue should be reviewed when the FCA has bedded into its new role.
Having considered the matter very carefully, the Government have adopted the proposal of the Treasury Select Committee. The FCA’s competition objective will require it to keep the markets it regulates under review and it may of course perform its own competition analyses as part of that. The evidence-gathering and analysis carried out by the FCA will support any subsequent intervention by the OFT. For example, on a referral from the FCA, the OFT may have sufficient evidence to launch a market investigation reference almost immediately. There is precedent for this in the OFT’s response to the report of the House of Lords Economic Affairs Committee on the audit market. In the light of the evidence collected by the committee, the OFT felt able to consult on a reference to the Competition Commission without conducting its own market study.
As the Government have made clear in their response to the Treasury Select Committee, we will review the question of the FCA competition powers when it has bedded in to its new role, five years after it comes into being. I hope that with that reassurance, and confirmation that we are following the Treasury Select Committee’s recommendation, the noble Baroness will feel able to withdraw her amendment.
Baroness Hayter of Kentish Town
My Lords, I thank my noble friend Lord Whitty for his support for the amendment. His experience in this field is much greater than mine. I am surprised by the Government’s lack of interest in the relationship between the OFT and the FCA, given its new competition powers. In an earlier debate, the Government would not even agree to an MoU between the FCA and the OFT. I am pleased that the Government will keep the matter under review and therefore accept that there are some issues here. Part of the concern is that, with the merger under the other Bill of the OFT with the Competition Commission, those organisations, as all organisations are when they get together, will be tied up with working that out just at a moment when the FCA has these new competition powers and perhaps would like to use them in the way described. I beg leave to withdraw the amendment.
Baroness Hayter of Kentish Town
My Lords, in addition to all the comments made by my noble friend Lord Whitty, which we obviously support, I would like to speak for a few moments to Amendment 189BC, which stands in my name. Had that been in place, it would also have provided a route for small firms that were sold totally unsuitable interest rate swaps to have reached a speedy cross-industry solution.
The committee will know that many SMEs took out loan agreements, having been told that they also needed to take out an interest rate swap. Those SMEs, usually with no professional legal or accountancy staff, are sitting targets for financial services companies out to make a fast buck. They need the protection that this amendment could provide. I hope that the Minister will accept it, or a suitable alternative, to ensure that small and medium-sized companies, on whom we all depend to kick start our economy, get easy access to complaint resolution where their interests are damaged.
The amendment would give small firms the ability to complain and bring proceedings—court proceedings if necessary—to ensure that they could get proper adjudication on whether they were indeed mis-sold a particular product. As we have heard, the amendment would require the Government to introduce proposals within three months of Royal Assent to make it easier for groups of small firms to bring collective proceedings before the courts in respect of financial services claims, with the right to opt out for companies not wanting to be party to the outcome of the cases.
The amendment would also empower SMEs to complain to the regulators and to give their representative bodies the right to complain about market failures to the FCA, in the same way in which individual consumers can.
There is a gap in the legislation for small firms wanting to make complaints in their role as consumers of financial products. A case can be made for the representative bodies of small firms being able to take civil complaints. On 22 May this year, the Minister in the Commons, Mr Hoban, said that,
“the provisions in the Bill will not prevent bodies representing small and medium-sized enterprises which fit the relevant definition of consumers from making super-complaints”.
We therefore seek clarity in the Bill to that effect through the amendment.
Mr Hoban also said that:
“what type of consumer body should have access to super-complaints is complex and will require more detailed criteria than can be set out in the Bill.”—[Official Report, Commons, 15/10/12; col. 1031.]
He announced that the Treasury would publish draft criteria “later in the year”.
I might have missed it, but it is now later in the year and I think it is yet to appear. Perhaps the Minister could provide those further details.
Lord Newby
The Government believe that collective proceedings, in the appropriate circumstances, can deliver access to redress and a potential deterrent effect. That is why the Government have been consulting on a range of proposals to make it easier for consumers and small businesses to bring private actions in competition law—including whether to extend to businesses the current right of consumers to bring a collective action following a breach of competition law, and whether to make it easier to bring such actions. The Government are considering the consultation responses and hope to publish their response before the end of the year. We want to take the opportunity to learn from the outcome of that consultation and reflect on the implications for the financial services sector before proceeding to legislation.
The noble Baroness may say that her amendment would provide adequate time for consultation. However, her amendment specifies that small businesses should be able to bring collective proceedings on an opt-out basis. The type of persons who might bring collective actions, whether on an opt-in or opt-out basis, are substantive questions on which BIS has been consulting. We think that it is a lot better to await the outcome of the BIS consultation and reflect on the implications for financial services than to seek to pre-empt that process and require a particular model now. If the Government were to conclude from this exercise that it would be appropriate to bring forward legislation on collective proceedings for the financial services sector, any proposals should then be subject to proper consultation.
As an addendum to the second part of Amendment 189BC, I note that the Bill would not prevent bodies representing small and medium-sized enterprises that fit the relevant definition of “consumers” from making super-complaints. As was explained in another place, the issue of what type of consumer body should have access to super-complaints is complex and will require more detailed criteria than can be set out in the Bill.
We have considered this matter carefully, and I can inform the House that the consultation document that the Government will shortly publish covering this issue will include the proposal that the Treasury should be able to designate bodies that primarily represent the interests of small to medium-sized enterprises as super-complainants and that this will be reflected in the draft criteria.
I hope that, with the reassurance that the Government will consider proposals on collective proceedings carefully and that they will shortly consult on allowing SME representatives to make super-complaints, the noble Lord and the noble Baroness will feel able to withdraw their amendments.