Enterprise and Regulatory Reform Bill

Baroness Hayter of Kentish Town Excerpts

Thursday 31st January 2013 Grand Committee

Amendment 58E specifies that any regulations which cover only the energy, mobile phones, current accounts and credit cards sectors will be subject to the negative resolution procedure while any regulations which extend beyond those sectors will be subject to the enhanced scrutiny of the affirmative resolution procedure. I beg to move Amendment 58C.

[Baroness Hayter of Kentish Town]

My Lords, I thank the Minister for introducing this new provision. We consider that the concept behind the Midata initiative is very worthy. We note that when it was launched, the heading of the BIS press release was:

“New power to boost consumers’ access to data”.

It seemed to be a welcome initiative and we applaud the Government’s role in pushing for voluntary initiatives on giving consumers access to their own purchasing and transactional data.

We also recognise that there is a need to put some of this on a statutory basis so that all providers of goods and services can, in time, be required to provide that access. But the act of putting this on a legal basis forces us to consider, and provide for, the complications that could arise. I am sure that the Minister will be aware of the very strong objection of the British Retail Consortium to this initiative. However, he may also want to note that the consumer organisation, Consumer Focus, while admiring the supposed right, has some serious anxieties about it. We risk the fact that what should be an improved consumer service may actually have issues that have not been dealt with fully on both security and privacy. Some of these arise already, both with the way in which providers keep individual data for their own purpose and in the voluntary schemes of provision to customers that are being introduced without statutory backing.

Once those schemes are required by the Government, then surely the Government and Parliament have a duty to ensure that consumer protection is built into the process. The new service that will be required of providers by law will involve issues of personal data transmission, data storage, multiple combination and multiple access, which means that the process must have built into it security and minimisation of risk to consumers’ privacy and disclosure of identity. Such precautions will also need to be accompanied by systems of identifying liability and responsibility for redress and absolute clarity about how one goes about seeking that redress.

At the moment, data on the purchases and transactions are largely held by the direct provider, although they are also often sold on or combined with other data. Under Midata, consumers will also have access but there will be greater potential for the selling on and combining of data. Hence, liability, clarity on liability and redress systems are essential. If the system works, the Midata providers must be required to adhere to the highest security and data protection standards. Consumers need to know that Midata providers meet those high standards; so there must be easy identification of those who have been designated as trustworthy providers. It is presumably the Government’s contention that this will be done by secondary legislation, but unless the principles are written clearly in primary legislation, it will be difficult to judge whether those systems can work.

Amendment 58D deals with enforcement of the duty to disclose, but it includes no provision for complaint, mediation, arbitration or redress should that obligation be carried out in a way that endangers or threatens to endanger privacy and security of data. We know that the Information Commissioner is designated as enforcer, at least until the Government decide otherwise, but there is no provision for an ombudsman or for ADR coverage for this. On the Information Commissioner, I have great admiration for the difficult job that both he and his predecessor have done but I seek some confirmation that the Minister is confident that that role is appropriate to fall to the Information Commissioner. He does, of course, already have to make difficult judgments between transparency and data protection, but there are particular dimensions here. I am curious to know whether he even wants this job. Perhaps the Government could also give us some assurance about what additional resources will he get in order to carry it out. The Government themselves seem a bit hesitant as to whether the Information Commissioner is the best-placed person, as they have allowed scope for designating some other body. I do not know whether the Government had something else in mind, or whether it was just a fail-safe provision.

Going back to Amendment 58C, there is also the associated issue of what kind of information and what kind of access is covered. There are many ways in which we purchase goods and conduct our financial transactions. Does this cover the web-based data and transaction services—social media, free apps and online platforms that facilitate transactions between parties? Obvious examples are eBay and Amazon—all different, but all using and storing online consumer data. Because of the conglomerate nature of many retail providers across many markets, there is an issue of how this data is shared even within a company and what the legitimate and non-legitimate boundaries are of such sharing.

In the course of the Financial Services Bill, my noble friend Lord Whitty raised the issue of whether consumer data collected by Tesco, and recorded on their Clubcards, from its retail sales could be used by Tesco’s banking arm to establish creditworthiness. Some Chinese walls are already required within banks and financial institutions. The new Financial Services Act, however, does not require that, in the case of a bank owned by a non-financial institution, there must be such Chinese walls—although the Government did write into the Bill, now an Act, a reserve power to make that requirement. Tesco and financial services are simply as a potential example of this. It has not yet happened. More concretely, in America there have been issues with Walmart and its banking arm.

With consumer data now required, or potentially required, under this Midata clause, to be parcelled up neatly on an individual basis rather than aggregated or earmarked for future marketing as is more usually the case, the possibility for data sharing increases significantly. There is also the issue of companies which are major traders in this country but owned overseas, some in the four areas designated as priority by the Government for this legislation.

Could the Minister tell us how far privacy and data protection can be guaranteed beyond UK boundaries? The sectors chosen—energy, mobile phones and financial institutions—are dominated by major companies and feature oligopolistic markets. However, there are small providers, and there will be even more in other sectors to which these provisions will be extended in due course. Provisions which are not onerous for large retailers—banking and telecoms giants, for example—could be very onerous for smaller retailers and even smaller financial institutions. We understand that the legislation has no exclusions for smaller companies. Again, perhaps the Minister could confirm whether that is the case.

We would also like to ask the Government about their choice of sector priorities. The amendment links together information on individuals held by the provider and held on behalf of the consumer. At present these are legally very different. Data, such as that held by Tesco on its Clubcards, are the clear property of the providing company, as is most data on purchases. However, transactional data held with banks on savings or debt are the property of the consumer and subject to strict privacy and disclosure requirements. As we see it, under Midata, the distinction between those two is blurred.

There are also issues about the kind of data disclosable and the format of that disclosure. The intention, as the Minister outlined, is to provide in electronic machine-readable form data requested by the customer. The customer must be able to request all purchasing and transactional data for a period of at least a year in order to be able to draw rational conclusions and make rational decisions on, for example, changing the pattern of purchase or switching suppliers, which has been suggested. That needs to be specified.

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[Viscount Younger of Leckie]

The noble Lord, Lord Whitty, makes an interesting point. I will need to double check and revert to him to clarify his point.

[Baroness Hayter of Kentish Town]

My Lords, I thank the Minister for his reply. I am particularly reassured by the ongoing discussions with consumer groups. Perhaps it was not clear in what he said—I did not quite hear it—but it seemed to me that he said that no extra resources would be made available to the Information Commissioner. If that is not the case, perhaps that could be clarified.

Amendment 58C agreed.

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[Baroness Hayter of Kentish Town]

My Lords, we very much welcome the amendments tabled by the noble Lord, Lord Razzall, and the noble Baroness, particularly their intention to clarify investors’ fiduciary duty. The amendments, as have been suggested, would clarify that institutional investors are not legally obliged to maximise short-term profits at any cost but “may”—that word was emphasised—take into account wider factors, such as the long-term sustainability of returns. This is modelled on Section 172 of the Companies Act 2006, which similarly clarified that company directors may take account of longer-term and wider factors, such as their impact on communities or the environment.

We on this side tabled remarkably similar amendments to the Financial Services Bill last year. We remain of the view that the position of those who hold money or assets on behalf of others, and who take decisions about those assets, should have their real owners’ or beneficiaries’ interests centre stage. The Kay Review of UK Equity Markets of July 2012 acknowledged a problem with misinterpretations of fiduciary duties, based on what he said was,

“a narrow interpretation of the interests of … beneficiaries which focused on maximising financial returns over a short timescale and prevented the consideration of longer term factors which might impact on company performance, including questions of sustainability or … social impact”.

This can lead to unhelpful short-term behaviour by investors and is a barrier to the adoption of the stewardship approach. The Kay report concluded that,

“there is a need to clarify how these duties should be applied in the context of investment, given the widespread concerns about how these standards are interpreted”.

The Bill in front of us is about enterprise and long-term growth. The Government are giving shareholders additional rights, which we welcome, but these must be balanced with duties to the underlying beneficiaries, who may have wider interests than just immediate returns. These amendments propose that there should be no legal barriers to consideration of those beneficiaries’ interests. They do not mandate anything but they clarify the law. The amendments are, we would say, permissive rather than prescriptive, and would ensure that the law does not prevent trustees from taking a broader approach. The provision does not mandate them to do so; in fact, it restores the primacy of trustees’ discretion in deciding how best to serve their beneficiaries, as opposed to assuming that the law restricts them to taking a particular approach.

The amendments make it clear that the duty of fiduciary investors is solely to their beneficiaries, and that the interests of beneficiaries must be the basis for all decisions. They clarify that this need not always mean maximising short-term profits: if trustees believe that their beneficiaries’ interests will be better served by taking into account wider factors, they will be empowered to do so. Indeed, where trustees choose to take account of purely non-financial factors—such as beneficiaries’ ethical views or implications for their quality of life—the amendments specify that this must not be to the detriment of beneficiaries’ long-term financial interests.

Perhaps I may give one example to show why this amendment is so needed. A large pension fund, which I fear does not wish to be named in this debate, received legal advice to the effect that its policy on shareholder engagement and responsible investment might be unlawful. Its policy stated that the fund would seek to exercise voting rights in listed companies in which it held shares, and that it would take into account environmental, social and governance issues with the potential to affect the long-term value for the fund’s beneficiaries. This position is firmly grounded in the financial interests of beneficiaries, and is widely accepted as best practice within the industry. The Government endorsed such an approach by promoting the stewardship code, through its package of enhanced shareholder rights on executive pay, and, in the Commons, where Pensions Minister Steve Webb said that,

“the coalition Government fully support the highest standards of corporate governance and ethical behaviour. We agree that a socially responsible investment strategy is a sound choice for pension schemes”.—[Official Report, Commons, 20/1/12; col. 1044.]

Despite this, the advice from a large and reputable law firm took an extremely narrow view of beneficiaries’ best interests, and suggested that the costs involved in exercising voting rights might render the policy unlawful unless the firm could demonstrate that such stewardship brought monetised benefits to the individual fund. The opinion cast doubt on whether such benefits could be demonstrated. This illustrates why the Government’s approach to responsible capitalism, which has focused on giving shareholders more rights, needs to be complemented by measures to remove any perceived legal barriers to the responsible exercise of these rights.

For long-term, sustainable growth and returns, we want responsible shareholder engagement with listed companies. The Kay review recommended, and the Government agreed, that the Law Commission be asked to review the question of fiduciary duty, with Kay himself indicating that statutory clarification may be necessary to resolve this. We would therefore ask Minister to confirm today that, if the Law Commission thereby recommends such statutory underpinning, the Government will take action.

[Viscount Younger of Leckie]

My Lords, these amendments would introduce a statutory requirement for institutional investors to act in the best interests of their clients and beneficiaries. They seek to clarify that these investors are not legally obliged to maximise short-term financial returns, but may take into account longer-term considerations, including the social and environmental impact of the companies in which they invest.

I am grateful to my noble friend Lord Razzall, supported in name by my noble friend Lady Brinton, for giving us the opportunity to debate the vital issue of fiduciary standards in the investment industry. As noble Lords may be aware, the duties of investment intermediaries were considered by Professor John Kay in his 2012 independent review of equity markets and long-term decision-making. The noble Baroness, Lady Hayter, mentioned this in her speech. The Government have broadly accepted the recommendations of the Kay report in this area. Specifically, they have made clear their support for the view expressed by Professor Kay, and echoed in Amendment 58F, that institutional investors should not automatically assume that maximising short-term returns is sufficient to serve the interests of their clients or beneficiaries. Instead they should take into account long-term factors relevant to their clients’ interests over the time horizon of the investment. However, the Kay report also found that there was no clear agreement on what the law currently requires of those investing on others’ behalf, and recommended that the matter be referred to the Law Commission.

The Government have therefore asked the Law Commission to undertake a review of the legal obligations arising from fiduciary duties that dictate what considerations are appropriate for trustees and other intermediaries acting in the best interests of their clients and beneficiaries. The Government also support Professor Kay’s view that there should be a common minimum standard of behaviour required of all investment intermediaries. While I therefore have great sympathy with the spirit of my noble friends’ intentions, I do not believe that the approach taken in these amendments would achieve this. The amendments attempt to enshrine aspects of the common-law concept of fiduciary duties in statute, and to apply these to certain institutional investors in all circumstances. This includes applying them to certain FSA-authorised firms without due regard to the FSA’s existing regulatory requirements. This approach would add to confusion and uncertainty about the meaning of the word “fiduciary”, the circumstances in which a fiduciary relationship already arises and the standards already expected of investors in regulation.

The government response to the Kay report is very clear in setting out the principle that all investment intermediaries should act in the best interests of their clients or beneficiaries in line with generally prevailing standards of decent behaviour. In order to embed this principle effectively, the Government have asked the FSA, and its successor organisation, the FCA, to consider to what extent current regulatory rules in this area align with this principle and to determine what action might be desirable. This includes, if necessary, changes to regulatory requirements at EU level.

With these reassurances, I hope that my noble friends will feel able to withdraw their amendment.