Financial Services Bill

Baroness Kramer Excerpts

Committee stage & Committee: 1st sitting (Hansard) & Committee: 1st sitting (Hansard): House of Lords
Monday 22nd February 2021 Grand Committee

[Lord Davies of Brixton (Lab) [V]]

My Lords, I agree with much of what has been said and it is not necessary to repeat it. I support the objective of the amendments—in particular, I support my noble friend’s Amendment 4—and I look forward to the Minister’s reply. It is difficult to see how the principle of these amendments can be refused.

However, it is necessary to make an overarching point, which I base on my experience over 50 years as a close observer of the financial services industry. The truth is that the industry has a systemic tendency to malfeasance. This is not an attack on the great many good people who work within the industry, as the last contribution mentioned, in banks and insurance companies, who only wish to do a good day’s work. However, the unremitting succession of scandals involving finance is not just a series of unfortunate one-offs; it is built into its very nature. This is a big issue, but I emphasise two simple reasons. First, there is an inevitable asymmetry of information. As Amendment 4 highlights, there are

“a consumer’s vulnerability, behavioural biases or constrained choices”.

This situation is bound to create the sort of problem that we have seen. The second, even simpler, reason, using the classic but apocryphal words of Willie Sutton, is because it is “where the money is”. People seek to gain money from where there is lots of it and there is lots of it in the finance industry.

There is much to be done to solve this problem. It is systemic but it still needs to be addressed because people need help. However, what is in these amendments seems to me simply a minimum of what might be done to address the problems that the industry so clearly incorporates.

[Baroness Kramer (LD)]

My Lords, I simply do not understand the resistance we find from the Government and the FCA to the duty of care amendment moved by my noble friend Lord Sharkey, and supported by my noble friend Lady Bowles and the noble Baroness, Lady Bennett, and to the almost identical Amendment 4 proposed by the noble Lord, Lord Tunnicliffe, and supported by the noble Lord, Lord Eatwell, and again by my noble friend Lady Bowles. I am not going to repeat the saga of abuse that many noble Lords have described. That has been done incredibly well and is exceedingly powerful. I will say though that this issue keeps happening. I notice the headline in today’s Times:

“City regulator ‘slow to act’ against car leasing firm”.


Every time we think that we are perhaps past a period of abuse, another one comes along. To me, it is utterly unacceptable, as I hope it is to everyone in this House.

What makes me particularly angry is that the regulator has largely known, very early on thanks to whistleblowers, when the financial institutions that it regulates are treating customers badly. However, again and again, the regulator takes years to react, reacts minimally at first, initiates a lengthy review—often several—asks the organisation to review itself and then does too little, too late. I want to pick up one issue in illustration: the treatment of payday lenders.

Many people in this House will remember the experience of trying to pass legislation to get a cap on the interest rates that payday lenders could levy. I bring up this issue because it deals with the difference between treating customers fairly and a duty of care. The FCA took a very strong position that customers were being treated fairly so long as they knew the terms of the contract. There were, perhaps, some constraints such as a limited number of rollovers. The FCA did not look at the far deeper issue of the way that people were being abused by payday lenders and the extraordinary level of interest rates. That is why the duty of care is very much more powerful. As my noble friend Lord Sharkey said, treating customers fairly is undermined in the FiSMA legislation by the caveat emptor parts of the FCA’s rules.

I am not a bit surprised that the noble Lord, Lord Blackwell, objects to these duty of care amendments. When I sat for nearly two years on the Parliamentary Commission on Banking Standards, the industry objected to almost every measure that would have constrained the abuse which created the crisis in 2008, such as the Libor crisis and PPI. The saga was endless. I say to the noble Lord, Lord Blackwell, that in a later group of amendments I will be referring to the HBOS Reading case, another example of fraud perpetrated between 2003 and 2007. A number of bankers went to prison but today, in 2021, victims of that fraud still have not received fair compensation.

Dame Elizabeth Gloster’s damning report of last November on the FCA’s regulation of London Capital & Finance Plc said:

“The root causes of the FCA’s failure to regulate LCF appropriately were significant gaps and weaknesses in the policies and practices”.


That is simply true across the board. It is piecemeal, as my noble friend Lord Sharkey described.

Misbehaviour keeps happening and delayed redress is the normal pattern. To quote Einstein:

“The definition of insanity is doing the same thing over and over again and expecting different results.”


It is time to make a step change to protect consumers, and I hope very much that the Government do so in this Bill.

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[Lord Hunt of Wirral (Con)]

My Lords, I draw attention to my interests as set out in the register. I recognise that these are probing amendments, but I exhort my noble friend the Minister not to underestimate either the strength of feeling on the question of international competitiveness or its importance to a sector vital to our economic recovery, as my noble friend Lady Neville-Rolfe stressed in her impressive speech earlier in this debate. The foundation stone for the regulation of financial services is still FiSMA—the Financial Services and Markets Act 2000—albeit in a form substantially amended by subsequent legislation. As the noble Lord, Lord Eatwell, reminded us, the regulatory structure is currently subject to a fundamental review.

The financial services future regulatory framework review and phase 2 consultation closed at the end of last week. The early indications of a general direction of travel are welcome. The original version of FSMA set out those four clear objectives for the new Financial Services Authority, the FSA: market confidence; public awareness; the protection of consumers; and the reduction of financial crime. In addition, the FSA was required to have regard to a number of other considerations, which included such obvious factors as efficiency, proportionality and innovation. They also included, as the noble Lord, Lord Sharkey, reminded us—and I quote verbatim

“the international character of financial services and markets and the desirability of maintaining the competitive position of the United Kingdom”

and

“the need to minimise the adverse effects on competition that may arise from anything done in the discharge of those functions”.

As other speakers have reminded us, after the crash of 2008, the incoming coalition Government inherited a severe recession and an unstable and untenable financial situation. They therefore undertook a deep consideration of regulation. In the debates in another place on what became the Financial Services Act 2012, concerns were repeatedly expressed to the effect that regulation under the FSMA had been not so much light touch as soft touch. Since 2012, the entire financial services sector, broad and diverse as it is, has effectively been punished—put into the naughty corner, as it were —almost entirely because of the alleged failures of the banks. The regulatory brush used was simply too broad and therefore not fit for purpose. The requirement to take account of international competitiveness was jettisoned because, it was argued, it might dilute the robustness of regulation.

I have also taken a close look at the Second Reading debate on the then Financial Services Bill, on 11 June 2012, in which one colleague after another raised this question of competitiveness, including my noble friends Lord Trenchard, Lord Hodgson and Lady Noakes. So this is a “Groundhog Day” debate, but I hope no less persuasive for that. My noble friend Lord Trenchard certainly wins a prize for consistency and constancy, because he eloquently argued that day:

“Some of us believed that competition and the competitiveness of our financial markets should have been made an objective of the FSA rather than merely one of the principles to which it had to have regard. I welcome the fact that the FCA is given a competition objective in the Bill, but it is inadequate in that it falls short of a responsibility to maintain or enhance the competitiveness of the UK’s financial markets”.—[Official Report, 11/6/12; col. 1245.]


As both the Association of British Insurers and the London Market Group have rightly pointed out, promoting the international competitiveness of the UK financial services sector to nurture its contribution to our economic strength must now be restored to the objectives of the regulators. This would bring our regulators into line with other, competitor jurisdictions, such as Hong Kong, the United States, Singapore and Australia. In its phase 2 consultation paper, the Government explicitly acknowledge:

“A gap in the original FSMA model is that, while it set high-level general objectives and principles, it did not provide for government and Parliament to set the policy approach for specific areas of financial services regulation.”


A move towards increasingly activity-specific regulatory principles is helpfully adumbrated, as my noble friend Lord Blackwell pointed out, ahead of the outcome of the FRF consultation, in Schedule 3 to the Bill. This would require the PRA, when considering capital requirements regulation, to have regard to

“the likely effect of the rules on the relative standing of the United Kingdom as a place for internationally active credit institutions and investment firms to be based or to carry on activities.”

This seems a welcome step back towards an old principle and, quite possibly, a Rubicon of significance crossed—or, more accurately, re-crossed. On that basis the Bill, while welcome in its own terms, is merely the beginning of a vital process which will determine the character of the post-Brexit UK financial services sector, potentially for a generation or more.

Once the results of the consultation have been digested, I hope to see far more acknowledgement in regulation of the great differences that exist between different elements of financial services, along with an explicit recognition that our international competitiveness matters. It is entirely spurious to claim that a regulator mindful of international competitiveness is likely to be a weak regulator. It could and should be a very effective one indeed.

As the noble Lord, Lord Mountevans, has just pointed out, our competitiveness relies on our strength. Our greatest strength is surely our reputation for providing the best advice and the best products at the best price, something no regulatory race to the bottom could ever deliver. If we really have the ambition to become the global centre for insurance and financial services—a realistic ambition, I argue, if we work together to deliver upon it—then we simply must get this right. I very much hope that the Bill does not go down as a missed opportunity.

[Baroness Kramer (LD)]

My Lords, inevitably with so many amendments to one Bill, this group is something of an omnibus collection. I have some sympathy with some of them—for example, the country-by-country reporting amendment tabled by the noble Lord, Lord Tunnicliffe. While I disagree very much with the noble Lords, Lord Hodgson and Lord Holmes, on their overall support for an international competitiveness objective in other areas, they are pointing out a need for the regulator to look again at issues such as proportionality and how to adapt to the new digital world. However, that does not seem to need to be put into law. This is really advice to the regulator, and I hope that they will take a great deal of that good advice on board.

I want to reply to the noble Lord, Lord Hunt, because he echoed an opinion raised by the noble Lord, Lord Blackwell, but very effectively countered by my noble friend Lady Bowles. He talked about activity-specific regulation creating the opportunity for some significant divergence in the regulatory environment. The lesson of 2008 was that the financial services sector is linked systemically. As my noble friend Lady Bowles pointed out, the crash in 2008 started with largely fake and junk mortgages in the United States. It worked its way into various securities instruments that were sold to people in the UK who did not understand them, but should have.

The underpinning consequences of risk were also completely misunderstood. The way that derivatives were traded and structured created a potential risk of losing liquidity overnight. This is exactly what happened with the high street banks in the UK. They became competitive with others in the financial sector to develop the kinds of profits that they saw being made by rival companies, pushed their credit standards to the point where, frankly, they were no longer standards, and chose methods of funding themselves that made them vulnerable to any volatility in the overnight markets. This is not an industry in which we can separate the different pieces into silos. They are all interlinked and that must underpin any form of regulation that we have.

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[Baroness Bennett of Manor Castle (GP) [V]]

Apologies, my Lords, but I have sorted the problem out now. I speak briefly in support of Amendments 5, 73 and 95, in the names of the noble Baronesses, Lady Bowles, Lady Altmann and Lady Kramer. Although not a generalisation that is 100% true, the gender division of the people on various sides speaking on the Bill is interesting. It made me reflect back to the financial crash of 2007-08 and the role that the extreme gender imbalance in the financial sector was seen to have played within it.

When I thought to look at these issues about exploitation, unconscionable conduct, and legal protection against mis-selling, I went to the website moneysavingexpert.com. In a previous contribution, I referred to the role of such commentators who, using the power of public opinion, often seem to be a stronger check on the behaviour of the financial sector than the Government. But, of course, they are able to work only after the fact. Just looking down the list, we are talking about payment protection insurance, mis-sold ID fraud insurance, the mis-selling of package bank accounts and excessive charges on bank accounts—and that is just talking about individual consumers. A similar list would come up for small business. It is a long tale of woe that has caused a great deal of suffering and harm to individuals and small businesses, the operators of which have often put their whole heart and soul into the business.

What we seem to have now is a strategy of shutting the stable door sometime after the horse has bolted, and after a long delay for debate and inquiry. All three of these amendments are a very strong bolt that we should be sliding home now to protect consumers and small businesses from the overweening, immense power of the financial sector.

[Baroness Kramer (LD) [V]]

My goodness, this has moved fast. My Lords, let me start by addressing Amendment 95, because it is in my name. It would give SMEs the right to sue in respect of all regulated financial services, not just banking. It would—and this is an important example—entitle them to sue for breaches of the rules relating to insurance, otherwise known as COBS, in respect of business interruption insurance policies.

Another big practical implication relates to the cross-selling of regulated products or services as part of the add-ons to a loan. In the swaps mis-selling scandal—I believe my noble friend Lord Sharkey mentioned this in his earlier list, when talking about a duty of care—over 40,000 swaps were sold to SMEs. The banks had broken the regulatory requirements in over 90% of cases. It is almost impossible to imagine that having happened if the banks’ legal departments knew that the banks would be sued by their customers as a result.

None of the SMEs that have taken swaps cases all the way to court have won. Judges have repeatedly said that, had the customer been able to sue for breach of the COBS rules, that would have made all the difference. The evidence is there in Green & Rowley v RBS, Crestsign Ltd v NatWest, London Executive Aviation Ltd v RBS, and Fine Care Homes Ltd v NatWest. Those cases and the other swap cases that failed at trial show that—even where a judge is convinced that the customer did not understand the product they were buying and even where the bank salesperson knew that the customer was relying on them to explain the product—the common law fails to provide the customer with a remedy. I realise that the swaps scandal is, hopefully, in the past but, without the amendment proposed, there is nothing to stop banks from perpetrating similar behaviour in future.

My amendment addresses only part of the issue of the limitations of the regulatory perimeter, which both my noble friend Lady Bowles and the noble Baroness, Lady Bennett, have discussed, and it is why I support Amendments 5 and 73 in the name of my noble friend. I find it ridiculous that the regulatory perimeter treats small businesses as, in effect, akin to multinationals in their capacity to understand financial products and fight on an equal footing with big institutions.

My noble friend Lady Bowles has cited the case of RBS GRG. For those not familiar with this case, GRG was the turnaround unit of RBS. A number of firms were persuaded to allow themselves to go into the turnaround unit even though they were both viable and paying their loans on time; but RBS believed that under the terms of their loan agreement they were at risk because the value of their assets had declined, which created a covenant default. In a remarkable number of cases, those companies that were viable and paying on time were made bankrupt, their assets were stripped after having been assessed at very low market values and—surprise, surprise—the bank was able some time later to sell those assets for a much higher value, thereby generating profits. It was indeed not just a turnaround unit but a profit centre.

After great pressure from Vince Cable, the FCA initiated an investigation. It asked a group called Promontory to produce a two-stage report: one to look at the case and the other to make recommendations. However, after the first phase of the report was complete, the FCA explained that it could not publish it as it contained commercially sensitive information, and it therefore produced a summary. Miraculously, the original report made its way into the hands of the Treasury Select Committee. This, to me, is almost the worst part of the story: the summary that had been provided by the FCA and the report itself did not match. There was essentially a whitewash of the conclusions of Promontory. The FCA may have disagreed with the report that it received, but that would have been a very different declaration.

We have talked before about the senior management and certification regime; the FCA could have used that regime to try to deal with senior management who had been involved in this entire process, but it chose not to. That, I am afraid, is the history of the use of the senior management and certification regime. However, my noble friend Lady Bowles could equally well have cited the HBOS Reading fraud perpetrated between 2003 and 2007, which I mentioned earlier. Six bankers ended up in jail for that fraud, but we are now in 2021 and fair compensation has not yet been paid to the victims. This is now a Lloyds problem and has been for some time.

We have been through multiple reviews and are now awaiting the work of yet another review of compensation, the Foskett panel, which hopefully will make sure the compensation is appropriate—but, as I said, it is 2021. There have been issues; for example, a whistleblower who examined who knew what and when has been compensated twice by Lloyds for retaliation against her. There is currently a review by Dame Linda Dobbs into who in senior management knew or ought to have known what was going on.

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[Baroness Kramer (LD)]

My Lords, I find the thrust of all three amendments in this group really interesting and worthy of thought. I would particularly have added my name, had I been fast enough, to Amendment 9 in the name of the noble Lord, Lord Holmes. I think that is a strong and very positive amendment. Parliament, financial institutions, regulators and civic society have been discussing financial inclusion for years, and all of us recognise that there has been some progress. The Government’s financial inclusion report of 2019 identified 1.23 million people without even a basic bank account. That is half of what it was about 15 years earlier, but I think we all know that it is still unacceptably high. I will say more about basic bank accounts in an amendment in my name in a later group, as I think there are some real issues there.

Debt management advice has significantly improved and much of our thanks is owed there to the noble Lord, Lord Stevenson, as other noble Lords have said. We will discuss amendments that would strengthen that in another group. The FCA has made changes to the high-cost credit market. Many of those changes both in the debt advice arena and the high-cost credit arena were not actually initiated by the regulator. They were driven by this House, and I think that this House deserves to take credit for recognising that need and for driving through what has been real and effective action.