Financial Services Bill

Baroness Kramer Excerpts

Consideration of Commons amendments
Wednesday 28th April 2021 Lords Chamber

[Earl Howe (Con)]

My Lords, this Financial Services Bill will enhance the UK’s world-leading prudential standards, promote financial stability, promote openness between the UK and international markets, and maintain an effective financial services regulatory framework and sound capital markets. I acknowledge the work of your Lordships in scrutinising this important Bill. The issue of parliamentary scrutiny has been prominent in our debates and noble Lords have more than demonstrated the positive role that they can play in this regard.

During the passage of the Bill, Members of both Houses debated how best to address issues of consumer harm in the financial sector. Amendment 1, which this House approved on Report, proposes that this should be addressed through a requirement for the FCA to bring forward rules on a duty of care. Let me underline that the Government are committed to ensuring that financial services consumers are protected and that steps are taken quickly to address issues, when they are identified. However, as the Economic Secretary set out in the other place, the Government believe that the FCA already has the necessary powers and is acting to ensure that sufficient protections are in place for consumers, so I cannot accept this amendment.

It is important to remember that financial services firms’ treatment of their customers is already governed by the FCA’s Principles for Businesses and specific requirements in its handbook. These fundamental principles set out specific requirements for firms, including that

“A firm must pay due regard to the interests of its customers and treat them fairly.”


The FCA’s enforcement powers allow it to ensure that these standards are met, but it recognises that the level of harm in markets is still too high. It is committed to taking further actions.

The Government accept, as the noble Lord, Lord Tunnicliffe, has rightly suggested, that this harm may stem from asymmetry of information between financial services firms and their customers. The risk is that some firms may seek to exploit this asymmetry. The FCA is well aware of how informational asymmetries and behavioural biases can influence consumer behaviour, and it works every day to address these issues where it considers that they may result in harm. The Government therefore support the FCA’s ongoing programme of work in this area and believe that it will deliver meaningful change for the benefit of consumers.

The FCA has considered its existing framework of principles and whether the way in which firms has responded to them is sufficient to ensure that consumers have the right protections and get the right outcomes. Building on this, in May, the FCA will consult on clear proposals to raise and clarify its expectations of firms’ actions and behaviours and on any necessary changes to its principles to deliver them. These proposals will consider how to raise the level of care that firms must provide to consumers, through a duty of care or other provisions. Ultimately, the proposals in this consultation seek to ensure that consumers benefit from a better level of care from financial services firms.

Amendment 1A puts this work on a statutory footing. It requires the FCA to consult on whether it should make rules providing that authorised persons owe a duty of care to consumers. It ensures that the FCA will publish its analysis of the responses to this consultation by the end of the year. It also ensures that the FCA will make final rules, following that consultation, before 1 August 2022. I hope that this provides reassurance of both the FCA’s and the Government’s commitment to this important agenda. I urge the House to accept this proportionate and, I believe, well-judged amendment.

The FCA will bring its consultation to the attention of the relevant parliamentary committees. This will give them an opportunity to consider the proposals and, if they choose, to express a view or raise any issues. The FCA will respond to any issues raised by parliamentary committees, in line with commitments made during the passage of this Bill.

Let me end there. I hope that noble Lords will accept Motion A and this amendment in lieu.

[Baroness Kramer (LD)]

My Lords, we will not challenge this Motion. I cannot say that it goes as far as reassurance, but I think we are in a much better place to have the consultation and its characteristics in statute on the face of the Bill. I particularly thank the Minister and his team. I suspect they have been instrumental in making sure that the concerns, from all sides of the House, were communicated back to the Treasury and the Treasury team.

The Minister today repeated a number of the statements that the Economic Secretary made in the other place when he addressed this issue. I will highlight a few that were of particular importance to me. The FCA recognises that,

“the level of harm in markets is still too high and is committed to—”—[Official Report, 24/4/21; col. 867]

taking further actions. That is an important statement to have on the record. I am slightly concerned, however, that the focus of the FCA should not exclusively be on asymmetry of information. Asymmetry of information is fundamental and important, but it is far from everything. The Economic Secretary said that

“the FCA will consult in May on clear proposals to raise and clarify its expectations of firms’ actions and behaviours, and on any necessary changes to its principles to deliver this.”—[Official Report, Commons, 26/4/21; col. 84]

I hope that will not be confined simply to asymmetry of information, but as the Economic Secretary said, and the Minister today said, Parliament wants to be assured that the FCA’s ongoing work will lead to meaningful change. I think that reflects some of the frustrations expressed in this House of having had eight consultations to date and relatively little action. I hope this will lead to a great change.

In the amendment in lieu—this is perhaps something the noble Lord, Lord Eatwell will address more extensively than I—the fact that all consumers are part of the consideration is an important one. I want to use this opportunity to underscore to the Minister how urgent and significant this issue is.

When the Government’s amendment in lieu was passed, I got an email from one of the leading financial services lawyers in the country, and two things are pertinent. It said that it looks like this one is headed for the long grass again. I think that is partly because we are looking at action in 2022 and not immediately. The reason for that level of concern was, apparently, that audit firms are now saying that any credit risk between the client and the authorised firm should be counted as client money within the meaning of CASS—the protection of client assets and money. This is storing up some big problems when one of these babies—we are talking about firms that collectively have well over £10 trillion in assets under management—goes down and a judge finds that the trust is bust because they comingled client money with money that is not. Lehman Brothers, here we go again. I went immediately to the FCA site, and it is an excellent but sad example of the very limited powers that the FCA has to deal with such situations, because of the regulatory perimeter that limits a great deal of their potential for action to their definition of consumers. The issue has always been that that is a very narrow definition of consumer.

Every day we wait for a duty of care to become embedded in the system, we run significant risk. It is a risk that none of us wants—it has the potential to be limited to a small pool of clients, but also to knock the economy off its paces once again. It is important that there is an element of urgency built into all of this, that the issue is taken seriously and that there is not an attempt to narrow examination by and the focus of the FCA to simply something like asymmetry of information, but to consider the much wider picture before we end up with another crisis none of us wants.

[Lord Eatwell (Lab)]

My Lords, while we on this side of the House were hoping for action rather than further consultation, and we remain somewhat puzzled as to exactly what further the FCA has to learn that was not learned in the consultation of 2018 when it published a discussion paper entitled with some prescience, A Duty of Care and Potential Alternative Approaches. None the less, despite our desire for action and puzzlement in that respect, we welcome the tenor of the Government’s amendment.

In particular, I congratulate the Government on the clear acknowledgement that real harm is done today to millions of users of financial services by this famous asymmetrical relationship in financial transactions and that harm is done to those excluded from access to financial services. As evidence of this acknowledgement, I refer to the remarks just made by the noble Earl, Lord Howe, and also the remarks by the Economic Secretary to the Treasury, referred to by the noble Baroness, Lady Kramer. For example, Mr Glen said:

“The Government agree with the concerns that … this harm may in part stem from an asymmetry of information between financial services firms and their customers. The risk is that many firms may seek to exploit this asymmetry. The FCA is well aware of how informational asymmetries and behavioural biases can influence consumer behaviour, and is committed to ensuring that these issues are addressed where it considers that they may result in harm”.—[Official Report, Commons, 26/4/21; cols. 83-84.]


All I can say to that is: “Quite right too”.

I am particularly pleased that in new subsection 2(b) in their amendment, the Government refer to the need to extend the duty of care to “all consumers”. I urge the FCA to ignore the suggestion that a duty of care might be limited to “particular classes of consumer”. That way lies unnecessary complexity and the potential for error and injustice. Any inclusive list of “particular classes” is also a list that excludes. Confining the duty of care to particular classes would also eliminate the peculiar advantages of principles-based regulation, namely the flexibility of the principle in an industry of which persistent innovation is a defining characteristic. This is an advantage not to be sacrificed lightly.

In the debates on this issue—including those in the other place—not only Mr Glen, but the noble Earl, Lord Howe, the noble Baroness, Lady Kramer, and several noble Lords have referred to the prevalence of asymmetric information in retail financial services. As we know, this renders markets inefficient. In retail financial markets, asymmetric information results in excessive risk being loaded on to consumers. A duty of care will rebalance risk by shifting the balance of risk from the consumer back towards the provider, which in an efficient market is where it should be.

However, the FCA must be alert to a potential consequence. This may well result in some financial services providers deciding to withdraw from the provision of services where previously they happily dumped the risk on consumers. This increase in exclusion would be contrary to the intent and spirit of the Government amendment. We should therefore emphasise that having the status of an authorised person in financial services is a privilege, and with that privilege comes responsibility. Indeed, as Mr Glen remarked in the other place,

“authorised persons owe a duty of care to consumers.”—[Official Report, Commons, 26/4/21; col. 84.]

He is quite right. It is the responsibility of financial institutions providing financial services not to withdraw but, on the contrary, to play their full part in tackling financial exclusion. I am sure that the FCA will address this issue as it draws up its new general rules on the level of care.

--- Later in debate ---

[Baroness Kramer (LD)]

My Lords, I will be brief. My noble friend Lord Sharkey comprehensively answered the points raised by the Economic Secretary on Monday and by the noble Earl, Lord Howe, today in rejecting this amendment. I should point out that if the Government thought that the amendment was not quite correctly finessed, they could easily have brought in an amendment in lieu that would have achieved relief for mortgage prisoners, and they have chosen not to do so.

The nub of the problem is straightforward. Would the financial experience of a mortgage holder be the same if his or her mortgage had been sold by the Government to an active, rather than an inactive, lender? Even the Government do not deny that the answer to that is no. The difference in experience between those whose mortgages were held by active lenders, compared with those whose mortgages were sold to inactive lenders, has been markedly different. Those whose mortgages were held by active lenders that did not collapse in the 2008-09 crash have been able to take advantage of the fact that rates have fallen very sharply and have been offered a whole variety of new and different deals, as part of the normal practice of banks in dealing with their mortgage opportunities and portfolios. Those who ended up in the hands of inactive lenders have faced between limited options and none, and have been unable to take advantage of interest rates falling exceedingly sharply.

That is the only issue at play here. To compare those mortgage prisoners to people today seeking a mortgage is to look at an entirely false set of circumstances. I am concerned that the Government are choosing not to rectify the situation. It was the Government who chose to sell those mortgage assets to inactive lenders. They did so in good faith and without any expectation that the mortgage holders would end up in a different position from their peers who had taken out mortgages with institutions that did not fail. I understand that that was not an intentional process, but, regardless, the Government remain responsible for their decisions when they sold off those assets.

People are genuinely suffering and I ask the Government that the very small measure that my noble friend Lord Sharkey begged for at the end of his speech—that those individuals could at the very least be protected from foreclosures as we exit from Covid and the rules change on repossessions—could be put in place. The Government would then have an opportunity to justify the arguments made in both Houses that they are genuinely trying to find a solution to the problems and devastation that so many individuals face.

[Lord Tunnicliffe (Lab) [V]]

My Lords, we have not made as much progress on this issue as many people, including thousands across the country, would have hoped. That is not through any lack of effort. The noble Lord, Lord Sharkey, and my noble friend Lord Stevenson have been tenacious in their pursuit of change. However, for that to be possible, both sides must want to work towards a favourable outcome.

I said on Report that we were not convinced that this amendment provided the answer to the long-running problems experienced by mortgage prisoners. It certainly provides an answer, but I accept the argument that there would be consequences for the mortgage market as a whole. With this in mind, colleagues offered an alternative option in what was then Amendment 37B. Your Lordships’ House has a reputation for being constructive and, in that spirit, the noble Lord, Lord Sharkey, and my noble friend made further offers to look at any text that the Treasury would be prepared to bring forward. Unfortunately, Ministers chose not to put an amendment on the table.

The Economic Secretary has, to his credit, demonstrated knowledge of the challenges in this area. Every time he has spoken, I have believed his wish to identify workable solutions. The noble Earl, Lord Howe, and the noble Lord, Lord True, have said similar things in our meetings; again, I have viewed their comments as earnest. The problem is that warm words do not pay bills—nor do they generally lead to lenders taking the kind of steps that are required. The initiatives launched to date have helped only a tiny fraction of mortgage prisoners, so one would have thought that the case for further action was overwhelming.

We wanted—and continue to need—the Government to take proper ownership of this issue. We welcome the fact that the FCA will conduct a further review of the options available to mortgage prisoners and that the Treasury will revisit its data on the different cohorts of affected customers. As well as following these processes closely, we will of course continue to press the Economic Secretary to do what is needed.

It is regrettable that we have not been able to achieve a satisfactory outcome on this legislation, which should have been more than another false dawn. However, Conservative MPs have rejected the case for action, and it is hard to imagine meaningful progress being made unless Ministers revise their red lines. Accordingly, we do not believe we should press this matter any further today and look to the noble Lord, Lord Sharkey, to withdraw his amendment. However, I can assure the Minister that we will return to this issue at the next legislative opportunity.