Financial Services Bill

Baroness Primarolo Excerpts

Tuesday 22nd May 2012 Commons Chamber

[Chris Leslie (Nottingham East) (Lab/Co-op)]

I beg to move amendment 75, page 43, line 16, at end insert—

‘(3) Within a year of Royal Assent to the Financial Services Act 2012, the Treasury shall publish a report on measures to improve the stewardship of institutional investments, which may require amendment under subsection (1).’.

[Madam Deputy Speaker (Dawn Primarolo)]

With this it will be convenient to discuss the following: Amendment 45, in clause 14, page 64, line 8, at end insert—

‘(3A) In section 73, subsection (1), insert at end:

“(g) to foster ethical corporate behaviour, including respect for internationally-recognised human rights.”.’.

Amendment 38, in clause 22, page 82, line 10, at end insert—

‘(c) provide for a requirement that an employee representative should be a member of the remuneration committee of a relevant body corporate, and

(d) provide for a requirement that the remuneration consultants advising on remuneration policy shall be appointed by the shareholders of a relevant body corporate.’.

Government amendments 5 to 8.

Amendment 73, in clause 40, page 127, line 38, at end insert—

‘Complaints by small businesses

234I Small businesses—complaints and proceedings

‘(1) The Treasury and Secretary of State shall bring forward proposals within three months of Royal Assent to the Financial Services Act 2012 in the following areas—

(a) to introduce provision for collective proceedings before the court in respect of financial services claims made on an opt-out basis by small and medium sized enterprises; and

(b) to introduce provision for complaints by small and medium sized enterprises to the FCA that a feature, or combination of features, of a market in the United Kingdom for financial services is, or appears to be, significantly damaging the interests of small business.’.

Government amendment 9.

Amendment 74, in schedule 5, page 204, line 37, at end insert—

‘(2) In subsection (1) after “approved persons”, insert “and the standards of stewardship expected of approved persons who are institutional investors.”’.

Government amendments 13 to 17.

[Chris Leslie]

This important Bill took a considerable amount of time in Committee, but it was still insufficient to cover many of the amendments that will be necessary to ensure that it is fit for purpose and able to fulfil the job for which it was designed. The Opposition believe that the Bill can still be improved, so many of the proposals we did not reach in Committee or that were not addressed on day 1 on Report are in today’s amendment paper.

This long group of amendments under the generic title, “Stewardship, etc.” covers a few issues, so I would be grateful, Madam Deputy Speaker, if you would bear with me while I touch on the details. Although amendments 75 and 74 relate to stewardship, other amendments are on different topics, which I should also like to address under this group.

On amendments 75 and 74, it is important to take the opportunity to ensure that the Bill properly improves institutional investors’ stewardship of pension funds or other savings or investments. Such funds are looked after by others on our behalf. In an ideal world, those who have pensions or other savings would spend time considering where they are invested, and whether they are invested ethically or in sustainable organisations and so forth. For reasons of practicality, however, that is often impossible, and investments are often grouped together in a basket of different products, so following the detail of where funds are invested is incredibly difficult.

That is why many people choose to use institutional investors—to ensure their best interests are being served. That means ensuring a good and strong rate of return, but many people care about where their money is invested. Most of British industry is partly owned by the collective pension funds of our constituents. They have voting rights through the shares and equity they hold, but they are often exercised without reference to our constituents and delegated to institutional investors to make decisions on their behalf.

The previous Administration and this one have therefore sought to address the quality of stewardship by institutional investors. Amendment 75 is on the threshold tests in the Bill and the Financial Services and Markets Act 2000 on whether people are suitable or fit and proper, whether they have adequate resources to fulfil their responsibilities, whether they have close links with others in the sector, and so on. The Opposition felt it would be a good idea to ask Ministers to consider whether the array of reforms that should be made to corporate stewardship should be reconsidered in the light of those threshold tests.

Amendment 74 also looks to the 2000 Act and the general rules of conduct of approved persons and seeks to amend the Bill so that it addresses key aspects of the good stewardship agenda. We argued in Committee and earlier that the Bill is a missed opportunity radically to improve the stewardship of some of the key players in corporate Britain, especially those large firms—banks and institutional investors—that have such a direct impact on society at large.

The stewardship code was brought into force in 2010. We have had reasonable progress, with around 230 asset managers, asset owners and service providers signing up in the first 18 months, but sadly, the Bill does not reference the Financial Reporting Council, which is the UK’s independent regulator responsible for promoting, among other things, high-quality corporate governance. We want the Bill to do more to give regulators a proper and clear mandate to strengthen the stewardship code where appropriate and give them sufficient teeth to ensure that significant culture changes can happen. These things do matter. We have to build a framework that roots out bad habits and addresses what some people have called the principal agent dynamic—the fact that shareholders are often very fragmented and, when faced with unified managers, are often unable to make any headway. Senior executives can sometimes respond only if there is a 50% plus one coalition of shareholders.

We need to rekindle that dynamic. Some have said that it is time for a shareholder spring or awakening, and there have been some suggestions recently that certain company shareholders, at the annual general meetings and elsewhere, have begun to ask fundamental questions of the senior executives. It is the mismatch between the power that senior executives can have and the lack of power of—paradoxically—the owners of some of these large companies that needs addressing. In legislative terms, we often have debates about firm rules and fixed ways of doing business. Obviously, it would be preferable if the dynamic between owners and managers were able to ensure that we had a healthier, more open and transparent way of doing business.

I commend those institutional investors who show an active interest in how they use the voting rights of their investors and use that leverage to try and influence positive corporate behaviour by the relevant companies. It must be tempting for many institutional investors, when faced with a company perhaps with a management dysfunction or some behavioural failing, to sell up and walk away from that company. That is too often the history of such shareholding. It would often be far better if shareholders, as owners, could stay and try to fix the culture of the organisations that they own. It is that sort of change that we need to find a way of addressing. Yes, some shareholders will not want to say publicly that they disagree with senior executives, because that could affect the share price and they would therefore be affecting their own financial interests in some ways, but there are several ways in which institutional investors need to have the ability, directly or indirectly, to influence what is going on.

Protests in recent months have, in some cases, seen the rejection of some of the larger pay deals in big companies—for instance, the executive remuneration packages at Trinity Mirror, Pendragon and Aviva. The banking sector has also seen some significant shareholder disquiet, including at Citigroup with the rejection of the chief executive’s pay package. Nearly a third of Barclays shareholders voted against the pay policies in that particular company.

So there have been some signs that shareholders are becoming interested in that more active role. This is perhaps to commend the work of the Association of British Insurers, which has done good work recently in encouraging its members to take a more active role. Those members account for some 15% of the stock market, and they recently wrote an unprecedented letter to the chief executives of some of the major banks in particular, saying that they were not happy and would no longer tolerate a “business as usual” approach when it came to remuneration, especially for executive directors.

Those moves are very positive, but we should not feel that the balance between shareholders and executives is sufficient. The persistent imbalance needs addressing in a number of specific ways. For a start, a shadow is often cast across the Atlantic as many institutional investors feel that what are known as the “acting in concert” rules affect them here. To what extent can institutional investors come together and discuss with each other their ability to voice common concerns about the behaviour of managers? I have sometimes heard concerns expressed that this may somehow be in conflict with anti-trust regulations. If the Government could clarify the “acting in concert” rules, it would help to send a clear signal to institutional investors that it is possible to have those discussions, to come together to form a significant majority and to express a view about corporate behaviour.

--- Later in debate ---

[John Hemming (Birmingham, Yardley) (LD)]

Let me begin by referring Members to my entry in the Register of Members’ Financial Interests. I think that I should declare registrable holdings in RBS and Lloyds as regulated entities. I have just checked my entry in the register, and note that I have a declarable interest in Highway Capital. It is a stock exchange rather than a parliamentary interest, but I think that it should be declared because it is relevant to the debate. I also founded, and still chair, John Hemming and Company LLP, which supplies software to the financial services sector. Although it is not itself regulated by the FSA, it trades with FSA-regulated entities, so I think that interest should be declared as well.

My hon. Friend the Member for Solihull (Lorely Burt) sadly cannot be here today, although she attended 16 of the Committee’s sittings. She has, however, passed me certain comments that she has received from interested parties, which she wishes me to raise with the Minister.

Payday lending has been a substantial issue throughout the debate. My personal view is that it is not a good thing, because it traps people in many circumstances. The question of what is the best way of dealing with it is a complex one, and I think that the Government are entirely right to ask the University of Bristol to investigate it. However, I have spoken to companies in my constituency and have said that I do not think that it is a very good thing.

In Committee, my hon. Friend the Member for Solihull said that the Bill should explicitly encourage the Financial Conduct Authority to seek to maintain and extend consumers’ access to financial services that meet their needs, and that when making regulatory decisions, it should assess their impact on markets and consumers. It should place value on policy proposals and regulations that increase access to savings, protections and other financial products, and also on financial advice. In the absence of such a requirement, there would be a risk of the FCA always being steered towards a risk-averse regulation. Markets might be restricted to large groups of consumers to avoid any consumer getting sub-optimal products.

The Government seek to encourage the development of simple financial products. If we are to succeed, we must have a regulator working with the grain of the policy rather than acting as an obstacle to it, as appeared at times to be the case with the last Government’s stakeholder products initiative. Does the Minister agree that the FCA now has the “teeth” to engage with the industry and engage in issues such as the maximum number of rollovers that a payday lender should be permitted to allow? Could the FCA set a threshold for market entry? Could it impose on companies real penalties that hurt, rather than the £50,000 limit imposed on the Office of Fair Trading, and make lenders pay compensation to consumers who have suffered detriment?

Let me now turn to the reflections of industry practitioners. The smallest businesses are keen to ensure that the cost of the regulation to them is not disproportionate. Forty per cent. of credit licence holders are sole traders. What cost-benefit analysis has been carried out for the smallest practitioners?

What about the implementation time? The Finance and Leasing Association has observed that the less far-reaching Consumer Credit Act took four years to implement. It estimates that implementation of this legislation would take between five and seven years. I am sure that the Government will work with all the professional bodies in devising a sensible implementation plan, but I should be grateful for any reassurance the Minister can give.

The Association of Independent Financial Advisers is fearful about the lack of a limit on time for complaints, which it says will place a burden on provisions that it will need to make to cover this open-ended provision—

[Madam Deputy Speaker (Dawn Primarolo)]

Order. The hon. Gentleman is speaking quite quickly, but I am trying to follow what he is saying. Will he explain how it is relevant to the amendments that we are discussing?

[John Hemming]

It is not.

[Madam Deputy Speaker]

In that case, it is out of order. Perhaps we should move on, unless the hon. Gentleman is going to speak in order.

[John Hemming]

rose—

[Madam Deputy Speaker]

Order. I should like the hon. Gentleman to do it now. Otherwise I am going to sit him down straight away, given that he knows that he was out of order. Presumably that is why he was speaking so fast. I ask him to speak directly about the amendments.

[John Hemming]

The Opposition have raised interesting questions about the issues of shareholder activism and the interrelationship between shareholder activists and companies, and I would be interested to hear what the Government have to say in response.

[Madam Deputy Speaker]

Splendid; thank you. I call Lisa Nandy.