Financial Services Bill

David Mowat Excerpts

Monday 6th February 2012 Commons Chamber

[Stella Creasy]

I hope that the hon. Gentleman will use the fact that he has shares to make representations to his bank about the consumer credit market in the UK.

The consequence of doing nothing about this industry and doing nothing about how British families are being made to struggle because of the cost of credit are far too great to see. Frankly, it is not good enough for the Chancellor and the Minister to say, “Well, we have to wait until we see the research from BIS.” We have been waiting years—yes, years—for action on this issue since it was first put to Ministers.

[David Mowat (Warrington South) (Con)]

I am following the hon. Lady’s argument closely, and many Government Members are equally concerned about these practices, but will she clarify what rate of APR she thinks should be the maximum for a loan of, say, one week?

[Stella Creasy]

I have answered this question in previous debates. I do not think that we should set a single rate of APR and I do not think we should have an interest rate cap: I believe we should have a total cost cap. In the absence of the Government making progress on such a cap, however, I view the FCA as offering an opportunity to start the more effective regulation of this industry. I hope that the hon. Gentleman would agree that the opportunity to have the industry and consumers setting rates and clarifying what is excessive and what counts as consumer detriment in the listing of these products represents a way forward. That is the argument of Labour Members, and we shall seek to table amendments on that basis. It is no wonder that the number of complaints about these companies and these loans is sky-rocketing in the UK.

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[Mark Durkan (Foyle) (SDLP)]

Like the hon. Member for North East Cambridgeshire (Stephen Barclay), I shall address areas in which we need to proof and improve the Bill before it goes to another place.

I first want to express support for the hon. Member for Walthamstow (Stella Creasy) in respect of consumer credit protection. Not only lenders of consumer credit should be under the FCA, but debt collectors, brokers, retail services that sell insurance products and those offering debt management services.

Similarly, I support the hon. Member for Rutherglen and Hamilton West (Tom Greatrex). Contrary to suggestions made earlier in the debate that the Bill is about putting Parliament back in charge, it is notable that inquiries and investigations under part 5 go to the Treasury. There is no reference whatever to Parliament in that measure, unlike in section 14 of the Financial Services and Markets Act 2000, which clearly states that any such report will be laid before Parliament.

The Financial Secretary no doubt anticipated that I would mention credit unions in Northern Ireland, because their regulatory status will change in the wider context of the changes heralded by the Bill. He was good enough to receive a pick-up band of Northern Ireland MPs last week to discuss our outstanding concerns on the detail. I can assure him that we are pursuing those. We have not yet eliminated him from our inquiries, but we are making the necessary representations to the FSA and will make them to its successor, the FCA.

I wanted to talk not just about the implications of the Bill in terms of the lessons of the banking collapse, but about other provisions. The launch of auto-enrolment means that millions more people will save for a pension through the capital markets, including many low-paid workers. In recent months, we have seen that pension savers’ interests are not always put first by the industry. The spotlight has been turned on to excessive and untransparent charges, and conflicts of interests.

The fund management industry’s duties to savers are poorly understood and observed. The Law Commission has confirmed that when firms manage other people’s money or give financial advice, they have strict fiduciary duties to act in their clients’ interests—both individuals and institutions, such as pension funds, that represent large numbers of underlying savers. That fact is, of course, not generally accepted or reflected within the industry. In addition, as we have heard, because those are common law duties, they do not form part of the FSA’s regulatory approach. An explicit reference to fiduciary duty in the Bill would give the FSA a powerful tool to ensure that consumers’ interests are protected.

Examples of where consumers have suffered from those duties not being observed include unauthorised profits, and recent research shows that some fund managers made significant profits from lending out clients’ shares with only two thirds of the income from those activities returned to the fund. Of course, under fiduciary duties, any such profit should go back to the underlying investor. Another example is in relation to the exercise of shareholder rights. Asset managers, acting on behalf of pension savers, should exercise their voting rights at major companies in the best interests of the savers, without regard to the interests of the firm, but we have anecdotal evidence of fund managers being told by superiors to wave through excessive executive pay to avoid upsetting potential clients. So the interests of the business are placed ahead of the savers whose money is at stake.

[David Mowat]

I agree with the hon. Gentleman’s point about the market failure that we have seen in the pension and fund industry in the last decade or so, which is close to being a scandal. He is right that the Bill does not include a fiduciary duty, but it would give the FCA a competition requirement that, if applied properly, would prevent the market failure and the non-transparent charges that are the core of the issue.

[Mark Durkan]

The hon. Gentleman has more confidence in the extensive effect that he expects from the competition requirement. I believe that that should be complemented by this other insertion in the Bill.

During pre-legislative scrutiny—about which we heard earlier—the Joint Committee heard that the Bill was unbalanced. On the one hand, it enshrines the principle that consumers are responsible for their decisions, but on the other it does not place any equivalent responsibility on firms. The Joint Committee recommended that the Bill should

“place a clear responsibility on firms to act honestly, fairly and professionally in the best interests of their customers.”

Meanwhile, the Financial Services Consumer Panel recommended that this should take the form of an explicit fiduciary duty to clients.

In response, the Government have inserted a new principle to which the FCA must have regard, which is that

“those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate”,

having regard to the risks involved and consumer capabilities. But that new wording does not provide a high enough level of protection for customers. It clearly lacks clarity on what might constitute an appropriate level of care and stops short of confirming that those managing other people’s money owe fiduciary duties. We need an explicit clarification in the Bill.

Another area in which the Bill is remiss is the whole principle of stewardship. In the aftermath of the financial crisis, it was widely recognised that major institutional investors had behaved as absentee landlords, not doing enough to challenge risky behaviour at the banks that they owned. This had direct consequences for many of the pension savers whose money those shareholders invested. According to the OECD, in the year after the crisis pension funds lost an estimated 17% of their value.

After the crisis, we had the Walker review, and the Financial Reporting Council established the UK stewardship code, designed to encourage investors to behave as active owners of the companies in which they invest. This agenda is increasingly recognised by both the Government and the Opposition in all the recent, highly publicised arguments about executive pay and what can be done to curb it. Both leading parties in this House have placed great emphasis on more shareholder responsibility. But to date the FSA has treated this as a fairly marginal issue, appearing not to regard it as a consumer issue. It is not clear that it will be regarded any differently by the FCA.

There is no mention of stewardship in the Bill, although it is clearly relevant to the objectives of the PRA and the FCA. In particular, there is a danger that stewardship will continue to fall through the cracks in the new regulatory architecture. The PRA is likely to take little interest, because the ordinary asset managers of the firms in question are FCA-regulated, yet there is little reason to assume that the FCA will accord the issue any higher priority than the FSA does at present.

The proposed duty of co-ordination mentioned earlier by the hon. Member for Cities of London and Westminster (Mark Field) will do little to resolve that issue, because it will focus purely on reducing the burden of regulation on dual-regulated firms, rather than on preventing gaps in regulation between the new authorities. That measure will deal with an overlap as it affects the business; it will not deal with the gaps affecting consumers. Again, there is a hole in the legislation as far as consumer protection is concerned.

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[David Mowat (Warrington South) (Con)]

I agree with those who have said that we are here to make a good Bill better. The financial services industry is vital to our country, and it is possible that we lead the world in that industry more than in any other, yet it is an industry that lost us near enough £200 billion three or four years ago. We need to chart a course between not locking the door after the horse has bolted and ensuring that we establish a regulatory framework that looks to the future.

Some have said that the most important aspect of regulation is not the structure, and that may cause us to wonder why we are moving from a tripartite structure to a twin-peaks system. Many words have been used tonight, but I believe that one that has not yet been used provides the most important explanation for the failure of the tripartite structure. I refer to the word “underlap”. The structure failed because none of its three components felt wholly responsible for taking the action which was needed and which they suspected might be required. That is why the twin-peaks system is sensible. It is not a “quartet”. I think that the shadow Chancellor’s point about a quartet indicated that he did not understand the issue of underlap or take it at face value. Undermining the responsibility of the Governor of the Bank of England by asking his deputies to act as whistleblowers takes us back to that structure of underlap.

The Bill could be improved in three respects. First, I want to talk about the importance of international and European co-ordination, about which my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley), the Chairman of the Joint Committee, talked at some length. I have a little more sympathy for Mr Barnier than he has. Secondly, I want to talk about competition. Thirdly, I want to talk about the link between the Bill and the work of the Independent Commission on Banking and the Vickers report.

We are regulating two types of entity in the banking sector, those that are predominantly in the United Kingdom and those that are international, and I believe that the UK entities have been regulated to death. Apart from the ring fence, the capital requirements, all the buffers, the tier 1 and tier 2 capital and all that goes with it, I believe that we have fixed the problem, but one issue is still out there. If I were to predict where the next crisis will come, I would say that it will come in the international banks that straddle boundaries and continue to grow in complexity and scope: the investment banking and brokering parts of organisations such as Goldman Sachs, HSBC, Deutsche and BarCap.

Collectively, those organisations control $4 trillion of derivatives. I do not fully understand the economic purpose of $4 trillion, but I do know that regulating those entities is outwith the competence of a nation state, and we must be careful that we do not think we are doing it by passing a banking Act within our nation state. The organisation within those banks is global, the way in which they look at themselves is global, and the way in which they move capital around is global.

The Joint Committee took evidence from the Governor of the Bank of England, who explained that he would supply liquidity to an overseas bank with a subsidiary in the United Kingdom that wishes to fund activity in South America. The issue is global, and I want to talk about MF Global, the derivatives trader that went bust in the middle of October. Amazingly, the organisation was considered to be outside the scope of the PRA, yet its balance sheet was more than £40 billion. The capital flows between the USA and the UK were huge, and there now appear to be issues of insider dealing. Between £1 billion and £2 billion of customer funds have been lost. What happened to that bank is a model for the kinds of problems that we will have in controlling the financial system over the next two decades, and we need to focus on such organisations. It was a relatively small bank, only a tenth the size of Lehman Brothers, but its problems crept up on us and took us completely by surprise. There are many more banks and shadow banks like it. I would like the Minister to acknowledge this issue. It is not enough simply to say that we have colleges of regulators. I believe that this is the area in which the next crisis will arise. If I am right, I could be made Business Secretary.

The hon. Member for Foyle (Mark Durkan) mentioned the pensions industry. The important aspect of the Bill is the competition objective. The City and the financial services industry would benefit from the systematic application of competition. The problem with systemically high salaries is not, in my view, the bonus culture; it is that there has not been enough competition in the industry to bring the salaries down. That can occur when the barriers to entry are too high, when there is market dominance or when there is asymmetric information—that is, when the organisations have much more knowledge than the punters. That is particularly true of the pensions industry. The hon. Gentleman mentioned fiduciary duty. The fundamental problem is that the charging is too high, but the fiduciary duty requirement will not take that away, because the organisations think that the charging is all part of their applying their fiduciary duty. The funds industry needs to reach a point at which something like 31% of a pension pot no longer goes on charges in the private pensions industry, and it needs competition to achieve that. Such charging is one reason why this country is so massively under-pensioned, and the issue needs to be fixed before auto-enrolment provides a further subsidy for the industry.