Earl Howe
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Financial Services Bill
Earl Howe ExcerptsWednesday 28th April 2021
(3 years, 6 months ago)
Lords ChamberRead Full debate Financial Services Bill 2019-21 View all Financial Services Bill 2019-21 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 193-I Marshalled list for Consideration of Commons disagreement, amendment in lieu and reason - (27 Apr 2021)
“FCA rules about level of care provided to consumers by authorised persons
(1) The Financial Conduct Authority must carry out a public consultation about whether it should make general rules providing that authorised persons owe a duty of care to consumers.
(2) The consultation must include consultation about—
(a) whether the Financial Conduct Authority should make other provision in general rules about the level of care that must be provided to consumers by authorised persons, either instead of or in addition to a duty of care,
(b) whether a duty of care should be owed, or other provision should apply, to all consumers or to particular classes of consumer, and
(c) the extent to which a duty of care, or other provision, would advance the Financial Conduct Authority’s consumer protection objective (see section 1C of the Financial Services and Markets Act 2000).
(3) The Financial Conduct Authority—
(a) must carry out the consultation, and publish its analysis of the responses, before 1 January 2022, and
(b) must, before 1 August 2022, make such general rules about the level of care that must be provided to consumers, or particular classes of consumer, by authorised persons as it considers appropriate, having regard to that analysis.
(4) The duties to consult under this section may be satisfied by consultation carried out after 1 January 2021 but before this section comes into force (as well as by consultation carried out after this section comes into force).
(5) In this section—
“authorised person” has the same meaning as in the Financial Services and Markets Act 2000 (see section 31 of that Act);
“consumer” has the meaning given in section 1G of that Act; “general rules” means rules made under section 137A of that Act.”
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.
Earl Howe (Con)
My Lords, I express my thanks to the noble Baroness, Lady Kramer, and the noble Lord, Lord Eatwell, for what they have said. I am pleased that they have both taken the trouble to read the words of my right honourable friend the Economic Secretary when responding to the debate in the other place on Monday. I was careful to frame my remarks in a way intended to ensure that there is not a hair’s breadth of difference between his words and mine.
The noble Lord made some very well-observed remarks on the risks arising from asymmetric information. However, I am happy to confirm to the noble Baroness that the FCA’s consultation will not be solely focused on asymmetry of information, important though that is; it will look more broadly at raising the level of care that firms provide to consumers—not particular classes of consumers, but all consumers.
Some hesitation—I think that is the best word—was expressed as to why there is yet another consultation. In response to that, I say that it is important that consumer groups and firms have the opportunity to comment on clear proposals and subsequent draft rule changes before final rules are set in stone. So I argue that it is a necessary step, even though I fully understand the noble Baroness’s wish for action this day. I remind her that we are talking about a consultation to be launched very shortly, and I hope that indicates that the sense of urgency which both noble Lords have indicated is right is shared by the FCA.
The FCA will and must act in accordance with its statutory objectives, which include the consumer protection objective. I come back to that point: this is not an issue that is ever lost on the FCA. With those comments, I am grateful to both noble Lords for their acceptance of the amendment in lieu, and I beg to move.
The Deputy Speaker (Baroness McIntosh of Hudnall) (Lab)
My Lords, we have a request to speak after the Minister from the noble Baroness, Lady Neville-Rolfe.
Baroness Neville-Rolfe (Con)
My Lords, I join others in congratulating my noble friend the Deputy Leader of the House and other Members of the Front Bench on the way they have dealt with the Bill and got us to this final stage. I just have a question about the consultation on the duty of care, and it stems from my experience in other areas of regulation—that is, health and safety and food safety. I have found that, where a duty of care is introduced, it is sometimes possible to change adjacent rules and regulations in a regulatory area and reduce the bureaucracy that can be a problem for both consumers and operators in the field. I would be interested to know whether that sort of work is likely to be envisaged by the Economic Secretary.
Earl Howe (Con)
My Lords, I do not have an answer for my noble friend, but her point is extremely helpful and I shall ensure that it is fed into the thinking that will be wrapped around the consultation process as it goes forward.
Earl Howe (Con)
My Lords, Amendment 8 concerns mortgage prisoners, an issue that the Government take extremely seriously. We are committed to finding practical and proportionate solutions to help this group but, as Motion B in my name makes clear, the amendment is not one that the Government can accept. As explained in Reason 8A, the amendment is neither a proportionate nor a practical response to this complex issue, and this is why the Government cannot support Motion B1, tabled by the noble Lord, Lord Sharkey.
In our previous debates, my noble friend Lord True set out the FCA’s analysis of this complex issue. To recap briefly, according to FCA data, there are 250,000 borrowers with inactive lenders. Of these, analysis suggests that 125,000 borrowers could switch mortgage providers if they chose to, even prior to the introduction of the FCA’s new rules. Of the 125,000 who cannot switch, the FCA estimates that 70,000 are in arrears and so would struggle to access a new deal even in the active market. The FCA therefore estimates that there are 55,000 borrowers who may struggle to switch but are up to date with their payments. Its data show that, on average, the 55,000 borrowers with inactive firms who have characteristics that would make it difficult for them to switch but are up to date with payments are paying around 0.4 percentage points more than similar borrowers with active firms who are now on a reversion rate.
As the Economic Secretary set out on Monday, the reason these borrowers are unable to switch is not that their mortgage is with an inactive firm; it is that they do not meet the risk appetite of lenders. For example, they may have a combination of high loan-to-value, be on interest-only mortgages with no plan for repayment, or have higher levels of unsecured debts, non-standard sources of income or a poor credit history. Similar borrowers in the active market are also very unlikely to be offered deals with new lenders.
My noble friend Lord True has previously set out the significant work undertaken by the Government and the FCA in this area, which has created additional options to make it easier for some of these borrowers to switch into the active market. If we look at Amendment 8, we see that what it proposes would be a very significant intervention in the private mortgage markets and in private contracts. It would bring with it a risk to financial stability as it would restrict the ability of lenders to vary rates in line with market conditions. The ability to vary standard variable rates allows lenders to reprice products to reflect changes to the cost of doing business and could therefore create risks with significant implications for financial stability. On top of that, the amendment is not fair to borrowers with active lenders in similar circumstances as it targets only borrowers with inactive lenders. Indeed, this cap would be deeply unfair to borrowers in the active market who are in arrears or unable to secure a new fixed-rate deal because it would not include them.
So, at the most basic level, I just do not think it is right to introduce such a significant intervention for those with inactive lenders which could cut their mortgage payments far below the level of someone in a similar financial situation who happens to be with an active lender. Nevertheless, while the Government are opposing this amendment today, I want to reiterate our commitment to finding any further practical and proportionate options for affected borrowers, supported by facts and evidence.
On Monday, the Economic Secretary set out what further steps the Government and the FCA are taking and I want to repeat those commitments today: namely, that
“the Treasury will work with the FCA … on a review to its existing data on mortgage prisoners”.
This will ensure that we have the right data
“on the characteristics of those borrowers who have mortgages with inactive firms and are unable to switch despite being up to date with their mortgage payments. The FCA will also review the effect of its recent interventions to remove regulatory barriers to switching for mortgage prisoners and will report on this by the end of November, and … a copy of that review”
will be laid before Parliament.
“The Treasury will use the results of the review … to establish whether further solutions can be found for such borrowers that are practical and proportionate.”—[Official Report, Commons, 26/4/21; col. 87.]
Within the significant constraints that I have noted, I want to reassure the House that the Economic Secretary, as the Minister responsible for this area, will continue to search for any further solutions that may provide support for borrowers with inactive lenders who are unable to switch. But, again, they must be practical and proportionate. The Economic Secretary has also confirmed that he will write to active lenders and encourage them and the wider industry to go even further and look at what more they can do to ensure that as many borrowers as possible benefit from these options.
I hope I have convinced the House that the Government are taking the appropriate next steps and have demonstrated our commitment to continuing to work tirelessly on this. Therefore, I ask the House not to insist on this amendment and I beg to move.
Motion B1 (as an amendment to Motion B)
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.
Earl Howe (Con)
My Lords, I am grateful to noble Lords who have spoken in this short debate, both for their constructive comments and for re-emphasising the genuine concerns they clearly have for this unfortunate group of people who find themselves trapped in mortgages that cause them great difficulty. I do not doubt for a second the distress that many such people are experiencing, but my noble friend Lady Noakes brought us back to some very important realities on this vexed subject. I agree with the noble Lord, Lord Tunnicliffe, that it is regrettable that we have not been able to reach full agreement on the way forward. Nevertheless, I hope my earlier remarks indicated that we take this subject extremely seriously. I am confident that noble Lords who have listened to my honourable friend the Economic Secretary speak on the subject will be in no doubt whatever of his intention to keep on top of it in the weeks ahead.
Part of the problem we face relates to the data that underpin the case that the noble Baroness, Lady Kramer, and the noble Lord, Lord Sharkey, have made. The report of the UK Mortgage Prisoners group makes accusations about the data held by the FCA, essentially saying that the data analysis is wrong. However, I put it on record that the FCA data analysis was conducted using information on the 250,000 borrowers with inactive lenders alongside a credit referencing agency dataset which includes data on 23,000 borrowers with inactive lenders. The FCA data has shown that, on average, the 55,000 borrowers with inactive firms who have characteristics that would make it difficult for them to switch but are up to date with payments are paying around 0.4 percentage points more than similar borrowers with active lenders who are now on a reversion rate. Its analysis also shows that the majority of borrowers with inactive firms are on relatively low interest rates of 3.5% or less.
It is important that, as part of the review that the Government have announced, the existing data is analysed to provide further details on the characteristics of the borrowers of most concern. That is definitely a core part of getting to grips with what more can be done in this area.
It was suggested that in the first instance the Government failed these consumers. I repudiate that suggestion very strongly. The customer protections that we set were best practice for transactions of this type—or went beyond best practice: the Government strengthened the consumer protections for the last two sales of new car loans in response to concerns raised by parliamentary colleagues.
I do not accept the points made by the noble Baroness, Lady Kramer, about the difference between those whose mortgages were refinanced with active lenders and those who found themselves with inactive lenders. The sales of those mortgages did not impact customers’ ability to remortgage elsewhere: customers with inactive lenders can remortgage with another provider as long as they meet the lender’s risk appetite. The customer protections that we insisted on for new car sales also included prohibitions on placing barriers in the way of customers remortgaging with another provider; for example, all early repayment charges are waived. These lenders are charging interest rates in line with SVRs set by active lenders.
The noble Lord, Lord Sharkey, asked about Cerberus. The customer protections in these sales were best practice in the market at the time. For the last two sales, restrictions on setting the SVR last for the lifetime of the mortgage. I add that Cerberus indicated that it was offering new products to customers but this was not part of its bid, so UKAR did not seek a binding commitment on this point. Cerberus was selected because it agreed to the consumer protections that were sought and provided the best value for money for taxpayers. I underline, therefore, that inactive lenders can, and often do, allow borrowers in arrears to make use of a variety of tools to get themselves back on track. Such tools include capitalisation of arrears, term extensions and payment holidays.
It is simply not true that the FCA has done nothing for this group of people. For example, to reflect the current Covid-19 situation, the FCA has brought forward guidance to allow borrowers who are up to date with their payments on a recently matured or soon-to-mature interest-only, or part-and-part, mortgage to delay repaying the capital on their mortgage while continuing to make interest payments. This guidance has enabled borrowers to stay in their own homes for a significant period. The FCA also confirmed that it was making intra-group switching easier for borrowers with an inactive firm that is in the same lending group as an active lender. On 14 September, the Money and Pensions Service launched online information and a dedicated phone service as a key source of information and advice for borrowers with inactive firms.
The point was made that the modified affordability assessment has helped only 40 households. The modified affordability assessment, I contend, provides an additional and important option for some borrowers who may not otherwise have been able to switch. We must just give it time to take effect. It will not be a silver bullet for all borrowers with inactive firms, many of whom have other characteristics that affect their ability to remortgage.
I will leave it there. I say again that I regret there has been no meeting of minds on this, but I also say that the Government place a great deal of emphasis on the work that is now in train. We will do our utmost to see what more can be done for mortgage prisoners as a result of the further analysis I have referred to. I hope noble Lords will see fit to agree with the Government’s Motion.