Financial Services and Markets Bill

Lord Davies of Brixton Excerpts

Committee stage
Tuesday 7th March 2023 Grand Committee

[Lord Davies of Brixton (Lab)]

My Lords, I support the objectives behind all these amendments. I was going to direct my remarks specifically to Amendment 237, but I want to make a narrow but important point of qualification. I support the principle, but I cannot stop myself responding to the discussion we had earlier, led by the noble Lord, Lord Lilley, about fossil fuels. The important point about fossil fuels is that there are massive externalities—external costs—which are not caught in the market, and, unless we do something now, our children, and their children, will pay the price. It is not just a question of moving the market now; we need to stop using this stuff, which is poisoning the planet.

[Lord Lilley (Con)]

I was not disputing that; I was saying that we accept that we have to find the route to net zero, but the question is: should we phase out demand for fossil fuels, as the noble Lord’s last sentence indicated, or should we phase out supply? Which does he prefer?

[Lord Davies of Brixton (Lab)]

Both. I am not really being given that choice but, as I said, it was just a narrow point.

My question on Amendment 237 is: would you take investment advice or guidance from the Secretary of State? Is the Secretary of State even authorised to provide investment guidance or advice? I am troubled by the involvement of the Secretary of State, and I hope that we could perhaps consider a different wording if we wish to raise this on Report. If the Government want something to happen—net zero—as a matter of public policy, they have to accept the risk themselves and not pass it on to private individuals. I am talking about pension schemes, and the underlying point is that the money in a person’s pension scheme is their money, provided to them to be used in accordance with their wishes to provide them with a retirement income. Part of that retirement income depends on solving climate change—that is clear. I do not doubt the importance of taking these issues into account; I simply question the relevance and role of the Secretary of State in that process.

Over many years’ involvement with pension funds, I have seen that, when people see the massive amount of money involved, as highlighted by the noble Baroness, Lady Altmann, they see that the economic power is there, but it is there on behalf of the members’ interests and not, in principle, as a means of implementing government policies—however worthy. They might be in alignment, but the leading factor should be the members’ interests.

[Baroness Bennett of Manor Castle (GP)]

My Lords, it is a pleasure to follow the noble Lord, Lord Davies of Brixton. Since the noble Lord, Lord Lilley, appeared to be directing a question at me about whether I oppose fossil fuels, I will take a moment to answer that. Do I think that pulling up carbon which has been stored in the ground over hundreds of millions of years, which was a crucial part of delivering the Holocene that gave us 10,000 years of incredibly stable climate in historic terms, and then pumping it into the atmosphere needs to be stopped with great speed? Yes, I oppose pumping out that stored carbon.

More than that, the fact is that extracting, transporting, burning and getting rid of the waste products from that fossil fuel causes huge damage to the health of people on this planet. One in five premature deaths that occur on this planet is as a result of burning fossil fuels—that is based on a study in environmental health in 2021. So do I want to do something urgently to make this a healthier planet for people? Yes, I do. However, that is not what any of these amendments are about. These amendments are to the Financial Services and Markets Bill, and all of them are about trying to stop the crashing of the financial markets, which are also crucial to our security and health in different kinds of ways. That is what all these amendments address.

It is really interesting that we have here a set of amendments which we might, collectively, for the purposes of Committee look at how we can hone and shape—I take the point made by the noble Lord, Lord Davies. But what we have in Amendment 168 are directions to the PRA to review capital adequacy requirements. That is about the security of firms. In Amendment 201, we have directions to the FCA to direct personal pension providers. Picking up on that point, I note the figures from the Pensions Regulator’s most recent survey of defined contribution schemes, which found that more than 80% did not allocate any time or resources to managing climate risk.

Then in Amendment 233, we have sustainable disclosure requirements, so that companies would report to investors what risks they are taking with their money by not dealing with all the sustainability risks which relate to the fact that we are exceeding planetary boundaries—not just on climate but on biodiversity, the loss of ecosystems and novel entities, and on phosphate geochemical flows. All these things are taking risks with people’s money, which is what we are talking about. Amendment 233 might indeed guide us in the direction of each major company having to have a chief environmental officer, who should be of equal status and importance to a chief financial officer because it is about ensuring the sustainability of the company, as well as the sustainability of this earth. Going on to Amendment 235, we are directing the Treasury to provide government guidance on how we achieve all of this.

That is an overview but I want to pick up one specific point. I would have signed Amendment 119, in the name of the noble Lord, Lord Randall of Uxbridge, and others in a full cross-party group, had there been space. When people think about forest risk commodities, they often start by thinking, naturally enough, about timber but, if we look at some statistics, palm, beef and soya production collectively amount to 36% of global deforestation. When Orbitas, an investment body, surveyed 24 capital providers in 2020, all of which had high levels of tropical commodity exposure, not one had screened their loan books and/or investments for agricultural transition risks. I want to major on that point while we debate this today, because if we look at Indonesia, 76% of unplanted forest concessions and 15% of existing palm oil assets could be at risk—that is, financial risk—should Indonesia adopt what is seen as its essential plans to meet its Paris climate commitments.

I said that we need to look at all aspects of planetary boundaries being exceeded. We also must include water risk. Fresh water supplies rely heavy on fossil water aquifers—in the American high plains, in Mexico, in eastern Europe, in Egypt, in Arabia, Iran and China. All agricultural production of food—the big sectors globally and financially—is utterly dependent on fresh water supplies, which are not being replenished. That is a huge financial risk as well as a risk to when any of us can eat in the future, at a basic level.

Finally, I focus on Amendment 168, tabled by the noble Baronesses, Lady Worthington, Lady Drake and Lady Sheehan. I would like to work with them ahead of Report because, as others have highlighted, this focuses particularly, though not exclusively, as the noble Baroness, Lady Worthington, said, on fossil fuel exploration, exploitation and production. We must broaden this out to look at the agricultural sector, because it is an area of enormous financial risk. I draw on the work of the investment group FAIRR, which looks at the extremely high financial risks. The majority of the largest protein producer companies are at high risk for greenhouse gas emissions, deforestation, water and waste. Over 60% of them saw soya feed from areas at high risk of deforestation and have still not set deforestation targets. Fewer than one in five meat, egg and dairy firms is adequately managing the pollution of waterways from manure. Just ask the people of Herefordshire about that if you want to know more.

FAIRR finds that the volume of waste produced by the 70 billion animals processed each year is equivalent to the volume of waste produced by twice the entire human population on this planet. Only 18% of global meat and dairy producers track even partial methane emissions, even though annual methane emissions from global capital and livestock make up 44% of anthropogenic methane emissions.

We are talking about the future of our life on this planet. We are talking about a liveable planet. That is inescapable. However, today we are talking about ensuring that we do not see the next financial crash. Let us remember the last financial crash, when the cash machines were within hours of stopping working. We must do something to stop the next financial crash from being at the point where the size of the carbon bubble, the level of stranded assets across a range of sectors—fossil fuels, animal agriculture and other areas—is such that it suddenly hits the markets. The markets are not counting this now. They must count this in if we are to have a sustainable financial sector.

Financial Services and Markets Bill

Lord Davies of Brixton Excerpts

Committee stage
Monday 20th February 2023 Grand Committee

I thought a Brexit benefit was meant to be agility and speed, not atrophy, waiting even longer for even less democratic international solutions. If our regulators are not up to addressing systemic risk in UK-specific matters, find people who are and put the requirement in legislation, so it is something to point to. I am afraid that is the measure of the loss of confidence that I have, but the amendment is a perfectly rational addition to clarify that we do not have to wait for international action to solve homegrown problems. I beg to move.

[Lord Davies of Brixton (Lab)]

I broadly support the proposals in these amendments, although I have doubts and I do not think this is the final answer—I suppose that is what I am struggling to say—in part because I have yet to be convinced that the Bank of England is the appropriate holder of the knowledge on these issues. It is a highly contested area; there are strong views and a range of views.

It is not clearly understood, except perhaps by the noble Baroness who moved this amendment, that there is total confusion between different standards involved in assessing a pension fund. There are the technical provisions under the solvency legislation; the accounting standards set by the accounting bodies so that the sponsor has some idea of the ongoing liabilities to the pension fund; and the standards set by the Pension Protection Fund. They are all important, but they are not the funding standards. The funding standard is the assessment of what money is required to be paid into the scheme to fund future benefits, and none of those other three funding standards is designed to produce that result.

The technical provisions are not a funding standard, just a way of assessing whether further contributions to the scheme are required; they do not tell you what those contributions should be. Similarly, the accounting standard does not tell you how to fund the scheme; it is purely for the purposes of the sponsor, so it has some idea of its financial standing. The standards set by the Pension Protection Fund, which are a specific insurance-type approach, are certainly not a funding standard.

The problem is that there is total confusion, and I am not sure that we can look to the Bank of England in its present state of knowledge, or the financial responsibility committee, to make that assessment. The issue is: who is going to promote this debate and arrive at a conclusion?

Another point that needs to be clearly understood is that pension funds are distinct from insurance offices. They are two financial institutions of a completely different nature. Over the last 20 years we have edged to a situation in which pension funds are expected to behave as though they are insurance companies.

I support the amendments, but I raise some doubts as to whether we can really look to the Bank of England and its committee to provide the clarity that is so sorely needed on these issues.

[Baroness Noakes (Con)]

My Lords, it is a pleasure to follow the noble Lord, Lord Davies of Brixton, because he knows rather a lot about this area—far more than I and perhaps many other members of this Committee.

I added my name to Amendment 149 in this group from the noble Baroness, Lady Bowles, and have little to add to what she said on it. It was genuinely shocking to find out about the risks to financial stability that existed through the use of LDI strategies last September. Even more shocking was the fact that the Financial Policy Committee knew about them but had done very little about it. These amendments would not solve the problem but at least remind the FPC what its job is supposed to be: to identify areas of risk to financial stability and do something about it.

I did not add my name to the noble Baroness’s Amendment 159 because giving wide-ranging responsibilities around financial stability and systemic risk to three separate bodies is just a recipe for confusion and inefficiency. It is perfectly true that none of the three covered itself in glory during the LDI episode, but I do not think the answer is in this amendment.

I am also deeply sceptical about giving the FPC any role in relation to accounting standards, as proposed in the noble Baroness’s Amendment 149A. While individual accounting standards are often flawed, the underlying concept behind accounting standards is sound, because it is trying to ensure that financial statements are prepared in accordance with a consistent and coherent set of principles, and not driven by non-relevant preferences or by events. In a sense, the amendment is trying to shoot the messenger of what accounting standards are bringing in terms of the message.

Accounting standards can have real-world consequences—for example, when what is now IAS 19, which has already been referred to, was introduced, it was almost certainly one of the factors that led to the demise of defined benefit schemes in private sector companies. But that is not a reason for not applying the accounting standard. So, too, if any accounting happens to amplify financial stability risks, the problem is with risk management, not with the accounting. That should be the focus of the FPC, risk management, not the formulation or approval of accounting standards. But as I said, I firmly support Amendment 149.

[Lord Sharkey (LD)]

My Lords, I add briefly to my noble friend’s comments on the need for a proper and joint assessment of systemic risk in pension funds and their management strategies. I think the need is urgent, as the LDI debacle has shown. Indeed, there is continued turmoil and unrest in the sector. I notice that Risk.net reported last Friday that UK pension funds are exploring legal claims against LDI managers, their fiduciaries who they tasked with running the LDI strategies. Five law firms have told Risk.net that they have been approached by pension schemes invested in both pooled and segregated funds to investigate whether legal action can be taken against the relevant managers.

There are apparently also questions being asked, not surprisingly, about whether fund managers had fully explained to trustees the risks associated with LDI, a point raised by the chair of our Industry and Regulators Committee in his brief letter of 7 February to Andrew Griffiths. It is a point that has a direct bearing on the generation of systemic risk.

[Lord Davies of Brixton (Lab)]

I intended to make a second point about risk. Everyone tends to think about risk in terms of systemic risk—the finances of the country come under some pressure—but there is another risk that is not given sufficient attention, which is the risk that pension funds will fail to deliver the benefits that people expect to receive. That risk is given insufficient attention, but I hope it will be covered if there is a system where someone is given responsibility to look at risk. There is the risk of not getting out the benefits expected, as well as the risk to the financial system.

[Lord Tunnicliffe (Lab)]

My Lords, I do not particularly understand the technicalities that have been alluded to in this debate. I will just say a word or two about the bigger issue here, which is the problem that human beings as individuals and institutions have with handling low-probability, high-consequence risk. We know that younger human beings, particularly, gamble their lives on it in how they behave.

Of course, I was very close to this because, in 1988, I took over London Underground, which had just killed 31 people. In a sense, the syndrome that led to that was, “Well, it won’t happen”. The defence was that it was unforeseen—that is, the circumstances that led to that catastrophe were unforeseen. Yes, it was unforeseen because it was not looked for. It was not unforeseeable. That is the issue.

Anybody or any organisation—public bodies, in particular—that is responsible for big risks has a duty to pursue the low-probability, high-consequence risks. I think it was the noble Baroness, Lady Noakes, who said that this is about risk management. It is much deeper than individual bits and bobs. We have had centuries of knowing just how high the consequences of systemic risk can be. If these amendments can address this problem in the financial world, I hope that the Government will give them a fair wind.

Financial Services and Markets Bill

Lord Davies of Brixton Excerpts

Committee stage
Monday 6th February 2023 Grand Committee

This seems to have a lot of support in this House. It is worth noting that the Conservative chair of the Treasury Select Committee in the other place supported it too, as have a large array of organisations—people who really know what is happening out there, including Macmillan Cancer Support, StepChange Debt Charity, Age UK and the Money Advice Trust. I urge the Government to follow the advice of the people working with some of the most vulnerable in our society and accept these amendments.

[Lord Davies of Brixton (Lab)]

My Lords, I will speak to Amendment 55. I broadly support the other amendments on financial inclusion and will perhaps say a bit more about that aspect when discussing the amendments in later groups. I thank the noble Lord, Lord Moylan, for explaining many of the points on which I had questions about his amendment, although I am still unclear what is covered by the term “regulated investments”. I do not think it is defined in the legislation, so perhaps it could be clarified.

I want to add a note of caution. I am not against the idea—obviously, it is motherhood and apple pie, and we are all in favour—but our old friend shareholder democracy is coming up again, and we should recognise that it has a political subtext. The truth is that, unfortunately, that ship has sailed, the bus has left the stop and it has gone the other way. Quite rightly, reference was made to our old friend Sid: the “Tell Sid” campaign was a masterpiece of promoting a policy that has had a lasting legacy, but that legacy has not been greater share ownership—greater ownership of regulated investments. In fact, we have seen the reverse, as the noble Lord mentioned in his introductory remarks. The whole thing has gone into reverse such that now, according to the ONS, only 12% by value of UK shares, for example, are owned by individuals, with the majority of shares owned by overseas entities. It is true that other shares are owned through other bodies, such as pension funds and unit trusts, but, in total, that is less than 10%, which I do not believe provides the individual holders with any sense of ownership.

There are many reasons for the shift away from individual ownership, and I think the attitude of the regulator is only a very minor part of it. In a sense, the objectives set out in the amendment have been overwhelmed by bigger forces. There are many reasons why people do not have individual ownership; many people are too poor and simply do not have the money. Even those who have some money in savings—this is a bit of a caricature—have it for rainy days. Regulated investments are not necessarily, depending on the definition, the best place to put your rainy day money.

My concern is the extent to which this amendment suggests it is advisable for people to use their money in this way. It would be very unfortunate and of great concern—perhaps the noble Lord can give me an assurance on this—if the regulatory bodies by implication were providing investment advice. I certainly do not think investment advice belongs in an Act of Parliament.

[Baroness Twycross (Lab)]

My Lords, I declare an interest as London’s Deputy Mayor for Fire and Resilience, as risks associated with access to cash were noted as a risk to financial inclusion in the London City Resilience Strategy published in 2020.

I am grateful to my noble friend Lord Tunnicliffe and the noble Baroness, Lady Tyler, for allowing me to add my name to their excellent Amendment 117 on financial inclusion. I will speak particularly on digital inclusion. The other signatories have already outlined in much better words than I could why this amendment is required. This amendment would ensure that the heart of this legislation takes account of the needs of the most vulnerable and that we have the opportunity to mitigate the risk that a significant minority of the population may be unwittingly left behind or excluded from crucial financial services. This amendment would be an important addition to the legislation. I agree with my noble friend Lord Tunnicliffe that this is not party political. It is a really sensible and pragmatic measure which should afford significant protection.

On financial inclusion, I ask noble Lords to note specific issues of digital inclusion. This relates to financial inclusion as, without access to a smartphone or computer, it is almost impossible to carry out online banking or transfer money to a family member or a business.

I apologise for using a string of statistics, but beneath them there is a significant minority of the population whose stories and suffering because of financial exclusion often get missed. These people may be unable to access basic banking services online, relying heavily on cash or even cheques, and may struggle to pay for very basic things we all take for granted—for instance, automated parking.

Latest figures from the ONS estimated that, in January to February 2020, 96% of households in Great Britain had internet access. This increased from 93% the year before and 57% in 2006, when comparable records began. Although this number is increasing, and statistically it looks as if there is not a huge number of people without internet access, in the same period 76% of adults were using online banking. This leaves a significant minority who still do not. Estimates suggest that over 7 million adults in the UK—around 14%—could be classed as potentially financially excluded, with around 5.8 million having no record of an open or closed bank account. There are well over 600,000 people who could be classed as credit invisible, with the issues that causes for affordable credit.

Digital exclusion’s effects fall disproportionately, and research by the Centre for Social Justice has found that digital exclusion is significantly higher among those on the lowest incomes. It has a disproportionate impact on those who can least afford it. A fifth of adults with a household income below £15,000 are digitally excluded, compared to just 1% of those with an income of £50,000 or more. In turn, this adds to the poverty premium they already pay, as they cannot access the best prices or deals. This poverty premium, which has already been mentioned in this debate, includes borrowing and other financial services, so the proposed duty to be placed on the FCA would ensure that it, as well as the Government and the banking sector, can act to mitigate the risks posed by increasing digitalisation of the sector.

I note that technology often moves faster than we can imagine, Covid changed behaviours that now cannot be unchanged, and any duties imposed on the FCA in relation to financial exclusion will need to assume that the discussion about cash versus card that we are currently having will move to card versus phone, as well as include other technological approaches. Ensuring that the FCA has oversight over that would provide additional protection for the most vulnerable in our society, and I hope the Minister sees the merit of safeguarding which this amendment would provide and agree to include it in the Bill.

--- Later in debate ---

[Lord Davies of Brixton (Lab)]

My Lords, like my noble friend Lord Hunt, I make a point in my amendment about the link between financial fraud—in practice this now broadly means “online scams”—and mental health. I made this point last Wednesday, in dodging between the Committee and the House, when I raised this issue in the context of the Online Safety Bill. The same issue arises under this Bill and should be dealt with.

There is no doubt that people who have problems with their mental health are, for a variety of reasons, more vulnerable to fraud than people generally. According to a recent survey, people with mental health problems are three times more likely to say that they have been the victim of an online scam than people generally. In reverse, scams are a threat to people with normal health that risk their mental health.

I will talk about this in a bit more detail during debate on the next group of amendments, but we must understand that the result of fraud, however perpetrated, is much misery, destroying people’s finances, in many cases their families and, in some cases, tragically, their lives, so the Bill should address the issue and face up to the need to provide adequate protection. Anyone can fall victim to a scam, but people with mental health problems are at particular risk and can suffer more as a result. We must do what we can, therefore, to improve scam protection and ensure that, when people fall victim to scams, they receive adequate support.

I must pay tribute to the great work being done on this area by the Money and Mental Health Policy Institute. It has drawn attention to the fact that although harm can arise in diverse areas—gambling, retail and scams—across them all, including financial services, there are recurring themes. There is the lack of friction in transactions, advertising of investment opportunities, and high-pressure techniques applied which can put people under pressure, particularly in online spaces.

The institute concludes that these concerns have, up to now, gone relatively unchecked and underexamined, with current regulation either lacking or poorly matched to the real environments in which people find themselves. Although the Online Safety Bill has an important role in this area, it needs to work with the regulations in this Bill to address the problems that cause so much misery.

[Lord Flight (Con)]

My Lords, might there be a case for the regulators to play a more active role in addressing fraud?

--- Later in debate ---

[Baroness Kramer (LD)]

My Lords, I am speaking a little earlier than I usually do on my amendments in case others want to join in on the Equitable Life issue. I thank the noble Baroness, Lady Altmann, for signing my first amendment; it is hard to tell what happened with the second. I hope she signed both of them. Yes? Fantastic.

I want quickly to follow up on the comments from my noble friend Lord Sharkey. Perhaps the Minister can clarify this for me. She will remember that the PPI scandal was widely spread across the industry. It was not unique to one or two companies, therefore no company that invested in that mis-selling was behaving as an outlier. Again, when interest rate caps were inappropriately sold to small businesses, it was not the action of one or two particular banks. It was industry-wide, therefore nobody was the outlier. Can she explain to me what this new consumer duty will contribute to enabling the FCA to act on these kinds of abuses? She will note that the FCA did not act until there was a major scandal and a huge amount of public pressure and pressure in Parliament because, when it looked at it, it could see no basis for action. Perhaps she might tell us how the consumer duty would have worked in those two key cases. I am sure that the Government must have tested those cases in coming to their decision to support the consumer duty, so I think she will be able to give us clarification on that.

Both of the amendments in my name arise out of the Equitable Life policyholder cases. I thank the Equitable Members Action Group, which has been frankly magnificent in support of the victims of the collapse of Equitable Life. It has fought for them in the past and continues to fight for justice.

Amendment 225 is a direct plea for compensation. When Equitable Life collapsed, 1 million people lost a significant part of their retirement savings. In 2008, the Parliamentary Ombudsman concluded that the victims’ losses were directly attributable to a decade of serious, serial regulatory maladministration.

The ombudsman made 10 determinations of maladmin-istration: one against the DTI; four against the Government Actuary’s Department; and five against the FSA, which

“resulted in the true financial position of the Society being concealed and misrepresented”.

I cannot think it extraordinary that, in a situation such as that, one would have expected the loss to the victims to have been remedied in full. In recommending redress, the ombudsman said that she would

“normally expect that, where appropriate, such a loss should be remedied in full”

and she called for the Government to

“fund a compensation scheme to put those people who have suffered a relative loss back into the position that they would have been in had maladministration not occurred.”

The Government later accepted that the amount of compensation to achieve that would have amounted to £4.5 billion but only £1.5 billion in compensation was announced by George Osborne. Some 37,000 with-profits annuitants were fully compensated but a further 10,000 received only £5,000—or £10,000 if they were on pension credit—because they took their annuities before September 1992. The vast majority of the victims—895,000 people who were not with-profits annuitants—received only 22.4% of their acknowledged losses. My amendment would carry out the recommendation of the Parliamentary Ombudsman and put everyone back into the position that they would have been in had maladministration not occurred.

This leads to my second amendment, Amendment 226, which would establish in law a requirement that, when the ombudsman finds maladministration by the regulators or government departments, all consumers affected

“are put back into the position they would have been in had that maladministration not occurred.”

Just imagine how we would react if a bank decided that, instead of paying the full compensation it owed, it would pay just a portion of it. I cannot see why the Government should be treated differently from an entity such as a bank. We would expect compensation to be paid in full.

How can we ask people to turn with confidence to the Parliamentary Ombudsman when recommendations are watered down after the fact? How we ask people to save when a rogue society—I think that describes Equitable Life quite well—cheats them? The Government make appalling mistakes to the level of maladministration —that is a very high bar; it is not a low bar—and then will not make it right. Many of the victims are now in their eighties and nineties so time is running out for justice; indeed, many have died without justice. That is the reason behind my two amendments. I very much hope that there is support for that perspective; indeed, I hope that we will finally see support from government.

In making a brief comment on the amendment proposed by my noble friend Lord Sharkey, on a return to a proper duty of care—it is one of the most important amendments that we are considering today —I want to stress, in this context, the private right of action. It seems to me that, without a proper duty of care or private right of action, we can never make banking institutions or other regulated financial services sector institutions live up to their full responsibilities to consumers.

[Lord Davies of Brixton (Lab)]

My Lords, I support all the amendments in this group. I dipped down the order a little because I wanted to hear what the noble Baroness, Lady Kramer, would say on Equitable Life. I have nothing to add. I was an Equitable Life policyholder twice over and no one came out of that whole sorry saga well. I do not think that all the necessary lessons have been learned, but that is perhaps for another debate.

I will address my Amendment 77. I am sure all noble Lords accept the principle that financial regulation should pay regard to the particular problems faced by people who have problems with their mental health. The issue is not about the principle but about whether it requires or deserves a place in Section 1C of the Financial Services and Markets Act 2000. I think it does, which is why I start by re-emphasising something. Many noble Lords might have heard this part of this speech before, because it has arisen in debates on the Online Safety Bill and on the last group—although the personnel attending this part of the Committee has changed somewhat, so I am not that embarrassed at repeating myself.

There are strong links between having a mental health problem and experiencing worse financial outcomes. Either a financial problem leads to poor mental health or pre-existing poor mental health leads to financial problems. Either way, mental health difficulties all too frequently make it harder to earn money, manage spending and get a fair deal on products and services. Life is likely to cost more precisely when we have less money available to spend.

Facing financial difficulties should not result in needing mental health treatment, but too often these things come hand in hand. Financial difficulties do not just cause stress and anxiety; this is often made worse by the follow-up actions—collections activity and having to go without essentials. It is not just an occasional problem. Here I must pay tribute again to the work of the Money and Mental Health Policy Institute, which in a series of reports has amply illustrated the scale of the problem and the relationship between good mental health and well-regulated financial markets.

Common symptoms of mental health problems, such as low motivation, unreliable memory, limited concentration and reduced planning and problem-solving abilities, are just the things that make managing money significantly harder. These symptoms can also make it more difficult to interact with financial services firms. For example, people with mental health problems are three and a half times more likely to be in problem debt than those without. Just under half of adults in problem debt also have a mental health problem. In nationally representative polling from November last year, the institute found that around half of those who were behind on multiple bills have had suicidal thoughts as a result of the increasing cost of living. More than 100,000 people in England attempt suicide while in problem debt.

A problem we face is that communicating with financial services providers can be particularly challenging for people with mental health problems. Three-quarters of people with mental health problems found at least one communication channel difficult to navigate, with four in 10 saying they found it difficult or distressing to make phone calls, for example. This has to be taken into account in FCA guidance. Part of the problem is that providers simply do not have the information about their customers to enable them to make better decisions. That is a crucial issue that will have to be addressed.

Financial Services and Markets Bill

Lord Davies of Brixton Excerpts

Committee stage
Wednesday 25th January 2023 Grand Committee

[Baroness Bowles of Berkhamsted (LD)]

My Lords, for the purposes of Committee I declare my interests in the register, in particular as a non-executive director of the London Stock Exchange.

I will comment only briefly in this debate because, as others have said, it touches on some issues that run throughout the Bill. This is a matter of great importance: how we transpose the legislation and get the benefits of that transposition into UK law. If we have the flexibility, we ought to be able to use it, but financial services are our largest-earning industry, and I believe it is right that Parliament has to be able to keep track of what is going on and why when there are changes, and, as has already been pointed out, to have its attention drawn to significant changes.

If this amendment comes round again on Report, I would also like to see in it a report on the resulting change to the regulatory perimeter. Quite a lot of change is already going on and it is not necessarily something that we have had our eye on. Some of this change will be entirely at the behest of the regulators rather than in the hands of government. We will come across this later. It was always clear with EU legislation—maybe irritatingly so, in some instances—that the regulator “shall” do something, which did not give it any room for manoeuvre if it thought something did not need to be done. It looks like we will give our regulators the bits of wriggle room and the flexibility that we want, but it is wholly right that there should a report back to draw to the attention of our House and those who scrutinise this the intended difference in the regulatory perimeter, among other things, so that we can watch it and see how it goes.

I will return to the regulatory perimeter in many ways, because one of the problems is that once something is inside that perimeter, a whole truckload of things that were not really necessary might come along. AIFMD might be a good example of that. It is a whole load of extra reporting: where has it gone, what has happened to it, and has it done anything?

At the same time, if bad things are going on, you want there to be some kind of powers of intervention. It should not be a whole caboodle, with lots of rules and regulations and reporting on one hand but nothing on the other. We need to be able to do the things that are in the middle and bridge that gap. Given the way the edges of what is or is not a financial service are getting more and more blurred, what with the big tech industries and so on as well as the more nimble fintechs, we need that ability to ensure that where there is harm there is a route for action, without it having to mean that the whole kitchen sink of reporting is thrown at it across the board.

[Lord Davies of Brixton (Lab)]

My Lords, I thank the noble Baroness, Lady Noakes, for pointing out that the process here differs from that in the retained EU law Bill. Could the Minister in her response set out more clearly the differences between the process here and the process in the other Bill, and the reasons for the differences?

[Lord Thomas of Cwmgiedd (CB)]

My Lords, I have just one brief point. I agree with the comments so far made that this may not be the appropriate place to deal with the whole problem of delegation, because this deals with revocation, although the amendment sensibly deals with what is inevitable, which is the replacement. It seems to me that parliamentary scrutiny is essential. We need to come back to this time and time again.

It is essential because, unlike the position of a Minister or that of a Government, we have, first, the issue of the accountability of regulators and, secondly, we do not want to politicise regulators. That is Parliament’s job. Therefore, we have to scrutinise this whole area, where we are moving financial services to regulators and away from being dealt with largely through a political process in the European Union. We are hoping to make great improvements, but the one thing we are losing is the input of the political process. One cannot pretend that the direction of financial services policy is not a political question as well as a regulatory question. Politics should be for this House and, although I hate to use this word, we should not taint the regulators with politics.

Financial Services and Markets Bill

Lord Davies of Brixton Excerpts

2nd reading
Tuesday 10th January 2023 Lords Chamber

[Lord Davies of Brixton (Lab)]

My Lords, I should mention that I am a fellow of the Institute and Faculty of Actuaries and, in one way or another, have worked in the financial services industry throughout my professional career, albeit generally on behalf of consumers.

The Bill is in effect a Brexit Bill, as emphasised by the two previous speakers, but the Government are taking the opportunity to pursue wide-ranging changes in the way the industry is regulated. This has led to the concerns which have been expressed and will be expressed subsequently in the debate. For my part, my main concern is to ensure, given any changes, that the interests of consumers are fully protected. The industry owes a duty of care to consumers, and how this should be implemented needs to be set out clearly and directly in the Bill.

Against that background, I want to highlight one aspect of providing care for consumers where more needs to be done. Mental health and financial circumstances are clearly linked. Problems with your mental health can make it harder to earn money, to manage spending and, crucially in the context of financial services, to get a fair deal on products and services. Facing financial difficulties should not result in needing mental health treatment, but too often those things come hand in hand. Financial difficulty itself causes stress and anxiety, but this is often made worse by, for example, collections activity or having to go without essentials. It is important, therefore, to understand the scale of the problem. In any given year, one in four people will experience a mental health problem, and the pandemic and the cost of living crisis have made things worse.

Common symptoms of mental health problems, such as low motivation, unreliable memory, limited concentration and reduced planning and problem-solving abilities, can make managing money significantly harder. Those symptoms can also make it more difficult to interact with financial services. For example, four in 10 people say that they find it difficult or distressing to make phone calls. Experiencing a mental health problem can also make people more vulnerable to fraud and scams. People with mental health problems are three times more likely to report that they have been the victim of an online scam than other people.

The relevance of all this to the Bill is that the financial services industry needs to be placed under an explicit obligation to act responsibly towards its customers who have mental health problems. The industry needs to recognise and understand the nature and scale of these problems, it should be placed under a duty of care towards its customers, and it should be required to take active steps that will minimise the potential difficulties faced by those who have or are at risk of having mental health problems that are associated with their finances. Obviously, this will be of benefit to the individuals concerned, but it will also relieve much of the pressure on our mental health services, and, finally, it will be of benefit to the financial services industry itself in not accumulating bad business.

Social Security (Class 2 National Insurance Contributions Increase of Threshold) Regulations 2022

Lord Davies of Brixton Excerpts

Tuesday 6th December 2022 Grand Committee

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, in the Autumn Statement, the Government set out their prioritisation for taxation to be fair by following two broad principles: first, that we ask those with more to contribute more; and, secondly, that we avoid the tax rises that most damage business.

Noble Lords will remember that the National Insurance Contributions (Increase of Thresholds) Act 2022 increased the point at which class 1 and class 4 NICs are paid to align with the personal allowance for income tax. As a result of that legislation, almost 30 million working people are better off. We are here today to discuss the final element of the Government’s ambition to align national insurance contribution thresholds with the personal allowance for income tax.

I note that, in its 19th report, the Secondary Legislation Scrutiny Committee raised these regulations as an instrument of interest. The regulations introduce a new threshold within class 2 NICs from which self-employed individuals start to pay class 2 NICs. This will be known as the lower profits threshold. Class 2 NICs will now be due only if profits exceed the new lower profits threshold, set at £11,908 for the 2022-23 tax year.

The new lower profits threshold will be aligned with the personal allowance. However, the threshold is being set at £11,908 for 2022-23 to reflect the fact that personal NIC thresholds were increased from July this year, meaning that individuals will benefit from an increased threshold for nine months of the tax year. For 2023-24, the self-employed thresholds will be set at £12,570. This means that no one will pay a penny of income tax or national insurance contributions on their first £12,570 of income from 2023-24 onwards, allowing people to keep more of what they earn.

However, this measure goes further. Class 2 NICs are the mechanism by which the self-employed become entitled to certain contributory benefits, such as the state pension and statutory maternity pay. To ensure that individuals do not lose access to their benefit entitlement, the existing small profits threshold will be maintained as the point at which the self-employed gain access to certain contributory benefits. This means that individuals will benefit from the increased threshold for paying class 2 NICs without losing their entitlement to contributory benefits.

This measure will apply retrospectively from the start of the 2022-23 tax year, in line with the provisions made in the parent Act. This means there will be no delay in this measure benefiting around 500,000 self-employed individuals, saving them £163.80 a year. Changes will be delivered via the annual self-assessment process for the vast majority of customers, following the end of the tax year.

These regulations fulfil the Government’s obligation to increase the point at which the self-employed pay class 2 NICs. Importantly, they ensure that thresholds are aligned and our tax code is simplified. I beg to move.

[Lord Davies of Brixton (Lab)]

My Lords, as a supporter and fan of national insurance, I did not want these regulations to pass unnoted. I am a believer in the national insurance system—I guess there are not many of us left—where people pay contributions and that provides entitlement to national insurance benefits.

It has been understood, from the beginning, that there are people in employment and people who are self-employed. For practical reasons, different sets of rules have to apply to each group of workers. Nevertheless, the objective should always be neutrality in the financial impact, otherwise it is bound to give rise to issues of financial arbitrage regarding being employed or self-employed. That is all well understood. I will avoid going off down the IR35 track; there will be plenty of other opportunities to pursue that.

On the face of it—I would be interested in the Minister’s views—this change might be seen as a move towards reducing inequality between the employed and self-employed. However, in practice, it increases the difference. The tell is the fact that there is a cost, in a normal year, of £100 million. In the context of the figures we have seen in recent Budgets, that is not an enormous sum, but it suggests that this is a move away from neutrality and that it further increases the advantages that people perceive in being self-employed as opposed to being employed, with all the problems that flow from that. The background to this is clearly the extent of the acknowledged problem of fake self-employment for financial reasons. Perhaps the Minister would indicate, in broad terms, quite how this change fits in with what I hope is an understanding that there should not be excessive financial advantages in being self-employed.

I heard what the Minister said about the changes to entitlement to benefits. I emphasise that, in achieving neutrality between employed and self-employed contributions, there should equally be neutrality between the benefits paid to people who have paid the different types of contribution.

[Lord Tunnicliffe (Lab)]

My Lords, I welcome the Minister’s introduction of these technical amendments by His Majesty’s Revenue & Customs. As she outlined, the practical impact is to implement the self-employment element of the Government’s commitment to align the trigger points for national insurance contributions with the income tax personal allowance. The SI will also ensure that individuals with profits at or above the existing small profits threshold but below the lower profits threshold are treated as if they have paid class 2 NICs. This will ensure that those individuals continue to be eligible for the contributory benefits, which is hugely important. We will not oppose the regulations, as they provide some much-needed help for self-employed people in the face of the current inflation crisis and probable recession.

Autumn Statement 2022

Lord Davies of Brixton Excerpts

Tuesday 29th November 2022 Lords Chamber

[Lord Davies of Brixton (Lab)]

My Lords, in her absence, I congratulate the noble Baroness, Lady Lea of Lymm, on her maiden speech.

In the Chancellor’s Autumn Statement, I was struck by the emphasis placed on public services. It merited several references, and it was one of the three “priorities” that were identified, that is, stability, growth and public services. There were mentions of teachers and nurses, and the declaration that what we needed were “high-quality public services”. Even the Prime Minister got a mention shoved into the middle of the Statement, that he is also in favour of high-quality public services. My question is: how can we expect to achieve high-quality public services when we are going to cut pay to the people who provide them? Public services are, by and large, about people; people carry out the work that we require to deliver good-quality public services. What does this plan deliver? It delivers cuts to their pay. How can you align those two factors?

In addition to that, cutting the take-home income in real terms of large parts of the workforce in itself creates the austerity that the Government claim they wish to avoid. So I am puzzled—well, I am not puzzled, because it is part and parcel of the Conservative philosophy, but inflicting the pain of the cost of living crisis on public service workers who are receiving pay increases materially less than the pay increases of the equivalent employees in the private sector is totally against what the Government claim they are trying to do.

As well as pay, there are pensions, and I shall say two things. First, I challenge the use, which Ministers have frequently adopted, of the phrase “generous public service pensions”. Public service pensions are not generous; they might be good—I would describe them as “adequate”—but to me they are the pensions that everyone should be receiving. They should not be dragged down to achieve the poor-quality pensions all too prevalent in large parts of the private sector; they are the objective at which all employment should be aimed. Using the term “generous” for such pensions is clearly wrong; it ascribes a motive of generosity. Well, I can assure noble Lords that terms and conditions of employment are never a matter of generosity—they are a matter of the rate for the job, and if the rate for the job includes an adequate pension, that is nothing to do with generosity, it is paying the rate for the job.

Secondly, I come back to the annual allowance for taxation purposes. It is an issue that is not going to go away. Implicit in the Government’s plans is that it is going to be frozen at a time when inflation is out of control; there is galloping inflation of 20% or 30% over a relatively short period, which means a significant effective increase in the impact of the annual allowance on people’s pay and their employment. It is worth reminding ourselves that the last Prime Minister promised to stem the exodus of doctors from the NHS caused by the annual allowance. The Prime Minister before that promised to fix the pension tax relief rules, and the new Chancellor, no less, has called the situation a national scandal in the report that he chaired for the Commons Health Committee.

Unlike the noble Baroness, Lady Penn, I am in favour of high taxation. I make no secret of the fact that I think that the well-off and the wealthy should be paying high rates of income tax—tax on their earnings. What puzzles me, and what I do not understand, is why they think it is worth taxing income from a pension at a marginal rate of 55%. That is what the system does. We are told that 45% is at the margins of what is considered to be acceptable, yet pensions, where people have sought to provide themselves with a decent income, are being taxed at 55%. Where is the sense in that?

Clearly, pensions taxation is a mess and needs a thorough review, but we still need some short-term measures to address the problems caused by the annual allowance. It is not just a question of doctors, although they have quite rightly fought that campaign. I recall comments made three years ago by the noble and gallant Lord, Lord Craig of Radley, who spoke about the annual effect of the annual allowance on forces personnel. He referred to the

“complex and indefensible treatment of Armed Forces pensions”

and pointed out that the annual allowance

“incurs a significant … tax charge”

that

“must be paid forthwith”

unless you use the

“irrevocable scheme pays”—[Official Report, 15/10/19; col. 72.]

approach.

The noble and gallant Lord identified that at that time there were 4,000 members of the Armed Forces who in a single year had breached their annual allowance and had to produce that financial contribution, not out of their current income but out of the income that they did not prospectively expect to receive for many years in future. So I hope that the Minister will be able to assure us that action will be taken on the annual allowance to relieve the impact that it has had on NHS staff as well as on the military, in schools, and throughout the public service.

Financial Markets: Stability

Lord Davies of Brixton Excerpts

Thursday 3rd November 2022 Lords Chamber

[Lord Davies of Brixton (Lab)]

My Lords, I first offer my thanks to the noble Lord, Lord Sharkey, for initiating this debate, and to the previous speakers. I have to declare an interest as a fellow of the Institute and Faculty of Actuaries. I have to say, based on over 40 years in the world of pensions, I find it quite difficult to cram what I want to say into five minutes—less than five minutes now.

I will, however, make three points. First, thanks to the noble Baroness, Lady Bowles of Berkhamsted, we have heard a clear exposition of the technical difficulties that arose in the episode in September. We need to understand, however, that this is a systemic problem with our pension system and the way that it is funded. It is not just a question of overleverage or pooled funds being difficult to manage. It is about the whole approach to how we fund defined-benefit pensions. There is a mistaken belief that if you look to reduce short-term volatility, that in some sense helps in the long term. The contrary is true: the real risk to pension funds is that they do not deliver their benefits, or the obverse, which is that the cost of providing those benefits is set too high, dissuading us from making adequate provision. It is a complicated subject, but this is encapsulated by this short-termism and focus on mark-to-market valuation at the behest of company accounts. That is the fundamental problem and it needs to be broken.

To address that issue, we must have a proper review of this incident and what it means for funding in general. Currently, we have an alphabet soup of regulators involved: there is the Joint Forum on Actuarial Regulation; within that we have the Institute and Faculty of Actuaries, the Financial Conduct Authority and the Pensions Regulator—it goes on. They are undertaking a review next month of what happened but we need an important and clear independent element in that review. I pressed the issue in Questions earlier in the week: I hope that the Treasury will take a more long-term view of what is happening here. We are told that three Select Committees are looking at this issue. Perhaps we will have to wait until their conclusions, but the Treasury has to take hold of this issue and look at what needs to be done, rather than relying on this alphabet soup of regulators.

Thirdly, what impact does this have on pension benefits? A lot of commentators in the industry have said that funding ratios have gone up, so it is all right. As has been explained, ratios have gone up not because there is more money—there is less money—but because of the adjustment in the value attributed to future liabilities. That is fine, but the problem is that the better funding ratio is not looking at what that means for benefits. The funding ratio might have improved, but the higher rate of inflation that comes with that reduction in interest rates will have a devastating effect on members’ future benefits. It is no good having a higher funding ratio if the benefits have, effectively, been reduced because of the impact of inflation.

Defined Benefit Pension Funds

Lord Davies of Brixton Excerpts

Tuesday 1st November 2022 Lords Chamber

[Baroness Penn (Con)]

My Lords, the Government do not agree with the noble Baroness’s assessment of the situation. Along with the Bank of England and the Financial Policy Committee, we keep a close eye on identifying and addressing systemic risks to improve UK financial stability. In 2018, the committee specifically looked at UK pension schemes’ resilience to an instantaneous 100 basis point rise in yields across maturities. The movements that we saw a few weeks ago were greater than that. As the FPC has also noted, it may not be reasonable to expect market participants to insure against all extreme market outcomes, because there can be negative effects to that as well.

[Lord Davies of Brixton (Lab)]

My Lords, I declare an interest as a fellow of the Institute of Actuaries. I am afraid that there will be an alliance of regulators and providers who will say, “Nothing to see here, we can move on”. There are questions to be answered about what damage has been done and about what we can do to ensure that it does not happen again. There is so much hidden in the investment policies of pension funds. Can the Government give an assurance that there will be a proper investigation of what happened, with an independent element?

[Baroness Penn (Con)]

My Lords, the Pensions Regulator and other regulators have said that they will want to look at what has happened and learn lessons. I also understand that the Work and Pensions Committee in the Commons is looking at this issue, including any changes to the Pensions Regulator, for example, that may need to be made. The Government look forward to reading the results of its findings.