Financial Services Bill

Lord De Mauley Excerpts

Wednesday 18th July 2012 Lords Chamber

[Lord De Mauley]

My Lords, Amendment 104B, as my noble friend Lord Flight has explained, would require the FCA to work with the Department for Education to secure the teaching of financial literacy in primary and secondary schools. I am sure, as the voices around the House have confirmed, that we all agree on the importance of financial education for young people and indeed for adults. The Government share this view.

As the noble Lord, Lord Stevenson, said, finance education is currently taught as part of non-statutory personal, social, health and economic education. I think that was how the previous Government set it up. The Department for Education is reviewing PSHE education, including whether any aspects of it should become statutory as part of the basic curriculum, and will be carefully considering the position of finance education. The Money Advice Service is feeding into this review.

However, the FCA is being set up as a focused conduct of business regulator. The Money Advice Service is the appropriate body to work with the Department for Education at an operational level on matters of financial literacy. MAS was established by the FSA, and its objectives are set out in new Section 3R of FiSMA, as inserted by Clause 5 of the Bill currently before your Lordships. They include an objective,

“to enhance—

(a) the understanding and knowledge of members of the public of financial matters”.

I cannot see how MAS could discharge this function without working closely with the Department for Education.

MAS was established by the FSA as an independent body with similar oversight arrangements to the FOS and FSCS. It has a statutory function to enhance the understanding and knowledge of members of the public of financial matters and their ability to manage their own financial affairs. The FSA must take such steps as are necessary to ensure that MAS is, at all times, capable of exercising its consumer financial education function.

The FCA will take on the FSA’s responsibility for consumer protection and conduct regulation, and will oversee MAS in the same way as the FSA does now. MAS will continue to have operational independence. To give the FCA responsibilities in the area of financial education would not only risk diluting its focus but would duplicate the role of MAS. So, in short, I do not believe that this amendment is necessary. I ask my noble friend to withdraw it.

[Lord Stevenson of Balmacara]

I wonder whether the Minister can answer my point about the Private Member’s Bill which is going through the other place. It seems to me to offer a way forward on this issue. If he cannot give me a reply today because he has not been briefed on this matter, perhaps he could write to me.

[Lord De Mauley]

My Lords, I think I addressed it, although I did not express it in those terms. I said that the department is reviewing PSHE education, including whether any aspect of it should become statutory. That was intended to be my response. The noble Lord knows the Government’s approach to Private Member’s Bills.

[Lord Flight]

My Lords, as I said, this was intended, largely, as a probing amendment. I am glad that MAS is continuing with its role. I am strongly of the view that financial literacy should be part of the core curriculum. The teaching of it at present is mixed and, in general, I do not think it is adequate. We have had a useful discussion of the subject and I beg leave to withdraw the amendment.

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[Lord Flight]

My Lords, my Amendment 173D covers essentially the same point, but is in that part of the Bill that deals with the practical operation of the competition objective for the FCA. There is clearly a risk of duplication or lack of co-ordination between the OFT and the FCA, so Amendment 173D proposes a legally binding MoU setting out how the two bodies will co-operate together and who will do what. It should be made clear that the FCA would normally take the lead on competition matters in financial services and the OFT would undertake market studies in exceptional circumstances. The competition objective for the FSA is very well worded, very clear and extremely appropriate. Consumers need a healthily competitive market. I am still of the view that the PRA should have a competition objective. It is the lack of competition that led to a cartel in banking. Whenever you get a cartel you get bad habits, so, in my book, a major aspect of having a much healthier banking system is having more competition.

[Lord De Mauley]

My Lords, Amendments 104BA and 173D both relate to co-ordination between the FCA and the OFT. Amendment 104BA would require the FCA to co-ordinate with the OFT and to prepare and maintain a memorandum of understanding to be laid before Parliament and published as it sees fit. Amendment 173D, in my noble friend’s name, is similar, but the duty to co-ordinate, and to establish an MoU, relates solely to the promotion of competition. Amendment 173D would also require the MoU to make it clear that the OFT will conduct a market study into a financial services market within the regulatory remit of the FCA only in exceptional circumstances.

Before turning to the question of the need for statutory provision for co-ordination between the FCA and the OFT, it might help if I explain the approach taken elsewhere in the Bill. The Bill provides for a properly focused regulatory system in which the individual regulators have clear roles and responsibilities and the right tools to deliver them. It is right, therefore, for the Bill to provide explicitly for co-ordination and MoUs between the key players in the system for regulating financial services—the Bank of England, the FCA, the PRA, the Financial Ombudsman Service, the Financial Services Compensation Scheme and the Treasury—so that they can work together effectively without the boundaries between their roles and responsibilities getting blurred, and of course the legislation sets out a procedure for laying these documents before Parliament.

Clearly, the FCA will need to work closely with the OFT and, in due course, the Competition and Markets Authority. In fact, the FSA already has an MoU with the OFT on a non-statutory basis and the FSA is already working with the OFT on putting in place a memorandum with the FCA.

To address the need for particularly swift and effective co-ordination in cases where a large number of consumers have suffered detriment, such as the mis-selling of payment protection insurance, the FSA has put in place additional formal mechanisms for co-ordination such as the Coordination Committee of the FSA, the OFT, the FSCS and the FOS. Statutory duties to co-ordinate and maintain MoUs are not needed to underpin that co-operation. That already happens and is effective.

On the specific issue of competition, which Amendment 173D addresses, the FCA, as the lead regulator for financial services, clearly will need to work closely with the OFT, as the central competition authority. Of course, the regulators will have to co-ordinate their work so that their own resources are used effectively and duplication is avoided. Although they will need to take into account their respective regulatory objectives and priorities, powers, expertise and resources, I contend that we should allow the regulators, based on careful consideration, to develop an effective protocol for working with each other in order to promote competition.

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[Lord Peston]

My Lords, I very much agree with my noble friend Lady Hayter and with the noble Lord, Lord Flight, that competition is the best means of consumer protection. There are occasional counterexamples, but overwhelmingly that is what matters. However, it occurred to me while listening to the noble Lord’s reply that I do not now know which is the primary body in dealing with competition in the financial intermediary sector. Is there a straightforward answer to that? If I had been asked to guess, I would have guessed that it must be the new Competition and Markets Authority, because its remit is about competition, whereas the FCA’s remit is not. Can we have an answer to that? If we do not know the answer, could we be told the next time we meet who is the prime mover in this?

[Lord De Mauley]

I am pretty sure that the noble Lord is correct in his analysis, but if there is any change to that, I will write to him.

[Baroness Hayter of Kentish Town]

My Lords, the fact that the Minister does not know the answer to that seems to me to make the case for why we need an MoU. In fact, in his answer he went through the sorts of things that the OFT and the FCA would need to look at—their objectives, their resources and their method of working. We are not setting out what those should be. We are simply saying that there should be an MoU that sets out those sorts of things, things such as when one will take the lead and when the other will.

I accept, sadly, that the specifics in the amendment of the noble Lord, Lord Flight, which we were attracted to, are probably more than we could hope for from the Government. However, as the Minister has admitted that there need to be MoUs for all the other key players—the Treasury, the Bank of England, the FOS, the compensation schemes and so on—it would be extraordinary not to have one for what he now accepts is the prime competition authority: the OFT currently, but the CMA eventually. I hope that the Government will think about this again. The lack of an MoU for the prime competition authority would seem to create a slightly opaque situation for the other market players that want to know who leads on certain items. In the hope that the Minister will think about that, although he did not promise to, I beg leave to withdraw the amendment.

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[Baroness Hayter of Kentish Town]

My Lords, I was particularly grateful to hear the words of the noble Lord, Lord May of Oxford. We will shortly come to a specific amendment about a duty of care. I hope that he will be here to repeat his words in 20 minutes or whenever we reach the amendment. I also hope that the Minister can pick up a briefing note that says “support”. His face tells me possibly not.

At Second Reading, I talked about caveat emptor, not having realised that it is no longer the accepted term. I have concerns about it because it is rarely used as an excuse for ordinary consumers to say, “Oh, I lost money”; it is far more used by producers to say, “Well, we told you so”, even if it was, as the noble Lord, Lord Hodgson, said on an earlier amendment, on page 4 of small typed script of something that had been sent to them. I remain of the view that responsibility for ensuring that consumers know what they are buying rests with the provider by producing intelligible and appropriate information. We will turn to the issue of duty of care shortly.

The Joint Committee on the Bill wrote that, should it be essential for the FCA to have regard to the behaviour of consumers, the FCA duty should be amended as set out in Amendment 105, in my name and that of my noble friend Lord Eatwell. As the Joint Committee stated,

“provision of information alone will not significantly improve consumers’ ability to make well-informed decisions. The information needs to be easily understandable and accessible”.

There is widespread suspicion that many purveyors of financial products deliberately try to keep certain customers in the dark. That confusion can mean that some, blinded by graphs and numbers, sign up to a product and later down the track find themselves caught by certain clauses and conditions of which they had, sadly, been unaware.

An issue just as difficult, of course, is the ability to compare prices and thus to shop around—an essential element of the much-vaunted caveat emptor, or competition, on which the Government rely to improve services. Martin Wheatley, the chief executive-designate of the FCA, has described the difficulty for consumers in comparing products such as bank accounts, which are structured in a way that makes it really difficult to establish whether the product is good value. We all know of practitioners who talk in terms so remote from the common-sense understanding of contractual agreements that people are unaware of what they are signing up to. This was undoubtedly the case with the recent interest rate swaps.

Asked whether firms had a duty to go beyond their legal responsibility to consumers, Mark Hoban MP said in another place:

“It is in the interests of firms to ensure that consumers do understand the products that they are buying because it then minimises the risk of problems further down the track”.

Although I agree with those sentiments, that answer seems to be about not having to pay redress later, rather than trying to prevent the mischief in the first place. Unless we do something to reduce such occurrences—today we have already mentioned PPI, personal pensions and mortgage endowments—we will have learnt nothing from what has gone wrong.

However, as the amendment moved by my noble friend Lord Peston makes clear, it is not simply language—the “crystal mark” of plain English—that is important. This is about explaining the risk to which the consumer is signing up, or for which they are paying money so that someone else takes that risk in exchange for the payment. So they might buy a product that covers the risk of inflation but does not cover longevity, or vice versa. Or a product might cover their life expectancy but not that of their surviving spouse. The permutations are endless. What is key is that, in addition to the language being clear, the limits of the product should be clear so that—in the famous words—there are “no surprises”. If I buy a bottle of Coke I will know its size, volume, sell-by date and taste. Regulation has sorted out much of that. We need to give this regulator the ability to expect no less from the providers of services which they are selling to largely unsuspecting customers.

In the other place, the Minister said:

“The Government recognise that there can be significant information and capability asymmetries between firms and consumers”,

and that poor “provision of information” could be a key factor in,

“a consumer ending up with an unsuitable product”.

He therefore fully supported,

“the intention behind the amendments”—[Official Report, Commons, Financial Services Bill Committee, 1/3/12; col. 261]—

in the other place, and therefore the intention behind the amendment that is in my name in this group. I hope that the Minister will now go further than his colleague in the other place, who accepted only the intention behind the amendments, and that he will accept the amendments as they stand. If it would make him feel better, perhaps he could agree to the intention now and bring back a suitably worded amendment on Report.

[Lord De Mauley]

My Lords, this group of amendments is concerned with the information provided to consumers, so that they are able to make empowered choices and decisions. Amendment 104C seeks to add a new ‘have regard’ subsection to the list of matters that the FCA must consider in advancing its consumer protection objective—namely,

“the need to inform and educate consumers with special emphasis on the unavoidability of some risk”.

I agree with the noble Lord that consumers need to understand that there will necessarily always be an element of risk involved in engaging in a financial transaction, and that they must consider carefully their own risk appetite and the ability of their personal finances to absorb any loss, and enter in to any contract with full information. We cannot pursue a zero-failure regime in financial services, and consumers must understand this. The regulator cannot shoulder the responsibilities that consumers should take for their own decisions and actions, but it can take steps—as my noble friend Lord Hodgson said—to ensure that consumers have the best possible information when they make those choices.

Both financial education—which we spoke of earlier—and effective conduct of business regulation have a role to play in educating consumers about risk. The Money Advice Service will have a key role in improving financial literacy so that consumers understand the difference between available financial products and their uses, what information they should seek out before entering into a contract or transaction, and what rights they have when things do not go to plan. We covered the role of the MAS when we discussed Amendment 104.

[Baroness Oppenheim-Barnes]

On that point, the majority of those consumers who are more at risk than anyone else from misleading terms are those least likely to benefit from financial literacy tests. They will be properly informed only if this is done in a manner, and with the type of wording, that would be simple to understand, not complicated.

[Lord De Mauley]

That is right, my Lords. In fact, when we debated the previous group of amendments I spoke about the deliberations that the Department for Education is going through on that exact point, so I thank my noble friend for that.

The FCA will set the conduct-of-business regime within which firms will operate and the requirements with which they will have to comply. Just as the FSA does today, placing firms under detailed obligations to assess the suitability of products for individual clients, as well as specifying that warnings must be given to consumers who express an interest in buying a product that does not appear appropriate for their needs or their tolerance of risk. In addition, these requirements specify which risk factors must be highlighted in the case of specific products—for example, income withdrawals or the purchase of short-term annuities.

However, none of this means that it is the FCA that should be required to have regard to the need to educate consumers about the unavoidability of risk. The FCA is not a consumer education body—that is the role of the Money Advice Service—and neither is it an interlocutor between firms or advisers and consumers. So I cannot agree with that amendment.

The noble Lord, Lord Barnett, asked what an appropriate degree of protection would be. “Appropriate” is used to allow the FCA to differentiate between the different needs that consumers may have. The detail is set out in the FSA’s rules and will be transferred into the new FCA’s rules. I will not offer to send the noble Lord a copy of them because I suspect they might be quite voluminous, but if he would find it helpful I am sure I could send a reference to that particular point in them.

[Lord Peston]

Before the Minister goes on to the next amendment, my noble friend Lord Barnett’s and my amendment, if I may draw his attention to it, appears in a clause that is headed “The consumer protection objective” and refers to the FCA. How can the Minister make the illogical leap of saying that that does not concern the FCA? It says categorically in the clause that it concerns the FCA; its acronym appears under the consumer protection objective, in the words,

“the FCA must have regard to”.

It therefore seems entirely reasonable that the FCA should have regard to what my noble friend and I have suggested. You cannot possibly say that someone else should have regard to it, when the FCA is clearly a body that must do so.

[Lord De Mauley]

My Lords, I hope I have explained that the FCA is doing that through its conduct-of-business regulations and that the issue of education is dealt with in the ways that I have explained.

[Lord Peston]

As a matter of elementary logic, though, the Minister cannot wriggle away and say that the FCA is doing it some other way. This amendment is about consumer protection and the FCA must have regard to that. I would like an answer to why the Minister will not accept an amendment that says that the FCA must have regard to it in this specific way.

[Lord De Mauley]

My Lords, I think that I have said that the FCA has regard to it, but I cannot go much further than I have.

[Lord McFall of Alcluith]

Is this not just part of the muddled thinking that took place at the beginning of this whole process when the word “consumer” was changed and the name became the FCA? Consumer protection lies with the FCA, whether the Minister sees it or not. Given the muddled thinking, and given that the Money Advice Service—which, by the way, was lacerated a few months ago when it went to the Treasury Select Committee—is not a consumer protection body, we need a little rethink. The Minister should take the pills and come back, and then we can get some clarity.

[Lord De Mauley]

I am sorry that the noble Lord is confused. I do not see the confusion that he does. Perhaps I may move on to Amendments 105A and 106.

[Lord Peston]

I would still like a rational answer to what I have put to the Minister. The least he can do is to say that he would like to think about it and come up with the right answer. Apart from anything else, it would do him a world of good.

[Lord De Mauley]

My Lords, I think that I have given the right answer but I am happy to write to the noble Lord, Lord Peston, if I can express it in a way that he might find more acceptable.

On Amendments 105A and 106, it is important to note that if we are to create the conditions in which consumers can make better choices for themselves, we need to address some of the asymmetries of information between consumers and providers that still prevail in financial services. I think that that is a point that noble Lords are making. That is why the Government added new subsection (2)(c) to new Section 1C, which will be inserted by Clause 5, before the Bill’s introduction to the parliamentary process. This provision requires the regulator to consider,

“the needs that consumers may have for the timely provision of information and advice that is accurate and fit for purpose”.

This provision complements the FCA’s new power to require firms to withdraw a financial promotion and disclose the fact that it has done so, as well as a new power to disclose at an early stage to the public that disciplinary enforcement action has commenced against a firm or individual. The FSA will carry out a root-and-branch review of transparency and disclosure on the part of firms and the regulator to be completed ahead of commencement of the Bill.

I agree with many of the points made by the Committee in terms of the improvements that we want to see, but I do not agree that Amendments 105A and 106 are necessary. I argue, for example, that referring to information being “fit for purpose” is, in modern idiom, a better way of achieving the aims that we all share. “Fit for purpose” is an umbrella term that includes, for example, information being legible, intelligible and appropriately presented. Information could not be fit for purpose if it was not also those things.

“Fit for purpose” is also broader and allows the regulator to differentiate between the needs of different consumers, to adapt its approach and perhaps to place additional requirements on firms where it considers this necessary. There may be requirements that we cannot anticipate at this point. Using a broad term such as this therefore gives flexibility and allows the regulator to be responsive to changing circumstances and market conditions. Being too exhaustive in the Bill could be unhelpful. However, it is also not appropriate, as the detailed requirements will be set out by the FCA in its rulebook.

I therefore argue that Amendment 105A is unnecessary, as fit for purpose already captures information being intelligible and appropriately presented. Amendment 106 could restrict the FCA’s ability to design a regime on the provision of information to consumers, as “intelligible” is a narrower term than “fit for purpose”.

[Baroness Hayter of Kentish Town]

Before the noble Lord moves off that particular amendment, perhaps I may point out that the provision also uses the word “advice”. He has covered only the information that has to be clear, but not the point about access to advice.

[Lord De Mauley]

My Lords, I apologise if my argument covered only one aspect, but it should be taken to cover both.

The noble Lord, Lord May of Oxford, to whom I am grateful for his intervention, asked about a duty of care. Subsection (2)(e) of new Section 1C, which is headed “The consumer protection objective”, states that providers should,

“provide consumers with a level of care that is appropriate … to the … risk … [of] the investment … and the capabilities of the consumers”.

I hope that that is helpful.

I hope that I have made it clear that the Government are fully committed to improving the provision of information to consumers, and that I have succeeded in convincing the noble Lord to withdraw his amendment.

[Lord Barnett]

My Lords, I do not think that the Minister has convinced anyone. I think he said that my noble friend Lord McFall was confused, but he was not confused. None of us is confused except about the way that the Bill is drafted. The whole of this section refers to consumer protection objectives. We also have new Section 1G, on the “Meaning of ‘consumer’”, and new Section 1H. The whole lot should be removed, because we are now told that the MAS will have to deal with it. The Minister has not convinced me, and I hope that we will come back to this at a later stage. For the moment, I beg leave to withdraw the amendment.

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House resumed.

[Lord De Mauley]

My Lords, the noble Lord, Lord Patel, has withdrawn his name from the following debate. I therefore suggest that there is now time for speakers other than my noble friends Lady Jolly and the Minister to speak for up to five minutes each.