Lord Flight
Main Page: Lord Flight (Conservative - Life peer)Department Debates - View all Lord Flight's debates with the HM Treasury
(11 years, 10 months ago)
Lords ChamberMy Lords, the series of amendments in my name are among those from Amendments 187E to 187T, and are all concerned with the interaction between the Financial Ombudsman Service and the new regulatory bodies under the new order set out in the Bill. I start by saying that I have been extremely impressed with the success of the Financial Ombudsman Service and the work that it has done. When it was set up, I was slightly concerned that its brief went beyond the law, but it has established a very successful record.
I shall go through these amendments. Amendment 187E seeks to require the Financial Ombudsman Service to exercise its functions in a way that is consistent with the FCA’s strategic and operational objectives, and with its regulatory principles—on the same sort of basis on which the Legal Services Ombudsman is subject to a high-level requirement to operate within the regulatory framework for legal services.
Amendments 187F through to 187L reflect some reservations about the new requirement on the FOS to publish reports of all its determinations. While supporting transparency in key FOS decisions, these amendments are designed to focus on more purposeful disclosures, which would be more beneficial for consumers and firms than the necessity to publish all decisions. A more balanced and focused approach to the legislation should give the FOS the statutory option, rather than the statutory obligation, to publish its determinations. This option should be balanced by safeguards for a firm to challenge publications which it considers inappropriate.
Amendment 187N seeks to make the FCA responsible for responding to regulatory issues with wider implications arising from complaints, while Amendment 187P seeks to require the FCA to conduct strategic high-level oversight of the Financial Ombudsman Service to ensure that it operates in a way that is consistent with the FCA’s objectives. In particular, to strengthen the accountability of the FOS the FCA should conduct regular reviews of its overall operations, policies and procedures. This would not and should not compromise the operational independence of the ombudsman when adjudicating on individual cases.
Amendment 187Q seeks to set out that the FCA should set out a clear process for decision-making on cases requiring regulatory or legal clarification. Amendment 187S intends that the FCA, not the FOS, should make the scheme rules. The legislation should more clearly define a fair and reasonable test, and the ombudsman should be required to take into account the FCA’s objectives, laws and regulations in force at the time of the complaint. Finally, Amendment 187T would require the FOS to be obliged to consult stakeholders before it issues guidance or technical notes about its procedures and its approach to handling common categories of cases.
In addressing this group of amendments, I remind the House of my declared interest as the senior independent director of the Financial Ombudsman Service. I hope that the House will bear with me while I go through the many amendments of the noble Lord, Lord Flight, beginning with Amendment 187E. I am concerned that this amendment would begin to compromise the independence of the ombudsman service. The ombudsman’s responsibility is to resolve complaints informally and promptly by considering what is fair and reasonable in respect of each individual complaint. That role is very different and distinct from that of the regulator and it feels important to all concerned that the two are kept distinct.
In making decisions, the ombudsman is already required by the rules to take into account a series of things: the law and regulations, the regulator’s rules, the guidance and standards, the codes of practice, and good industry practice at the time. In that way it is for the regulator to interpret its objectives and for the ombudsman to reflect this interpretation by taking into account the rules and guidance which the regulator publishes. I therefore do not think that this change is necessary, but I will go further and say that it potentially risks the unintended consequence of requiring the ombudsman to interpret the regulatory objectives of the FCA directly. Given that the nature of those proposed regulatory objectives is very wide—going, for example, up to the competition objective—it does not seem to me desirable that the ombudsman service should be put into the position of having to interpret them.
Those comments relate also to Amendment 187P, which seeks to change the relationship between the ombudsman service and the FCA in a way that again risks undermining the model of an independent ombudsman service. The ombudsman should clearly be accountable, and I welcome the provisions already in the Bill to strengthen that accountability: for example, by making formal requirements which the ombudsman has already undertaken voluntarily. The ombudsman will, for example, become subject to audit by the National Audit Office—something that it has embraced by going ahead early and voluntarily asking the NAO to come in and do an audit. However, to move to a compulsory annual review on top would involve significant diversion of effort, both by the FCA and the ombudsman service.
Related issues emerge in Amendment 187S, which would give the regulator the power to decide not just which complaints the ombudsman should decide, as now, but how the ombudsman should go about doing this, which would undermine the operational independence of the ombudsman service as an alternative to the courts. The regulator already determines the jurisdiction of the ombudsman—that is, which complaints can be considered—but the ombudsman service makes its own rules, which set out how it will deal with cases. Those are its own internal procedures, covering, for example, criteria for dismissing cases, evidential requirements, delegation by ombudsmen, rules about case fees and any costs rules. The ombudsman service is required by FiSMA to consult those likely to be affected and to have regard to any representations made by them. The rules are, of course, already subject to approval by the FSA and will be by the FCA, but deciding how to resolve cases is a crucial feature of the ombudsman’s independence, and that must be retained.
A slew of amendments, Amendments 187F to 187L—the noble Lord, Lord Flight, has been prolific—relate to the publication of ombudsman decisions. I am concerned that their effect would be to undermine the main advantage of the publication of decisions, which, it seems to me, is to share a fuller picture—a complete picture, indeed—of the cases the ombudsman deals with and his approach to resolving them. As drafted, the Bill provides a very clear obligation on the ombudsman to publish decisions unless there are very good reasons not to do so. That clarity is very welcome. The ombudsman has talked to stakeholders about how he might go about doing something such as this should Parliament decide to go down that road. Many stakeholders were very supportive of the proposed approach to publish all decisions. In my view, transparency has benefits for all involved; it can help to increase the accountability of the ombudsman, but it can also mean that cases that could be wasteful may be diverted right at the outset.
Amendment 187N also causes me concern for a different reason; it might risk challenging the work of the ombudsman to provide a prompt as well as an informal resolution of complaints, which is an important safety net for consumers. If the aim of the amendment—perhaps the noble Lord, Lord Flight, could clarify this—is to enable the regulator to deal with issues that have wider implications, it is unnecessary because the regulator is already able to do this by using Section 404 powers under FiSMA to impose a redress scheme which the ombudsman is required to follow. Of course, all the FiSMA organisations work well together anyway. The ombudsman regularly meets the FSA, the OFT and the compensation service to discuss emerging issues that could develop into risks, and wider implications can thereby be tackled. Actually, many cases could have wider implications, so if the legislation says that any case with wider implications means that all similar cases should be put on hold, that could be of significant detriment to consumers by introducing potentially massive delays into the system.
My Lords, I am very tempted to say that I agree with the noble Baroness, Lady Sherlock, and sit down.
My Lords, I started off by paying tribute to the success of the ombudsman’s service. There is a clear argument here for saying that if it ain’t broke, don’t fix it. A number of the points underlying these amendments have been raised with me by the insurance industry, to a large extent in a probing fashion. I am pleased to note that quite a lot of the underlying points have already been dealt with; if there is anything ongoing which the ombudsman’s service and the FSA want to pick up between them, they can have a word with the insurance industry. On that basis, I beg leave to withdraw the amendment.
My Lords, Amendment 187TE, in the name of my noble friend Lady Hayter of Kentish Town, is essentially about the quality of information and its provision. To put it in context, I should like to go back to the purpose of the Bill. I put to the House that its purpose is to prevent or mitigate a crisis in the financial services industry. The crisis from 2007 to 2009 came from the selling of subprime mortgages principally in the US. As we know, these mortgages were repackaged and moved down the line. Eventually, they ended up on the balance sheet of what one would have thought at the time were highly sensible banks of great stature and stability.
How did that happen? It happened because of the malicious intent of the original designers of these products and the people who designed the various packages to disguise the essential weakness that they contained. But when you read the various reports about the crisis, there is no question that a fundamental part of this crisis was caused by the poor knowledge and information that passed through the system. In a sense, the poor knowledge was in two places. It was within the firms, and between the firm and the regulator. In particular, the FSA’s report on the RBS brings this out well. Essentially, parts of RBS simply were not effectively communicating with each other.
Perhaps I may add that in my estimate the US also wiped off about $1,000 billion of its overseas debt as a result of the failure of subprime mortgages.
As a great admirer of the US, I would never underestimate its ingenuity but I did not realise that that had been a principal objective. I thank the noble Lord for my improved education. Returning to my speech, the failure in RBS in particular was once again an internal management problem. The refreshingly honest report of the FSA brings that out but it goes on to criticise its own performance as a regulator. It criticises various ways in which it behaved and its allocation of resources but it also criticises the information that it was able to get during the crisis. That was because firms were unable to provide information that was sufficiently accurate, comprehensible and timely.
The Joint Committee on this Bill took a considerable interest in the whole matter of information and pointed out that in the US the,
“Dodd-Frank Act created the Office for Financial Research which was given responsibility for monitoring of systemic financial risks and, in order to undertake this task, has been given powers for the setting of data standards for the industry. In order to allow effective monitoring of systemic financial risk, the Dodd-Frank Act also requires that OTC derivative contracts are recorded in trade repositories, a step that requires standardisation of reporting across the industry”.
The recommendation from the Joint Committee, which the Government effectively rejected, was:
“The Bill should be amended to place a duty on the Bank of England (or its subsidiary the PRA) to develop information standards for the UK financial services industry and to report regularly on progress in improving these information standards in order to support financial stability”.
This amendment does its best to give effect to that recommendation.
In researching the background to this amendment, I looked over a number of areas but perhaps the most inspirational thing I came across was a speech by Andrew G Haldane, Executive Director, Financial Stability, Bank of England, at the Securities Industry and Financial Markets Association, “Building a Global Legal Entity Identifier Framework” symposium in New York on 14 March. That is a long introduction but it was called simply “Towards a common financial language”. He contended that a common financial language would improve risk management in firms because of better flows and understanding of information; improve risk management across firms; map the network of financial transactions; and, shock-horror, lower barriers to entry. He pointed out that the information standards and information systems within the industry are probably 10 or 20 years behind those in other industries, and particularly the major distribution industries.
We put forward this amendment and it will no doubt be countered by the noble Lord saying, “Well, they can do this anyway”. We are trying to say something different. We are trying to say that this is not just an enabler but a doer. It is a requirement not just that the PRA has the ability to take a positive role in the matter of information and information standards, but requires it to take a role. It is quite long so I will not go through it in any detail but it requires the PRA to require firms to report; it requires them to set standards in the manner in which they report; it requires that they should have sufficient resources to be able to use that information; and it requires them to publish reports.
The Bill has a purpose. It is about institutions, it is about governance and it is about enabling. The amendment is designed to give it some teeth. It is designed to make a requirement in the Bill. This is a “must” amendment, not a “may” amendment. I beg to move.
My Lords, I, too, am delighted to support the amendment moved by my noble friend Lady Wheatcroft. With her characteristic delicacy and discretion, she did not mention the name of the auditors in question—but I will. I believe that Deloitte has very serious questions still to answer about its audit of RBS, particularly towards the end. There were some unhealthily close relationships between Deloitte’s auditors and the senior management of RBS. I also believe that PWC has very serious questions to answer about its final audit of Northern Rock before it went bust. I am sure that the Minister will remember that in this House, I moved an amendment calling for a special audit of Northern Rock, organised by the Bank of England. The amendment was agreed, but not approved in the other place. My noble friend has put her finger on a very important question and I very much hope that the Government will take it seriously.
My Lords, I, too, strongly support the amendment moved by my noble friend Lady Wheatcroft. The first point I will stress concerns IFRS, which hugely exaggerated bank profits and hence capital in good times, and has done the reverse in bad times. IFRS has contributed substantially to the destruction of our pension schemes by discounting liabilities at inappropriate interest rates. There have been complaints about IFRS from many quarters. Accounts have been rendered almost impenetrable. Fund managers frequently have to rewrite the accounts of companies they examine in order to make an assessment of the trading state of the business.
I have consistently complained about this subject, but nothing has happened. Who is responsible? When I was shadow Chief Secretary, the point was made to me that it was the job not of Parliament but of the profession to dictate standards. That is entirely wrong. In the USA the political representative bodies have rightly taken up such issues, and it is the duty of both Houses of Parliament to do the same.
My Lords, in previous debates on the Bill we strongly welcomed the super-complaints process included in Clause 40. Particularly in a market such as this, it is important that independent consumer bodies, expert in intelligence-gathering and in touch with clients, can bring a complaint about something which is causing general consumer detriment.
However, it is not only the FCA which will regulate issues with the potential to cause consumer detriment. The PRA, via its role over with-profits policies and bank-lending ratios, might also be the regulator to intervene in particular cases of market failure. We are therefore asking that in such cases the super-complaint can be made to the PRA where appropriate. There are 25 million customers in this market, with some £330 billion of with-profits policies, so we are talking about significant consumer questions. The Bill transfers responsibility for these to the Prudential Regulatory Authority but without giving consumer bodies the ability to call conduct issues to account via a super- complaint. Why should the voices of consumers not be properly heard given the size of the market and the chequered history of some of those policies and, indeed, regulatory failures?
In the other place, the then Minister, Mark Hoban, agreed that,
“the super-complaints power should be wide enough to cover complaints about with-profit policies”,
although he did not agree that,
“the PRA should be designated as a recipient of the super-complaints”.—[Official Report, Commons, Financial Services Bill Committee, 15/3/12; col. 519.]
He seemed to think that such super-complaints should be taken to the FCA, even though it had no responsibility in this area. Despite reading that exchange and what he said very carefully, I do not understand how a complaint to one body could affect the regulatory actions of another, no matter how good the dialogue or the MoU between the two. Therefore, we again ask that, for with-profits insurance policies, the super-complaint should be made to the PRA.
On the amendment in the name of the noble Lord, Lord Flight, in this group, we would not want to see the FCA lose this power and are content with the way it is set out in the Bill. I beg to move.
My Lords, I shall not move Amendment 189A. I am now satisfied that the powers here do not contradict or are not repeated by powers under Section 404 and that the potential arrangements of the ombudsman’s power to refer to the FCA are quite helpful. Similarly, I shall not move Amendment 189B.
My Lords, this group is now slightly confusing in that more amendments will not be moved than have been moved. However, I shall do my best to speak to the one that has been moved, but if I find myself speaking to one which will not be moved, no doubt someone will tell me.
On Amendment 188A, which would enable super-complaints to be made to the PRA about the with-profits market, the Government recognise the thrust of the argument that the Bill is drafted so as to give the sole responsibility to the PRA at the moment. However, in the light of our earlier debate about “with profits”—in particular, the points raised by the noble Baroness, Lady Drake—the Government committed to giving further consideration to this matter. I can confirm that the Government intend to amend the Bill on Report to enhance the role of the FCA in “with profits” regulation, in a way that I hope will meet the noble Baroness’s concerns. We will write shortly to the noble Baroness, Lady Drake, on this point and I will of course copy the letter to interested Peers. This may be the first absolutely firm concession that we have made this evening, and I am delighted to be able to do it.