Financial Services Bill

Lord Hodgson of Astley Abbotts Excerpts

Wednesday 18th July 2012 Lords Chamber

[Lord Stewartby]

A brief point of order: the screen has got stuck.

[Lord Hodgson of Astley Abbotts]

My Lords, my noble friend has moved a very interesting amendment. We may be in danger of confusing two issues. The noble Baroness referred to impenetrable language. I quite accept that, but that is a question not of financial literacy but of improving the form in which the communication is made. To try and deal with financial literacy is a much narrower issue than impenetrable language. I support her entirely, but I would also add the form and content. How often do we get a letter from our credit card company saying that it is going to amend the terms in which the credit card is offered? It is four pages of closely packed print and what do we do but drop it straight in the waste paper basket. However, the company has complied with the requirement. In those cases, the famous phrases “less is more”—less information, better focused—is what we should be all about.

That is an important point though not exactly what my noble friend was driving at. I think my noble friend was driving at something designed to deal with people at an earlier stage of their life. In particular, it has relevance to Amendment 104C, in the names of the noble Lords, Lord Peston and Lord Barnett, about the unavoidability of some risk. One of the issues that has somehow got about in the world is that we can actually insulate people from risk. When we have financial literacy lessons, we need to emphasise to everybody that there is no product anywhere that does not carry some level of risk. I am looking forward to hearing the two noble Lords on this issue in a few minutes. I have only one question on my noble friend’s amendment. Who pays for all this?

[Lord Peston]

Is the noble Lord going to answer that first?

--- Later in debate ---

[Lord Peston]

Sorry—Andrew Haldane. I am not good on these things. Names are one of my Alzheimer’s problems. Mr Haldane says, in a typically short paragraph of his brilliant lecture:

“This evolution in the topology of the network”—

that is, the network of financial intermediaries—

“meant that sharp discontinuities in the financial system were an accident waiting to happen. The present crisis is the materialisation of that accident”.

Financial literacy means being able to understand those two sentences. I am not a bad mathematician but even I had difficulty with the topology of networks. That is the problem in this area. What you can teach at the level at which the noble Lord, Lord Flight, wants to teach, is very little indeed. As I said, that does not mean that we should not do it, but we should not delude ourselves that we can produce a financially literate population because most people simply do not have the mathematics to understand this kind of work. I cannot believe that anybody could write a non-mathematical explanation of what Andrew Haldane said.

Nothing I have said should stop us from trying—I am not going against the noble Lord, Lord Flight, on this—but financial literacy is not the easiest thing to achieve.

[Lord Hodgson of Astley Abbotts]

Does the noble Lord not agree that two or three basic things could be taught relatively easily? The first is the impact of inflation and how it affects the value of savings. The second is the impact of compound interest and the costs and returns of borrowing. Those two subjects do not require the brilliant mathematics of which the noble Lord alone is capable. Quite realistic, real-life examples could be given to people in their final two or three years at school.

[Lord Peston]

I have had a little experience of this. In my younger days in the Treasury we tried to persuade senior Treasury officials that capital investment projects ought to be dealt with by discounted cash flow. We were talking to senior officials who were brilliantly clever, but it was nearly impossible to teach them even about compound interest. When we had taught them compound interest, they had no idea how to convert it into discounting. Again, I am not saying that we should not teach compound interest in schools—quite the contrary. All I am saying is that it is not easy.

--- Later in debate ---

[Lord May of Oxford]

I shall make a couple of comments in favour of the amendment. As I understand it, its general sense is to state that there is a duty of care. The medical profession and the legal profession have an explicit duty of care. An interesting seminar brought together economists, lawyers and philosophers in Oxford over the past year and a half, working towards trying to say something sensible about this. As I understand it, the amendment is intended to say that, of course, we have to understand that there are risks, but that we know of specific examples where customers have had cheerfully and aggressively marketed to them investment instruments that the vendor itself, Goldman Sachs, was betting against. The gist of the amendment—and other things that I would like to be in the Bill in a much more explicit and in-your-face way—is to assert that there should be a real duty of care.

[Lord Hodgson of Astley Abbotts]

My Lords, I very much support the amendment, as I said when speaking to my noble friend’s amendment a few minutes ago. There is a real danger of failing to distinguish between risk and fraud. They get intermingled in the public’s mind. Clearly, fraud is absolutely unacceptable and needs to be chased down and prosecuted with all possible vigour. Too often, in this compensation-culture era, a risk that goes wrong is seen as fraud: “I should not have lost money”. One difficulty with the interesting concept, proposed by the noble Lord, of duty of care is that although you can explain very clearly to people the risks that they are taking, when it does not happen as you and they hope—things are volatile—they are inclined to forget that they were given the appropriate warnings. Our emphasis must be on making sure that risk is understood; and that fraud is unacceptable; but that the two are completely distinct. There is a confluence in the public mind, sometimes encouraged by the way that the newspapers report it, of two issues. There are plenty of cases where fraud has happened—that is wrong—but there are also cases where people have taken risks which they anticipated would deliver them huge returns. When they did not, because they were highly risky, they did not see themselves in any way responsible; they sought someone else to blame.

[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.