Financial Services Bill

Lord Hunt of Wirral Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Hunt of Wirral]

My Lords, I declare my interests, set out in the register, as chair of the Lending Standards Board and the Press Complaints Commission, as well as being a practising solicitor and partner in the global commercial law firm DAC Beachcroft for nearly 45 years.

The Bill establishes a new framework for financial regulation in the United Kingdom. I share the determination of colleagues to improve the Bill, including that of the noble Baroness, Lady Cohen of Pimlico, whose expertise and experience in this matter I greatly respect. I warmly welcome her emphasis on proportionality. However, I would like to concentrate my remarks on the regulation of consumer credit. I support the move from the OFT to the Financial Conduct Authority. This will result in all retail banking products becoming the responsibility of one statutory regulator, bringing benefits for consumers and firms and avoiding the problems of split regulation. I am, however, concerned that there is still no decision about what type of statutory regime is appropriate for consumer credit—the regime which existed under the Financial Services and Markets Act or the Consumer Credit Act or, as is now proposed, a combination of the two.

I want to make it clear to the House that I strongly believe in self-regulation, particularly effective self-regulation. It has concerned me that to date little consideration appears to have been given to what role self-regulation through industry codes might play in the new regime. I do not believe that it should be a choice between statutory regulation or self-regulation; they both have a place. I strongly believe that the best outcome would be for them to continue to co-exist. We should take the best of what each has to offer to achieve an appropriate and proportionate balance between consumer protection and the commercial needs of a properly functioning competitive market. The new regime has to be demonstrably better than the sum of the current constituent parts; otherwise, why on earth are we incurring the considerable transitional costs and risks? Therefore, in my view, self-regulation remains important and relevant. In consumer credit, The Lending Code sponsored by the British Bankers’ Association, the Building Societies Association and UK Cards Association, and enforced by the independent Lending Standards Board, which I have the honour to chair, has an excellent track record and I believe is seen by consumer bodies and other stakeholders as efficient and effective. Of course, industry can and should take a lead in rebuilding the trust and confidence of its customers, but this will not be achieved overnight and I support action on a number of fronts. However, one of these must be effective self-regulation.

There are five principles of good regulation and, for me, the most important is proportionality. Regulation should be proportionate to the risks posed and costs should be identified and minimised. Vast tomes of very prescriptive statutory rules will usually add little to consumer protection. There is increasing concern about the potential costs of moving to and complying with the proposed new regime—costs that will, of course, ultimately have to be borne by the consumer. I strongly agree with the noble Baroness that at the moment the Bill is not user friendly. However, I was very pleased to see reference to the principle of proportionality in Clause 5 in new Section 3B(1)(b) at the bottom of page 28 of the Bill.

I would like to see self-regulation in the following form. I want there to be strong codes of practice with effective independent monitoring and enforcement that would not only be proportionate to the perceived problem or risk but score highly against the other four principles of good regulation—consistency, accountability, transparency and targeting. What do I mean? Self-regulation can set higher standards than statutory rules. One such example is the latest set of provisions introduced into The Lending Code whereby banks must retain responsibility for the fair treatment of customers after a debt has been sold to a third party. Voluntary codes can also avoid super-equivalence problems where they set standards that go beyond European regulations such as the EC consumer credit directive.

I could give many examples. Codes offer a vehicle to embody industry best practice and can cover areas that are not appropriate for inclusion in statutory rules. Self-regulation is more flexible and responsive to change and emerging issues. Codes provide a level of conduct of business detail that supports high-level statutory rules and can help industry better to interpret and apply the statutory requirements. It is better to have one externally visible code than myriad different lender-specific internal codes. Codes can also be market-focused or product-focused, as compared with the broad generic approach that is symptomatic of statutory regulation. That would produce much better consumer outcomes.

Improvements to self-regulation must be part and parcel of this approach. A number of codes of practice currently operate in the consumer credit market. Not all have standards that are as robust as those contained in The Lending Code or the FLA code to which my noble friend Lady Noakes referred. These codes are followed by the major banks, building societies and credit card providers. In promoting the case for self-regulation as a component of the future regulatory regime for consumer credit, Governments should encourage the sponsors of these codes to look at strengthening their rules, as has recently happened in the payday lending market. Most importantly, they should ensure that the codes are independently monitored and enforced.

The new regime would benefit from a close working relationship between those enforcing such codes. Ideally, there should be some provision for recognition or endorsement of codes by the FSA. Endorsement could provide a degree of protection for firms if they were to follow the codes’ provisions. That would encourage commitment on the part of the industry. I do not think that the statutory regulator would be abrogating ultimate responsibility; it could work along the lines of the OFT’s compliance partnership approach.

In conclusion, self-regulation is the right way forward—complementary self-regulation policed by an independent regulatory body that would protect the consumer without destroying the creativity and competitiveness of the market. Unfortunately, statutory regulation tends to be very heavy-handed, whereas self-regulation can supply not a light hand but a firm hand—and sometimes even a helping hand.