Financial Services and Markets Bill

Lord Lilley Excerpts

Committee stage
Wednesday 1st March 2023 Grand Committee

[Lord Lilley (Con)]

My Lords, until the noble Lord, Lord Hunt, led me to it, I had not realised the similarity between the Arts Council and the financial regulators in the City of London—but he is absolutely right. Both are manifestations of that growing and alarming phenomenon, the administrative state. These are bodies that set their own rules, mark their own homework, are largely unaccountable, often wayward and certainly unpredictable. The one weakness of this Bill, which in other respects is good, is that it creates even more freedom and power for the regulators to operate without accountability or predictability.

There are two ways in which to deal with this problem, which are compatible and probably both necessary. One is that to which the amendments proposed by the noble Lord, Lord Bridges, make a major contribution: bringing parliamentary accountability to bear. His amendments effectively arm Parliament to carry out that accountability. The other is to try to constrain the behaviour of the regulators within the disciplines of the common law, which is what my amendments here and elsewhere seek to do. I speak particularly to Amendments 169, 171, 173, 174 and 200. The changes in those amendments deal with the Upper Tribunal and the regulators; I shall go on to those which deal with the Financial Ombudsman Service.

At present, firms can take a challenge to a regulator’s decision to the Upper Tribunal. If a challenge is about a regulator’s enforcement decision, the UT decides the matter again on its merits. If the challenge is about a supervisory decision, the UT effectively carries out a judicial review. It may hear fresh evidence, but it merely decides whether or not the regulator’s decision was reasonable and, if it was unreasonable, refers it back to the regulator to take the decision afresh. These amendments would not change that role but, I hope, would constrain the way in which it was carried out.

Amendment 169 would simply give the Upper Tribunal the obligation to give consideration to the predictability and consistency in any case before it and to comply with those objectives when deciding a fresh enforcement decision, and it would empower the Upper Tribunal when making findings on a supervisory decision to help the regulator meet the predictability and consistency objective when reconsidering a case. It would also require the regulator to prove in each case that it had acted predictably and consistently on any issue referred to the Upper Tribunal.

Amendment 169 would also give firms that believed they had acted in good faith within what they knew of the meaning of the regulations laid down by the regulator the right to apply to the Upper Tribunal, if they were found to be in conflict with the regulator, within three days for a declaration of reasonableness. If the Upper Tribunal granted a declaration of reasonableness, the FCA or PRA could not pursue enforcement action against the firm.

There are comparatively few references to the Upper Tribunal. If the Upper Tribunal and the regulators achieve greater predictability and consistency, there are likely to be fewer still in future, which is a good thing. Moreover, those that do take place will themselves create case law, making the meaning of the regulations clearer and more predictable. However, because the volume of cases will be small, the amount of case law that will arise at the level of the Upper Tribunal will be small.

By contrast, a huge number of customers—SMEs and individuals—claim losses that they attribute to breaches of regulatory rules by firms providing financial services, and they do so to the Financial Ombudsman Service. In the most recent quarter, over 43,000 complaints were made to the FOS. At present, consumers, largely small businesses, can take a complaint free of charge to the ombudsman, which can decide whether a financial services company has treated them fairly and reasonably and require the finance company to pay compensation. The costs of the ombudsman service, whose budget for 2023-24 is £240 million, are met by a compulsory levy and some fees payable by financial institutions.

The advantages of this arrangement to the consumer are that there is no fee, there is no risk of having to pay the finance company’s costs if the complaint is not upheld, and the process is generally faster than a court case would be. However, there are disadvantages too: the Financial Ombudsman Service has the power to decide what is fair and reasonable without any obligation to be predictable and consistent before or afterwards, or to explain its reasoning, and it is

“free to make an award different from that which a court applying the law would make”.

Financial institutions that object to the ombudsman’s ruling can in theory appeal to the Upper Tribunal or seek judicial review, but if they did so they would have to prove that the Financial Ombudsman Service’s decision was so unfair or unreasonable that no right-minded person would ever have made a similar decision, so they stand little chance of success and few cases have been brought.

The ensemble of my amendments would respond to those weaknesses in a number of ways. First, earlier amendments would introduce the explicit objective of predictability and consistency, and any challenges to the regulators on those grounds would primarily be considered by the Upper Tribunal. The other amendments in this group would ensure that the internal review bodies within the FCA and PRA that consider enforcement decisions before they are finalised, known as the RDC and the EMDC, were fully independent, and would require them to apply similar tests. That should ensure that most cases would not need to be taken to the Upper Tribunal since concerns would have been addressed before the regulator made a final decision.

Secondly, the amendments would change the role of the ombudsman system into an adjudication system, and that is perhaps the most important element of this group. Instead of being empowered to reach decisions simply on its own subjective view of what was fair and reasonable, the financial adjudication service would be tasked with adjudicating on the basis of the law, including case law as it built up. That is modelled on the adjudication system in the scheme for the construction industry in the Housing Grants, Construction and Regeneration Act 1996. The idea of transferring the lessons there to the financial sector was suggested by Lord Dyson, a former Supreme Court Justice and Master of the Rolls, in a report by the APPG on Fair Business Banking in 2018, which also recommended the formation of the First-tier Tribunal. The adjudication system would remain free to consumer complainants, who would still have the benefits of the obligations on financial businesses to treat them fairly as in the FCA rules and legislation, such as the Consumer Rights Act 2015.