Financial Services Bill

Lord Lucas Excerpts

Tuesday 10th July 2012 Lords Chamber

[Baroness Hayter of Kentish Town]

My Lords, I first apologise to the Committee, because I would like to degroup Amendment 128AA, which is in this group. I know that the Minister has had minutes’ notice of this, but I apologise to others. It is an important issue, and clearly we will return to that.

I support the amendment moved by the noble Lord, Lord Phillips, and I will also speak to Amendment 104ZA. As we have heard, social enterprises are businesses that trade to tackle social problems and improve communities, people’s life chances, or the environment. They make their money from selling goods and services in the open market, but they reinvest their profits back into the business or the local community. So when they make profits, society profits. They do not make profits for the shareholders. In future, perhaps we should adopt the words of the noble Lord, Lord Hodgson, and call them not-for-profit distribution, NFPDs, which may be the new word for them.

Funding is certainly needed to start up enterprises but, just as critical is the need to scale up and sustain them. That means getting access to modest and responsible sources of finance which will grow profits and jobs in this case, and make the local and national economy work. Appropriately funded social enterprises can lead an economic fight-back in the most deprived communities. The more deprived the community, the more likely you are to find social enterprises working there. They reinvest in the community. Indeed, 39% work in the 20% most deprived communities. They employ more people relative to turnover than mainstream small business and are outstripping other SMEs in terms of growth and sustainability. Just as access to funding can unlock the social enterprise sector’s potential, so it is the single largest barrier to the sustainability of this sector. Last year, 44% of respondents to a survey said that they were hampered by the availability and affordability of finance.

I make no apology that our Amendment 104ZA asks the FCA to discharge its general functions in a way that promotes growth and development of social finance and social investment. We ask that it should promote competition. This is, if you like, an emerging market, which needs a little help at the moment. I think that the word “promote” is not too dangerous but if the Minister would accept “enable”, I would settle for that. There is a distinctive difference to this sector. I hope that our regulatory system is big enough to engage with it.

[Lord Lucas]

My Lords, one of the reasons why the likes of Wonga charges high rates of interest is that its formula for doing business is mechanical. What is required in order to be able to offer proper rates of interest on small amounts of money to people who are not well off is trust, knowledge and community. That is what this sector sets out to provide. Armed with that, it is capable of giving a much better deal to borrowers without imperilling those who are lending money. It is a thoroughly worthwhile sector of the financial industry.

We need to ask the FCA not to promote it but, as the noble Baroness, Lady Hayter, says in her late revision, to enable it. The Government and regulation stand in the way. They give the big banks privileges which are not extended to small lenders. Some of them probably cannot be. I do not know that there is any way in which the £85,000 guarantee can be got down to these sorts of institutions. But they impose immense tax differentials so that you can end up not being able to offset losses if you have made them in community lending. As the noble Baroness, Lady Kramer, says, you can end up not knowing as a financial adviser whether you are allowed to mention these sorts of investments. We need a financial regulatory structure that gets out of the way, levels the playing field and gives these businesses a fair opportunity.

[Lord Sassoon]

My Lords, let me begin by saying that, as with the previous group, I wholeheartedly support the sentiment underpinning these amendments. The Government want markets which serve the wider economy, underpin growth and contribute to a more prosperous society as a whole. We want more proactive and judgment-based regulation, and we want the FCA to be tough and decisive in identifying and acting on bad practice in the financial services sector.

The Government have been very clear that they want social ventures to create positive change in our society and that to achieve this we need to make it easier for them to access the capital and advice they need. There is a growing social investment market which seeks to combine financial return with social impact. Investors are often willing to accept higher risk and a lower financial return because of the social value that their investment can make. However, as has also been noticed, the market is embryonic and needs support. The Government are committed to providing that support. In a moment, I will describe how we seek to do that. Before I do so, I will turn to some of the specific amendments to which noble Lords have spoken.

There are a number of reasons why I cannot support Amendments 104, 104ZA, 120, 137, and 139. First, where their intention is to promote social investment, that is simply not an appropriate role for the regulator. Although I agree with my noble friend Lord Phillips of Sudbury that the Government need to act in support of the social investment sector, we will not create a healthy UK financial services market, including for social financial services, by giving the FCA the job of taking forward what should be and is part of the Government’s wider social policy agenda. Let me be clear: the FCA’s job should be to administer a regulatory regime, policing it so that consumers are appropriately protected, regardless of what they invest in, that there is effective competition, and that markets are clean and operate with integrity.

Secondly, where the intention behind the amendments is to—

--- Later in debate ---

[Lord Sassoon]

My Lords, I cannot agree with that construction of what is intended here. Mis-selling very clearly comes under new Section 1C, the consumer protection objective. We have, perhaps, teased out of this discussion that if we are talking about social responsibility in the sense that my noble friend intends and in the way he has described it, it is more linked to the consumer protection objective, rather than the integrity of the UK financial system. The difficulty may partly be in the different uses of “integrity”. We are not talking in new Section 1D about integrity in the direct sense of the behaviour of the individuals in the system. We are talking about the wholeness and stability and soundness of the financial system, which is why these particular factors are listed in Section 1D(2). They are linked to concrete actions that would be expected of the FCA, examples of which I have just given. We may be partly mixing up apples and pears here because I do not think that social responsibility fits into this clause of the Bill.

If my noble friend came back and tried to attach it to proposed new Section 1C, I would still argue that social responsibility is a matter for government. Social responsibility in the sense that he is talking about will go to the heart of what the Joint Committee will look at in response to the LIBOR scandal. The responsibility of the participants in the sector will be tackled in different ways.

I have tried to reassure the Committee—I can see that I may have given only partial reassurance—that the Government firmly believe that the financial industry should serve society. There is a big unfinished agenda and the Government will not shy away from driving it forward. The right way to do so is through different avenues but not through expecting the FCA to be responsible for these particular areas. I ask my noble friend to consider withdrawing his amendment.

[Lord Lucas]

My Lords, while my noble friend is doing that, perhaps he will say something about the effect that Amendment 103 would have in a practical sense. If faced with the words “and society” at the end of the subsection, how would the FCA’s decisions be different? Under what kind of practical circumstances would it make a difference?

[Lord Phillips of Sudbury]

My Lords, that is a strictly out-of-court request at the moment. However, if the Committee will indulge the noble Lord, Lord Lucas, and myself, I will give him a short answer.

I am concerned, and those who have supported the amendment and the whole of the social investment sector are deeply concerned, that there is no single recognition in 168 pages of its special nature—not one single indication. I agree with them—others have made the point—that that is a profound omission given where we are, the financial sector we have got and the innovative drive and importance—potentially more than actually—of this new social sector.