Financial Services and Markets Bill

Lord Moylan Excerpts

Committee stage
Monday 6th February 2023 Grand Committee

Moved by

[Lord Moylan]

55: Clause 24, page 38, line 27, at end insert—
“(3A) In section 2B (PRA’s general objective), insert—“(3A) In advancing its general objective, the PRA must act so as to minimise barriers to the wider ownership of regulated investments by the general public consistently with its general objective in subsection (2).””

[Lord Moylan (Con)]

My Lords, I will also speak to Amendment 241, also in my name. I hope this will be the least controversial mini-debate on the Bill, because I do not think anybody in the Committee is other than opposed to financial exclusion. We favour financial inclusion, especially in a modern digital age. What is normally meant by financial inclusion is the opportunity for people of limited means or living in marginalised circumstances to participate in the financial and banking system—something that is all the more necessary now that people are so dependent on access to it, not least for benefits but also for other, ordinary means of getting about in life and so forth. Who can be against that? A number of amendments in this group tend towards strengthening the obligations on the regulators to promote financial inclusion, and I am happy to lend my general support to them.

Amendments 55 and 241 in my name relate to a different sort of financial exclusion that has grown up over the last 25 or 30 years: the general tendency to exclude the retail investor from the opportunities to invest in regulated products. For example, we have gone from a situation 30 years ago where it was possible to buy gilts—UK government bonds—at the Post Office, or to bid for new issues of gilts at an average price through cutting out a coupon in the newspaper, to a situation where it is very difficult for ordinary people to buy government bonds.

In the case of highly rated corporate bonds, an EU regulation incorporated from its prospectus directive has set the minimum denomination of new issues of bonds at €100,000, which we have applied of course. The result is that very few sterling bonds are in denominations small enough for ordinary investors to buy, and even they are long-dated issues that are running off, so soon there will be no more unless we take some action.

The days of Sid are long gone. Nowadays, when companies do new share issues—what have come to be known as IPOs, initial public offerings, or even subsequent offerings—corporate treasurers are simply uninterested in engaging with retail investors, partly because the burden of additional regulation involved deters them from doing so. Shares are generally placed in private placements with institutional investors, because it is easier and quicker—no room for the retail investor.

There have been two reasons for this. The first is overcaution on the part of regulators. They feel responsible for regulated investments, so they do not want anyone to lose any money unless they are a really big player. The easiest way of preventing smaller players such as retail investors from losing money and complaining is to prevent them from investing in the first place. The second is the reluctance of corporate treasurers to engage with the retail market, because they have no incentive to do so, only additional burdens.

This might have been motivated by a good sentiment for protecting investors, but the results have been completely perverse. Nothing prevents retail investors investing in unregulated investments, so we see people out there quite freely putting their money into spread-betting; contracts for difference, which are similar to spread-betting; and even some things misleadingly known as mini-bonds, on which they regularly lose their shirts. Indeed, one issue of mini-bonds, from London Capital & Finance, was unregulated; it was ambivalent whether or not the regulator had actually regulated it. Noble Lords will recall that, last year, we had to pass a special Act of Parliament to allow the Treasury to indemnify those investors, because they had potentially been misled on the legal position. The core point is not that we had to indemnify them; it is that they were perfectly able to invest and to lose their shirts. But we stopped them—regulators and the circumstances prevent them—from investing in much safer, regulated products.

Amendment 55, in my name—I am grateful for the support of my noble friends, Lord Trenchard and Lord Naseby, and the noble Baroness, Lady Kramer—puts a new objective on the Prudential Regulation Authority to ensure that, as part of its work, it aims to minimise the barriers to retail participation in regulated products in the financial market.

Amendment 241 deals specifically with the narrow point that denominations of corporate bonds are required at the moment to be a minimum of €100,000 and replaces that with what we were used to many years ago, by having £1,000. That would make them accessible to retail investors.

I have had conversations with brokers—and I am grateful for them—who deal with retail investors in the City. I know that they are already in contact with the Treasury and that the Treasury is sympathetic to these arguments. There is nothing in what I say that will come as a surprise to the Minister, and I hope that, when she stands up, she will say many warm words in support of both my amendments, which I would appreciate. But I am concerned that there should be more than simply warm words and unbankable promises about what regulators might be asked to do in the future, so my inclination at the moment is that legislation would be a jolly good way forward. I beg to move.

[Viscount Trenchard (Con)]

My Lords, I declare my interests as a director of two investment companies, as stated in the register. I support my noble friend Lord Moylan in his Amendments 55 and 241, to which I have added my name. My noble friend has explained the purpose of his amendments very well and he spoke persuasively on this subject at Second Reading.

I was involved in much of the privatisation programme of the 1980s, and the Government’s efforts to increase the shareholder base, especially the retail shareholder base, were rather successful. Regulation has increasingly stymied retail investors’ ability to buy equities and bonds since that time, and I strongly support my noble friend’s wish to bring back Sid. New issues of equities used to be widely available to retail investors, but additional regulatory requirements now discourage corporate treasurers from including retail tranches in public offerings.

Amendment 55 requires the PRA, in advancing its general objective, to minimise barriers to wider securities ownership. This will create a better balance of factors, which it must take into account without in any way weakening the stability of the UK financial system.

As my noble friend mentioned, the prospectus directive is a strong candidate for early reform, in particular its requirement for a minimum transaction amount in a corporate bond issue of €100,000, which obviously excludes most retail investors from the market.

I also support Amendment 241, for the reasons that my noble friend has well explained to the Committee.

My noble friend Lord Holmes of Richmond proposes a new financial inclusion objective for the FCA. I welcome the steps that the Treasury and the DWP have taken to support financial inclusion. Could my noble friend the Minister tell the Committee how the welcome decision to release £65 million of dormant assets funding to Fair4All Finance has improved access to fair, affordable and appropriate financial products for those in financial difficulty? How do the Government intend to honour their commitment to protect the long-term viability of the UK’s cash infrastructure as we move inexorably towards a cashless society.

The Money and Pensions Service, in its national well-being strategy published in 2020, set out an agenda for change containing various ways in which to help people manage their money more effectively. I welcome this and other steps that the Government are taking in this area. I am also mindful of the fact that the Government have legislated to create a consumer financial education body, and I ask my noble friend what plans the Treasury has for that body. I welcome what is being done, and I am not sure that it is sensible to give a further objective to the FCA in this area, because it would dilute the attention that the FCA must give to its existing objective and two new ones—both the one already included in the Bill, the competitiveness and growth objective, and that proposed by my noble friend Lord Lilley, the predictability and consistency objective.

I also have sympathy with Amendment 75, in the name of the noble Lord, Lord Tunnicliffe, on financial inclusion, and I look forward to what he has to say. When I look at the matters to which the FCA must have regard in furthering its consumer protection objective, I am surprised that retail investors are allowed to invest at all. I am not sure that Amendment 75 would help reduce the barriers to market participation by ordinary investors.

I have sympathy with Amendment 117, because I think it will help if the FCA has a duty to address the issue. But I cannot support Amendment 228 in the name of the noble Baroness, Lady Kramer, because it may unfairly prescribe a bank’s ability to decide within reason the businesses that it wants to undertake, and its obligations to its shareholders and depositors to invest their money wisely. I am also not sure how the noble Baroness would define low-income communities. Our markets have been adversely affected both by the impediments to new authorisations and by unwarranted restrictions on the businesses of licensed banks. The result of this is often the reverse of what is intended, by dissuading new entrants from seeking authorisation, which negatively affects competitiveness and consumer choice.

--- Later in debate ---

[Baroness Penn (Con)]

I will absolutely take that back to the department, but I disagree with the noble Baroness that no action is happening on this issue. We talked about access to cash; that is being legislated for in the Bill. On access to low-cost finance, I have talked about the money that the Government have put in to pilot a programme of interest-free finance for those who are most vulnerable. We have talked about access to bank branches. I acknowledge that the initiatives on banking hubs have not been as fast as people would want, but they put forward a solution to an issue that we face. We agree that it is a common issue. I have given examples of what we are doing on digital inclusion. In a later group, we will discuss the importance of mental health. We have put in place the Breathing Space scheme for those who are in problem debt and have mental health problems.

Yes, there is a lot more action to take. I recognise the problem and I will take the noble Baroness’s words back to the department, but we are legislating on some measures in the Bill. I have set out very specific measures that we are taking in other areas. It does not mean that the job is done, but it does mean that action is happening.

[Lord Moylan (Con)]

My Lords, I am grateful to all noble Lords who have spoken in the debate and for the support that has been given generally for the amendments tabled. It is true that one or two noble Lords have quibbled about the detail of particular proposals in the amendments, but I think there was universal support for the general principles underlying them.

It falls on me briefly to deal with the quibbles raised by the noble Lord, Lord Davies of Brixton, because they were pointed directly at amendments in my name. First, he is right to say that over a period of 30 or 40 years there will be a large number of sociological and economic changes that might explain the appetite for different types of investment among the population at large, but surely he will accept that these are completely dwarfed and made irrelevant if the fact is that you are not allowed to purchase the investments in the first place. The object of the amendment here is to allow this to happen. If you have to put €100,000 on the table to buy a corporate bond, people are excluded in very large measure, and questions of their appetite for different types of risk simply do not arise. If there is routinely no retail element to a new issue of shares, retail investors will not be able to buy those shares, so that is that.

The noble Lord, Lord Davies, also picked me up on what I meant by regulated investments. It is true that if the amendment were to come back on Report, it should perhaps be drafted more carefully to say, “investments traded in regulated markets”. I accept that it might have been infelicitously drafted but, to give a more substantive answer, perhaps one should take a more apophatic approach and define what non-regulated investments are. They are things such as betting, spread-betting, contracts for difference and mini-bonds.

The noble Lord is concerned that putting your money into highly rated shares, corporate bonds or gilts might be a little risky and inappropriate for somebody setting aside money for the future, but he has not tabled the amendment that I would hope to see in that case that would have prevented them investing in all these different products, which are there freely available and which people invest in. As the noble Baroness, Lady Kramer, pointed out, the mini-bond crisis was about perfectly respectable people believing that they were investing in something that looked like a bond, when it was not at all, for a return that appeared attractive. If we do nothing for them and allow that, why are we worried about them investing in real bonds?

Finally, there is the question of whether by agreeing such an objective for the regulators they would in effect be giving advice. I simply refute that: to remove a barrier to investment is not to give advice. I do not know where the noble Lord keeps his money for a rainy day. Perhaps it is all in a savings account somewhere, but I would encourage him to think a little more broadly and to look upon various safe and regular opportunities that would be available to him for his spare cash if he were to swing in behind this amendment. I am sure he would benefit in many ways from that.

I turn briefly to the remarks of my noble friend the Minister. I am grateful to her for the encouragement she has given and will look carefully at what she has said. I am still not wholly persuaded that proceeding on the basis of the Treasury’s current work, rather than by way of legislation, is entirely the best way. I will consider whether these amendments, or one of them, might come back on Report.

On the broader question of the financial inclusion of people who are marginalised by the financial system—I hope I am not presuming too much if I speak for the Committee at large—my noble friend might want to reflect a little further on whether a process of engagement with noble Lords on all sides of the Committee who have brought these issues up would be beneficial between now and the issue returning on Report. I know that it is not in her personal nature to sound negative and unwelcoming, but her speech had that tone of saying that everything was a little too complicated and might have an unintended consequence. Well, anything might have an unintended consequence; by definition, one would not know. I wonder whether she might consider some process of engagement on the issue, because I think the feeling around the Committee is quite strong. With that, I beg leave to withdraw my amendment.

Amendment 55 withdrawn.