Financial Services (Banking Reform) Bill

Lord Newby Excerpts

Wednesday 27th November 2013 Lords Chamber

Moved by

[Lord Newby]

122: Clause 30, page 42, line 9, leave out “38” and insert “(Publication)”

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[Lord Newby (LD)]

My Lords, the Government are committed to bringing payment systems under formal economic regulation to address deeply rooted failures in the UK’s payments market. In Committee, the Government tabled amendments to establish the new Payment Systems Regulator. The Government are now introducing a small number of further provisions and making amendments to some of the clauses previously tabled to ensure that the regulator is able to perform its functions effectively and that the right procedures apply to powers contained in the Bill.

First, these amendments will introduce provisions modelled on measures in the Financial Services and Markets Act 2000 which prohibit the regulator and those working for or on behalf of it from disclosing confidential information without the consent of the information owner. The prohibition will be enforced by a new criminal offence. However, further provisions will permit confidential information to be disclosed to certain prescribed persons in specific circumstances, including the provision to the regulator of certain information held by the Bank of England. This will be an important element of the Payment Systems Regulator’s regulatory regime. Without a prohibition on the disclosure of confidential information, people may be dissuaded from providing to the regulator important information which would assist it in the discharge of its regulatory functions.

The Government are bringing forward a number of other amendments which mirror provisions that already exist for the FCA under the Financial Services and Markets Act. The FCA will be able to collect levies for the purpose of maintaining adequate reserves for the regulator, which will help it to meet any contingencies. Another amendment will require that the regulator uses a sum equal to its enforcement costs for the benefit of its regulated population by reducing their levy the following year. A further amendment will ensure that the FCA does not have to produce a cost-benefit analysis when drawing up fee-levying rules to govern the collection of fees to meet the costs of the Payment Systems Regulator.

The other amendments tabled today will ensure that the right procedural requirements apply in respect of certain powers in the regulator clauses. The regulator will have a power to direct participants to take or not take specified action, and amendments are tabled to expand the concept of a “general” direction that applies to more than one person. The consequence will be that more directions fall within the category to which consultation requirements apply. Another amendment will require the Treasury to publish its decisions to designate payment systems to bring them within the regulator’s scope. The amendments also make some technical drafting changes to assist the reader of the legislation, as well as some consequential amendments to other legislation to include references to the regulator—for example, to ensure that the Freedom of Information Act applies to information held by it.

Overall, this set of provisions will contribute to the creation of a robust and well functioning regulatory regime for payment systems that can deliver on the Government’s objectives. I commend these government amendments to the House.

There is also an amendment in this group in the name of the noble Baroness, Lady Noakes. In Committee, the Government tabled amendments which included a provision for the regulator to order banks to give indirect access to payment systems to other financial institutions. The noble Baroness has tabled amendments to this power with a view to addressing a concern that ordering a bank to provide another institution with indirect access to a payment system would expose the access-providing bank to additional operational and compliance risks. I should like to reassure the House that the amendments tabled by the noble Baroness are not required to address the concerns that have motivated them.

This power was designed to serve as a necessary back-stop in case banks with direct access to payment systems reacted to being brought within the regulator’s scope by ceasing to provide indirect access. This would have left smaller players with no access to the vital systems. The Government envisage that the regulator will be likely to exercise this power only in such a situation. It would be used to safeguard the position of the smaller banks reliant on the larger banks for continued access to the systems and to prevent the detrimental consequences for competition in UK retail banking if such access were denied.

The Government are confident that the regulator will not exercise this power in any way that results in banks having to take on undue operational or compliance risks. The power can be exercised only if an institution applies to the regulator to exercise it. The regulator would, in practice, inform the bank which it was proposed be ordered to grant the access and would consider the circumstances of the applicant. It would be open to the bank that was subject to any order to make representations to the regulator about the applicant or any other matter concerning the application. The regulator would consider any such representations in making its decisions. It would not exercise the power if it thought to do so would expose the bank, the subject of the order, to additional risks which it would not be reasonable for it to bear. The Government would expect the regulator to provide in industry guidance more detail on the circumstances and manner in which it would consider using its powers. In the light of that, I would ask the noble Baroness to withdraw her amendment.

At this point, I shall deal with the amendments tabled by the noble Lord, Lord Brennan, to certain of the provisions of the proposed regulatory system for payment systems. I should like to reassure the noble Lord that his amendments are not necessary to achieve the end of a proportionate and balanced regulatory system, which I am sure we share. The noble Lord has proposed some additional safeguards to the Treasury’s power to designate payment systems so that they fall within the regulator’s scope. I should like to reassure the noble Lord that the power would be exercised by the Treasury only after proper consideration and where it is genuinely satisfied that the available evidence indicates the designation criteria are met, and that the exercise of its discretion to designate is necessary and proportionate in the circumstances. It is not necessary to make this an express requirement in the Bill. No such provision was included in the precedent power, contained in Section 185 of the Banking Act 2009, under which the Treasury recognises systems for Bank of England oversight. I should also like to reassure the noble Lord that the additional matters that he has proposed should be considered by the Treasury when deciding to designate a system would in any event be considered, and that it is not necessary to state them in the Bill.

Under the procedural provisions, the Treasury must notify operators of payment systems that it proposes to designate and consider any representations made, so we do not believe it is necessary to write into the legislation that the operators must be consulted as that is, in practice, what the Treasury would do. The drafting of this provision matches that contained in the precedent—Section 186 of the Banking Act 2009. In relation to the regulator’s competition objective, it is important to maintain flexibility as to the matters to which the regulator may, rather than must, have regard when considering the effectiveness of competition, particularly given the fast-moving, high-tech nature of the payments industry. The Government do not think that it would be right to accept the noble Lord’s proposal to change this discretion to a duty. The regulator should be free to consider the factors which it considers relevant at any given time to its assessment of the effectiveness of competition. The Government also do not think it is necessary to add to the list of factors the two proposed by the noble Lord. The consistency of treatment of payment systems operators and the impact of any past or proposed regulatory intervention are matters to which the regulator will generally be obliged to have regard as a matter of good administration. For the same reason, the Government believe that the amendments tabled by the noble Lord to the regulatory principles to which the regulator is to have regard are unnecessary. The regulator, as a public authority, would need to act fairly and consistently, and not take action if not necessary or not justified on the basis of the evidence available.

In relation to the regulator’s innovation objective, the Government believe that the noble Lord’s suggestion to supplement it with the objective of promoting the creation and sustaining of a regulatory environment that is conducive to innovation is unnecessary. It is implicit that the regulator will consider how its system of regulation can best support innovation, and it will exercise its regulatory powers only where it thinks that will serve to promote innovation.

On the regulator’s power to order a disposal of an interest in an operator of a payment system and its power to vary certain agreements relating to payment systems, the Government disagree with the noble Lord’s proposal that these powers should be exercisable only where the Competition and Markets Authority has decided that the interest held in the operator of the system has resulted, or is likely to result, in a substantial lessening of competition. This is a power that the Government want the regulator to be able to exercise independently, given the specific knowledge and expertise it is hoped the regulator will acquire in relation to the markets in payment systems and the services provided by them. However, it is important that the interests of all concerned are adequately protected, so the use of this power, and the power to vary agreements concerning payment systems, will be subject to appeal to the Competition and Markets Authority, which could, on the application of the appellant, suspend the effect of the regulator’s decision pending the determination of the appeal. It would be open to the CMA to quash the regulator’s decision and substitute its own for that of the regulator.

In summary, the Government believe that the legislation as drafted provides a balanced and fair regulatory system. In light of that, I would ask the noble Lord not to move his amendments.

[Baroness Noakes (Con)]

My Lords, as the Minister has said, I have Amendment 138 in this group. He has explained the amendment and the answer to it so well that I did not need to bring my speaking note with me. I thank him for the comments he has made, which have fully answered the points that lay behind my tabling of the amendment. He asked me to withdraw the amendment but as I have not moved it I cannot withdraw it. However, I confirm that I shall not be moving it when we reach the appropriate time on the Marshalled List.

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[Lord Flight (Con)]

My Lords, I support what the noble Lord, Lord Brennan, had to say about the card payment system. Having looked at it in some detail, it strikes me that it is a classic situation of, “If it ain’t bust, don’t fix it”. There are so many other priorities that I urge the Government to think again about this one.

[Lord Newby]

My Lords, I think the burden of the case of the noble Lord, Lord Brennan, is that the Government are acting disproportionately in seeking to regulate something that is working very well and, in doing so, if they are not careful, they will cause major problems to a system that is currently without major problems. I hope I can reassure him that the principles that he set out at the end of his speech are ones that the Government share. There is no sense in which this regulator is being established with a remit to deal in the heavy-handed way that he fears. Given that we want to cover all payment systems, it would have been remiss to have excluded credit card payment systems. There is, however, no sudden plan to start a new, hugely intensive regime.

The noble Lord made the perfectly valid point that the regulator is slightly unusual in that it not only is a classic regulator but has a function to promote innovation as well. He raised a perfectly valid concern about the staff and whether we will be able to find people with the relevant expertise. We believe that there are people who have the relevant expertise and that it is an extremely interesting area in which innovation can be developed. The FCA will therefore be successful in finding staff who have the expertise and can do the job satisfactorily.

As I say, I am content that we are acting proportionately. We are not going to disrupt a system that is working well and we will be able to find people with the relevant expertise to manage it.

Amendment 122 agreed.

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Moved by

[Lord Newby]

123: Clause 30, page 42, line 18, after “to” insert “(Disclosure of information by Bank to Regulator) contain information and investigation powers and provision about the disclosure of information.
( ) Sections 81 and”

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Moved by

[Lord Newby]

124: Schedule 4, page 134, line 1, after “imposing” insert “generally-imposed”

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Moved by

[Lord Newby]

134: After Clause 38, insert the following new Clause—
“Publication
(1) The Treasury must publish any designation order.
(2) If the Treasury amends a designation order, the Treasury must publish the amended order.
(3) The Treasury must publish any revocation of a designation order.”

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Moved by

[Lord Newby]

135: Clause 44, page 48, line 15, leave out paragraph (b) and insert—
“(b) in relation to—(i) all operators, or every operator of a regulated payment system of a specified description,(ii) all infrastructure providers, or every person who is an infrastructure provider in relation to a regulated payment system of a specified description, or(iii) all payment service providers, or every person who is a payment service provider in relation to a regulated payment system of a specified description,”

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Moved by

[Lord Newby]

137: Clause 45, page 48, line 32, at end insert—
“(3) A requirement under this section that is imposed on—
(a) all operators of regulated payment systems, or(b) every operator of a regulated payment system of a specified description,is referred to in this Part as a “generally-imposed requirement”.”

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Moved by

[Lord Newby]

139: Clause 49, page 50, line 14, leave out “(“the concurrent functions”)”

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Moved by

[Lord Newby]

140: Clause 50, page 51, line 11, leave out “has the same meaning as in section 49” and insert “means the functions which by virtue of section 49 are concurrent functions of the Payment Systems Regulator and the CMA.”

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Moved by

[Lord Newby]

142: Clause 52, page 52, line 16, leave out “requirment on all operators of regulated payment systems)” and insert “generally-imposed requirement);”

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Moved by

[Lord Newby]

143: Clause 66, page 57, leave out line 22 and insert “generally-imposed requirement),”

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Moved by

[Lord Newby]

144: Schedule 5, page 145, line 35, at end insert—
““appellant” has the meaning given by paragraph 3(4);”

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Moved by

[Lord Newby]

145: Clause 71, page 60, line 38, leave out subsections (4) to (9)

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Moved by

[Lord Newby]

146: Clause 72, page 61, line 23, leave out “(“the relevant participant”)”

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Moved by

[Lord Newby]

149: After Clause 80, insert the following new Clause—
“Restrictions on disclosure of confidential information
(1) Confidential information must not be disclosed by a primary recipient, or by any person obtaining the information directly or indirectly from a primary recipient, without the consent of—
(a) the person from whom the primary recipient obtained the information, and(b) if different, the person to whom it relates.(2) In this section “confidential information” means information which—
(a) relates to the business or other affairs of any person,(b) was received by the primary recipient for the purposes of, or in the discharge of, any functions of the Payment Systems Regulator under this Part, and(c) is not prevented from being confidential information by subsection (4).(3) It is immaterial for the purposes of subsection (2) whether or not the information was received—
(a) as a result of a requirement to provide it imposed by or under any enactment;(b) for other purposes as well as purposes mentioned in that subsection.(4) Information is not confidential information if—
(a) it has been made available to the public by virtue of being disclosed in any circumstances in which, or for any purposes for which, disclosure is not precluded by this section, or(b) it is in the form of a summary or a collection of information that is framed in such a way that it is not possible to ascertain from it information relating to any particular person.(5) Each of the following is a primary recipient for the purposes of this section—
(a) the Payment Systems Regulator;(b) the FCA;(c) a person who is or has been employed by the Payment Systems Regulator or the FCA;(d) a person who is or has been engaged to provide services to the Payment Systems Regulator or the FCA;(e) any auditor or expert instructed by the Payment Systems Regulator or the FCA;(f) a person appointed to make a report under section 72;(g) a person appointed under section 73.(6) Nothing in this section applies to information received by a primary recipient for the purposes of, or in the discharge of, any functions of the Payment Systems Regulator under the Competition Act 1998 or the Enterprise Act 2002 by virtue of section 49 or 51.
(For provision about the disclosure of such information, see Part 9 of the Enterprise Act 2002.)”

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Moved by

[Lord Newby]

154: Clause 87, page 72, line 33, after “system,” insert—
“( ) threaten the continuity of core services provided in the United Kingdom,”

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Moved by

[Lord Newby]

156: Clause 89, page 73, line 35, after “direction” insert “under section 44”

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Moved by

[Lord Newby]

159: Clause 92, page 77, line 8, leave out “requirements imposed” and insert “generally-imposed requirements”

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Moved by

[Lord Newby]

161: Clause 95, page 77, line 35, at end insert—
““CAT-appealable decision” has the meaning given by section 66(4);
“CMA-appealable decision” has the meaning given by section 66(7);”

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Moved by

[Lord Newby]

163: Clause 104, page 83, line 30, at end insert—
“(f) staff.”

[Lord Newby]

My Lords, the purpose of this amendment is to restrict the early termination of contracts by suppliers of staff to infrastructure companies in respect of which a FMI administration order has been made.

Part 6 of the Bill establishes a special administration regime, to be known as FMI administration, which will be capable of applying to what are known as infrastructure companies. These infrastructure companies are the operators of payment and settlement systems and designated service providers to those operators. Clause 104 is a continuity of supply provision, which restricts the ability of suppliers to terminate the provision of certain listed supplies to an infrastructure company once the company has entered FMI administration. The supplies that are currently within the scope of the restriction are: computer hardware or software; financial data; infrastructure permitting electronic communication services; data processing and access to secure data networks.

This amendment would add the provision of staff to this list of supplies. Agency staff are critical to the functioning of payment and settlement systems, and several payment systems are staffed entirely by agency staff. The early termination of a contract for the supply of staff could result in the discontinuation of the provision of critical services by the payment or settlement system. This amendment will ensure that staff will continue to be supplied during the period of FMI administration.

The FMI administrator would pay for the provision of staff throughout the period of the administration. If during the period of the administration the supplier goes unpaid for 28 days or more, the supplier will be entitled to terminate the supply. I beg to move.

Amendment 163 agreed.

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[The Archbishop of Canterbury]

My Lords, I add my support to what the noble Lord, Lord Eatwell, said in specifying these particular contracts, not only for their tax avoidance capacity but because participation in them within the trading community leads to obvious conflicts of interest between their main work during the day, for their employer, and any potential gains or losses they have through the spread betting operations which they are capable of undertaking. In other words, it is very much a cultural problem and it is specifically to do with contracts that are considered to come under the purview of the gaming Acts. That is how I understood this amendment to apply, rather than more generally. From my point of view, I am not certain that it needs to be in the Bill, but it would certainly be useful if the Government were to say that the scope and impact of this should be looked at.

[Lord Newby]

My Lords, the purpose of the amendment is to require the Treasury to undertake a review of the consequences of exempting certain gaming contracts from the rule that used to provide that no gaming contract or wager could be enforced in a court of law. Such a review would consider the national, commercial and economic effects, in addition to the social, cultural and ethical effects, proposed in the equivalent amendment in Committee. I understand my noble friend’s desire to know more about the consequences of what appears to have been an extensive gambling culture in the City of London, which flourished in the derivative markets that expanded significantly following the gaming contracts rule change but was not limited to those markets.

The financial crisis exposed serious problems in derivative markets—particularly, as the most reverend Primate pointed out during our last debate on the equivalent amendment, in OTC activities. Clearly, the proliferation of such activities and the lack of adequate regulation showed up a need for change.

Following extensive international regulatory debate, a set of significant international reforms was agreed by the G20 to address these concerns. It may be helpful if I provide noble Lords with a short update on what they are. They include measures to ensure transparency by requiring all OTC derivatives transactions to be reported to trade repositories, and the requirement for all standardised derivatives to be centrally cleared and, where appropriate, traded on electronic platforms. These reforms are now being implemented in the UK and should go some way towards limiting the risks associated with these instruments.

So far as the wider effects of gaming in the City are concerned, the PCBS undertook an extensive and wide-ranging examination of the professional standards and culture of the UK banking sector. Its final report made a number of findings on the existing standards and culture in the banking sector, and recommendations as to what might be done to improve the position. We are seeking to give effect to those recommendations in this Bill. As the noble Lord will be aware, we will have a debate on the broader cultural aspects of the PCBS’s report next week.

In the circumstances, I am not sure that a formal Treasury review, as proposed by the noble Lord, is the best way forward. In Committee, I suggested to him that a more appropriate way forward to address his concerns might be for him and, possibly, other Members of your Lordships’ House to work with a think tank that specialises in financial services to undertake such a review. The precedent I had in mind was the review of the banking sector undertaken in the previous Parliament. The Future of Banking Commission was chaired by David Davis MP and included not only my colleague Vince Cable but the noble Lord, Lord McFall. That report had a major impact at the time in influencing the consideration of how we should be looking at the banking sector. The advantage of such a structure over a formal Treasury structure is that it enables a wide range of individuals, including serving politicians, to sit on it. That is much more likely to happen if it is done under the aegis of that sort of think tank than if it is initiated by the Treasury. As a result, when the report came out, it commanded a broad degree of public respect.

I take the point made by the noble Lord, Lord Eatwell, and the most reverend Primate the Archbishop of Canterbury about the specific consequences of potential tax avoidance or evasion by people involved in this sector. I undertake to discuss that with my colleagues in the Treasury in the context of measures that might be brought forward in a future finance Bill. I agree that at first sight it appears to be a loophole that we should have a look at. As noble Lords know, the Government have devoted considerable resource and attention to these issues. I am sure my colleagues in the Treasury will be happy to have a look at the issue.

With those suggestions, I hope my noble friend will feel able to withdraw his amendment.

[Lord Phillips of Sudbury]

I thank the Minister for what he said. I am particularly pleased to hear him say that he will take up the two practical points made by the noble Lord, Lord Eatwell, which are entirely germane to the review that I was thinking of. That will be an important step forward. I am obviously disappointed that the Government will not go further, but I do not think that I can take the matter any further today.

In opening, I should have said how grateful I was to two professors at the University of Essex, on whom I relied substantially for a lot of the statistics: Professor Sikka and Professor Markose. With that, I beg leave to withdraw the amendment.

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[Lord Flight]

My Lords, I simply add that there is surely a strong duty of care to the depositors, whose money a bank is lending. The bank has a balancing role of looking after the interests of its depositors and looking after the interests of its loan customers. I also echo the point made by the noble Baroness, Lady Cohen. The “treat your customer fairly” principle has been applied across the financial services sector and I think that, in the main, the investment management industry has put it into practice well. However, it is a nightmare to police. If the individuals are not going to be motivated to act properly, then the law, or whatever is in the regulations, will not necessarily lead to that. We can say that we will pass a law and everything will be wonderful but the question is: will people behave correctly?

[Lord Newby]

My Lords, I am sorry that when we discussed this amendment on a previous occasion, the Government failed to convince the noble Lord, Lord Eatwell, that his amendment was not necessary. I hope that I will have more success this time because I believe that the amendment is neither necessary nor helpful.

We all share the objective of driving up standards in banking and improving the treatment of customers. That is why the Chancellor set up the Parliamentary Commission on Banking Standards and why we have accepted the vast majority of its recommendations. However, we remain unconvinced that the noble Lord’s amendment will add anything meaningful to these reforms.

The regulator’s FSA Principles for Business already includes what is virtually a fiduciary duty. Principle 10 states:

“A firm must arrange adequate protection for clients’ assets when it is responsible for them”.

As other noble Lords have mentioned, these high-level principles also already include the principle that:

“A firm must pay due regard to the interests of its customers and treat them fairly”.

I am not sure how the noble Lord’s amendment would improve standards or help bank customers; nor do I think that he has explained what the new duties on firms really mean. When he spoke in Committee, he said:

“This will increase consumer protection and help to restore confidence of the retail customer in banks. It will raise standards of conduct because banks will know they are responsible for acting according to these duties”. —[Official Report, 23/10/13; col. 1092.]

But my question is: how will it do that? How will it, as he hopes, stop the kind of scandals that we have had in the past? I think that that is an extremely difficult question for the noble Lord to answer in that neither “fiduciary duty” nor “duty of care” in this context describes a specific, precise obligation. As I have explained before, regulators’ rules provide very specific obligations.

I should add that the Official Opposition in the other place seemed to understand this difficulty. When an identical amendment was considered in Committee there, the opposition spokesperson, Cathy Jamieson MP, acknowledged the risk of unintended consequences or lack of clarity. She emphasised that the purpose of the amendment was to ensure that,

“customers are looked after and that banks are clear about their responsibilities and remember the part of the contractual relationship with customers that is about looking after their money”.—[Official Report, Commons, Financial Services (Banking Reform) Bill Committee, 16/4/13; col. 247.]

Of course, that is what we all want. That is why the Government introduced the regulatory reforms and new properly focused regulators. The FCA, in particular, will focus on protecting consumers and maintaining market integrity.

This Bill will take the process further by strengthening the regime of individual accountability and standards for those who work in firms, in line with the recommendations of the Parliamentary Commission on Banking Standards. These rules will be specific. They will be precise. They will set out the responsibilities of banking staff and senior persons to their customers. Moreover, they will be enforceable by the regulator. If they are broken, those people will be punished and could be subject to fines or public censure.

If we were to have the general duty of care or fiduciary duty as set out in the amendment, how would that be enforced? In law a fiduciary duty is enforced by the person to whom the duty is owed taking action in the courts. Does the noble Lord really believe that those people, some of the most vulnerable at the sharp end of bank practices, are likely to pursue their bank through the courts? Instead, the Government’s reforms have established a regulator with real teeth, of whom the banks will genuinely be scared—indeed, I think they are. Bolstered by a clear and binding set of banking standards rules, which specify codes of conduct and personal responsibility through the senior persons regime, this will mean a real change for consumers. The noble Lord referred to the SEC introducing a fiduciary duty in the United States. The proposed fiduciary duty in US securities law is not comparable. The proposal, on which incidentally the SEC itself has not yet taken any clear position, extends only to covering activities that involve giving advice. In any case, in the UK, when a firm provides advice to a customer, a duty of care already exists under the general law. In that respect, the US is simply looking to catch up.

To sum up, attempting to add duties of care or fiduciary duties of the kind proposed in this amendment would add nothing to the existing protections for customers. It is unnecessary and would not add any clarity to existing requirements. I hope, therefore, that the noble Lord will withdraw the amendment.

[Lord Eatwell]

My Lords, I regret that the Government seem to have learnt nothing since Committee stage. We have heard the repetition of high-level principles of the regulator protecting customers. What has actually happened? There have been successive scandals when customers were not protected by the regulators and successive scandals in which treating customers fairly was simply a joke.

The noble Lord also referred to a number of specific provisions. That is the great weakness of the regulatory structure. We have simply specified conditions. As we all know, that which is not specified is permitted. The whole point of having a fiduciary responsibility and duty of care in the terms that I set out when I moved the amendment is to create a general responsibility that will be enforceable in law by individuals and, indeed, by collective actions. Therefore, it seems to me that simply saying, “We have made things better by making them more specific and providing regulators with teeth”, is not the same as providing protection for the individual, which is exactly what the amendment would do. Given that the notions of fiduciary duty and duty of care are successful in other professions, why—the Government failed to answer this question—can they not be successful in the banking profession? That question was not answered. This is so important that I wish to test the opinion of the House.

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Moved by

[Lord Newby]

166: Schedule 8, page 157, leave out lines 11 to 14

[Lord Newby]

My Lords, in Committee, the Government proposed that the FCA should be given competition powers, to be exercisable concurrently with the Competition and Markets Authority, to make sure that the FCA has the right tools to get the job done. The amendment that we tabled to achieve this set out the scope of the FCA’s concurrent competition powers as applying to “financial sector activities”, defined as relating to,

“the provision of financial services”.

The amendment also included a delegated power that would allow the definition of “financial services activities” to be changed in future. It was felt that allowing this definition to be amended by order helped to future-proof the legislation by providing the flexibility to adjust the scope of the FCA’s competition powers should this be warranted—for example, because some new activity that arose in the future did not qualify as the provision of financial services.

However, concerns over this were raised by the Delegated Powers and Regulatory Reform Committee, particularly that the power was too wide-reaching and unnecessary, given the breadth of the definition of “financial sector activities”. I am grateful to the committee for its efforts in scrutinising the Bill and the Government’s amendments. In the light of the already very wide definition of “financial sector activities” and the views of the committee, the Government have decided to remove this power, along with procedural provisions concerning its exercise, from the proposed legislation.

The Government have tabled another amendment to ensure that the competition powers conferred on the FCA are capable of being exercised effectively. One of the powers conferred on the FCA is the ability to conduct a market study in the context of markets for the provision of financial services. If the FCA discovers competition-related concerns, it can refer the market for investigation by the Competition and Markets Authority. The amendment we are discussing today serves to ensure that a legal restriction on the FCA disclosing confidential information would not prevent the FCA from sharing with the Competition and Markets Authority confidential information which was relevant to a CMA market investigation. The amendment would also ensure that the provisions concerning treatment of confidential information that apply to other regulators with concurrent competition powers would also apply to the FCA, ensuring consistency. I beg to move.

Amendment 166 agreed.

Moved by

[Lord Newby]

167: Schedule 8, page 157, line 26, leave out “financial sector activities” and insert “the provision of financial services”

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[Lord Eatwell]

My Lords, Amendment 172 derives from, and is a response to, an amendment that the Government successfully moved in Committee, which gave the PRA a secondary competition objective directly related to issues of market structure and performance. We have developed in this Bill, and in the previous Financial Services Bill which we also considered in this Session, a twin-peaks approach to financial regulation, with the Financial Conduct Authority looking at conduct of business and the Prudential Regulation Authority looking at issues associated with the prudential behaviour of firms.

Given that the PRA now has a competition objective, we should not allow the twin peaks to isolate consumer representation. The FCA consumer panel has an important role in advising on and responding to FCA proposals with respect to conduct of business but, with the PRA now having a competition objective, the issues which affect consumers directly will involve the competition element of prudential regulation. It is important, and entirely appropriate, that the PRA at least considers and responds to representations made by the FCA’s Consumer Panel—that is all we are asking for—so that decisions which the PRA makes with respect to market structure and performance have an appropriate consumer input. I beg to move.

[Lord Newby]

My Lords, this amendment concerns the important issue of consumer representation at the PRA and requires the PRA to consider and respond to representations from the FCA’s Consumer Panel.

There is much to welcome in the approach suggested. It is important to ensure that there is sufficient regard to consumer concerns at the PRA, especially where there are specific issues of consumer protection that the PRA should take into account. I welcome the recognition that it will not require the creation of a completely new body in order to achieve this. We need, of course, to be mindful of maintaining flexibility on the best way for the PRA to take into account representations from consumers and the need to avoid overly burdensome arrangements.

Following the earlier discussions on this issue, the regulators have considered how best to ensure consumer interests are communicated to the PRA. The regulators have come to the view that there should be arrangements for the FCA Consumer Panel to be able to raise concerns with the PRA, and I believe that it is worth considering putting arrangements on a statutory basis. We will therefore consider coming back at Third Reading with amendments, subject to reflection on the best way to do that without incurring unnecessary costs or burdens for the regulators or the panel. We would be happy to discuss further with noble Lords opposite the most effective approach to doing this. In view of that, I hope that the amendment can be withdrawn.

[Lord Eatwell]

There I was with my notes saying how inadequate the noble Lord’s answer was going to be. I am delighted that the Government have recognised the power of this argument and I look forward to discussions with them and to the moving of amendments at Third Reading.

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Moved by

[Lord Newby]

173: Clause 117, page 92, line 14, at end insert—
“(2) In section 3A of FSMA 2000 (meaning of “regulator”), in subsection (3)—
(a) omit the “or” at the end of paragraph (a), and(b) after paragraph (b) insert “or(c) the meaning of “regulator” in sections 410A and 410B (fees to meet certain expenses of Treasury).””

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Moved by

[Lord Newby]

174: Clause 118, page 92, line 21, leave out from “(e)”,” to end of line 22

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[Lord Turnbull]

I shall speak also to Amendment 183. This is about whether there should be a statutory basis for the existing remuneration code. One can analyse this at three levels. First, does the current code permit the kind of actions that the parliamentary commission recommended, such as longer deferrals where the nature of the risk justifies it, and more extensive clawback? Secondly, will those powers be used more rigorously than they have been in the past, particularly for banks? Thirdly, is giving statutory backing through the Bill necessary in order to ensure the correct answer to the second question?

Since tabling this amendment, we received a letter from the noble Lord, Lord Newby, on Monday, which in my view gives a satisfactory answer to the first question. All that the parliamentary commission sought, with the possible exception of forfeiture of some pension rights, can be imposed under existing powers. With regard to the second question—will those powers be used more rigorously?—the letter from the noble Lord, Lord Newby, says that the regulators,

“have stated that they will revise the … Code following consultation in 2014. The Government will work with regulators to ensure that …the Code [takes] full account of the views of the PCBS and the debates”,

on this Bill. Therefore, it is a matter of judgment for the House. Does it want to accept those assurances or does it feel that further amendments are needed to embed this presumption more fully? I think that the correct way forward is for there to be some further discussion about precisely what the review and the outcome might be. I look forward to hearing what the noble Lord has to say.

[Lord Newby]

My Lords, I am extremely pleased that my letter has at least partially satisfied the noble Lord. He has left me with a remaining question, which is: are we happy to continue to engage with him and his colleagues as we work towards, and consider, the review? I can give him the absolute assurance that we will be very happy to do so. On that basis, I hope that he will feel content to withdraw his amendment.

[Lord Turnbull]

On the basis of that assurance, I am indeed content to beg leave to withdraw the amendment.

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[Lord Turnbull]

This amendment concerns the concept of special measures. We were again told, as we often have been, that all the powers necessary are there and that, indeed, they are being used. That may well be the case. However, the Minister did not respond to my suggestion that, if this is part of the armoury of the regulators, it would be helpful if they set that out so that there was wider understanding of the special measures regime. I do not think that the regime has an identity in the way that it has in the US, where they talk about memorandums of understanding. Subject to that, I would be happy to put this matter into the box labelled “For further discussions”. I beg to move.

[Lord Newby]

My Lords, I think that this is now having the appearance of a Christmas box, in that the noble Lord is asking the Government to agree to things and we are tending to agree to agree to things.

Given all the powers that the regulators already have, we have been slightly sceptical about whether they need to have, as it were, an Ofsted power of special measures. We do not think that they need more powers but, in order to address the noble Lord’s concern that failings in professional standards and cultures should not be overlooked, we shall be happy to discuss this with him further and to involve the PRA in discussions about how we move towards a firm policy in this area.

[Lord Lawson of Blaby]

My Lords, I am very grateful regarding a number of issues. The Government have said that they are going to move further and will probably —and, in most cases, definitely—bring something forward at Third Reading. That is excellent, but it means that we are going to have a lot of government amendments to consider for Third Reading. I stress what I said yesterday about how important it is that this House has plenty of time to consider the amendments that the Government, to whom I am grateful, will bring forward. They must be tabled at the earliest practicable date and well before the date set for Third Reading otherwise it will be necessary for that date to be postponed.

[Lord Newby]

My Lords, I understand the point being made by the noble Lord. I am not sure at this point, without further discussion, whether we need an amendment at Third Reading. We think that the way forward might be a PRA policy statement, but we can have urgent discussions with the noble Lord on that.

[Lord Turnbull]

It is indeed a PRA policy statement that I am after. I am trying to establish a regime in which the regulator sees things that are going wrong and gets into dialogue with the company about remedial measures to head off the long-drawn-out agony of enforcement. If it is already doing it, it would be helpful to codify it but I am very happy to work with the Minister on that basis. I beg leave to withdraw the amendment.

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Moved by

[Lord Newby]

185: Before Clause 121, insert the following new Clause—
“Power to impose penalties on persons providing claims management services
(1) The Schedule to the Compensation Act 2006 (claims management regulations) is amended as follows.
(2) In paragraph 8 (rules about conduct of authorised persons), in sub-paragraph (2)(b), after sub-paragraph (i) insert—
“(ia) provision enabling the Regulator to require an authorised person to pay a penalty;”.(3) In paragraph 9 (codes of practice about conduct of authorised persons), in sub-paragraph (2)(b), after sub-paragraph (i) insert—
“(ia) enable the Regulator to require an authorised person to pay a penalty;”.(4) In paragraph 10 (complaints about conduct of authorised persons), after sub-paragraph (2) insert—
“(3) Regulations under sub-paragraph (1) may enable the Regulator to require an authorised person to pay a penalty.”
(5) In paragraph 11 (requirement to have indemnity insurance), in sub-paragraph (2)(b), after “Regulator” insert “to require the payment of a penalty by an authorised person or”.
(6) In paragraph 14 (enforcement), in sub-paragraph (4), for the words from “impose” to “authorisation” substitute “require an authorised person to pay a penalty, or to impose conditions on, suspend or cancel a person’s authorisation,”.
(7) After paragraph 15 insert—
“Penalties: supplementary provision16 (1) This paragraph applies in any case where regulations include provision enabling the Regulator to require an authorised person to pay a penalty.
(2) The regulations—
(a) shall include provision about how the Regulator is to determine the amount of a penalty, and(b) may, in particular, include provision specifying a minimum or maximum amount.(3) The regulations—
(a) shall provide for income from penalties imposed by the Regulator to be paid into the Consolidated Fund, but(b) may provide that such income is to be paid into the Consolidated Fund after the deduction of costs incurred by the Regulator in collecting, or enforcing the payment of, such penalties.(4) The regulations may also include, in particular—
(a) provision for a penalty imposed by the Regulator to be enforced as a debt;(b) provision specifying conditions that must be met before any action to enforce a penalty may be taken.”(8) In section 13 of the Compensation Act 2006 (appeals and references to Tribunal)—
(a) in subsection (1), omit the “or” at the end of paragraph (d) and after paragraph (e) insert “, or(f) imposes a penalty on the person.”;(b) after subsection (1) insert—“(1A) A person who is appealing to the Tribunal against a decision to impose a penalty may appeal against—
(a) the imposition of the penalty,(b) the amount of the penalty, or(c) any date by which the penalty, or any part of it, is required to be paid.”;(c) in subsection (3), after paragraph (d) insert—“(da) may require a person to pay a penalty (which may be of a different amount from that of any penalty imposed by the Regulator);(db) may vary any date by which a penalty, or any part of a penalty, is required to be paid;”.”

[Lord Newby]

My Lords, Amendments 185 to 189, 191 to 194 and 197 to 198 are government amendments on claims management companies and non-government amendments on the consumer’s access to redress from CMCs through the Office for Legal Complaints.

Turning first to the government amendments on CMCs, it is clear that bad practice by certain claims management companies operating in the financial services sector has created poor outcomes for both consumers and businesses. As the scale of potential claims for PPI compensation has become clear, CMCs have become particularly active in this market. Unfortunately, this increase in activity has in some cases been accompanied by an unacceptable fall in standards. CMCs have a legitimate role to play in helping consumers claim compensation. However, a minority have been acting irresponsibly. Some CMCs submitted illegitimate claims which clog up the system. This poor behaviour has led to delays in receiving compensation for consumers who have legitimate claims and has increased costs for defendant financial services firms where claims are unsubstantiated. This issue is most prevalent in, but not limited to, the financial services sector and the PPI claims market in particular. Despite the threat of the suspension or cancellation of authorisation, some CMCs act speculatively which can impose unnecessary costs on defendant businesses and ultimately on consumers.

These amendments enable the Secretary of State to make regulations giving the claims management regulator the power to impose financial penalties on those CMCs guilty of misconduct, which will lead to tighter regulation of the industry and better outcomes for consumers and businesses. They also make a number of consequential amendments, ensuring that the provisions of the Bill on secondary legislation, including the power to make incidental or transitional provision, are extended to apply to the Secretary of State as well as the Treasury; that the commencement power applies to these provisions; and that providers of claims management services are referred to in the Long Title of the Bill.

Bolstering the claims management regulator’s enforcement toolkit by giving it a power to fine those engaged in malpractice provides an additional means to deter speculative activity. Further, a power to fine could serve as a useful alternative penalty in cases where it can be disproportionate to vary, suspend or cancel the authorisation of a CMC despite it not being compliant. Where a CMC’s authorisation is suspended or cancelled, for example, it can no longer act on behalf of its clients and this can lead to further consumer detriment. We can ensure that these CMCs go on to work in the best interests of consumers by making sure that they adhere to the codes of practice and Conduct of Authorised Persons Rules issued by the claims management regulator. These rules require CMCs to conduct themselves with honesty and integrity, including requirements to not make speculative claims, to not use misleading advertising, and to not partake in high-pressure selling. I apologise for that stream of split infinitives.

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[Lord Newby]

My Lords, if we can do it at Third Reading, we will. I am advised that there are a number of technical and procedural issues that we have to go through. I hope we can do it at Third Reading. I shall certainly press very hard that we do, and every effort will be made to achieve that.

Amendment 185 agreed.

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[Lord Eatwell]

My Lords, I support my noble friend Lord Brennan in his attempt to remove subsection (2)(b) from Clause 124. As he has clearly told the House, it would enable secondary legislation to amend future Acts prior to the end of the Session—not this Act, but other enactments. This is an extraordinary power which was justified in Committee by using the argument that there are precedents. No precedents have been produced. It is shocking that the promise of a letter made over five weeks ago has not actually been kept on something which raised considerable concern in Committee. I think that the Government need to take this matter very seriously indeed and not palm it off with what seem to be entirely unsubstantiated stories of precedence.

[Lord Newby]

My Lords, I understand the concerns expressed by the noble Lord, Lord Brennan, and I assure him again that there is nothing unusual about the form of the power to make consequential amendments in Clause 124, and in particular, subsection (2)(b) does not extend the power unreasonably. My memory of exactly what I have written to whom, given that I have written to quite a number of people, is slightly hazy. I think I may have referred to this issue in what was a sort of portmanteau letter to the noble Lord, Lord Eatwell. It covered a whole raft of issues that had been raised not only by him but by other noble Lords. If I did not do so, I apologise to the noble Lord, Lord Brennan. However, in what I am about to say, I think that I can deal with the main point that he made.

Removing paragraph (b) would limit the power to make consequential amendments to Acts which are passed before the passing of this Act. That can produce unpredictable results depending on the progress of Bills and the dates on which they happen to reach Royal Assent. For this reason, powers to make consequential amendments to existing legislation often refer to Acts which are passed in the same Session as the Act in question. Noble Lords have asked for examples of this, and I can give them several. Such powers can be found in Section 51 of the Constitutional Reform and Governance Act 2010, Section 237 of the Planning Act 2008, Section 28 of the Welfare Reform Act 2007 and Section 118 of the Financial Services Act 2012—the provision on which Clause 124 was modelled.

The assumption is that Bills of the same Session are likely to have been prepared by reference to the existing law at the beginning of the Session, while the Bills of the next Session would have to take account of the change in the law produced by the Act in question. Where a Bill is amended significantly in its passage through the second House, it is particularly unlikely that Bills passed or made in the same Session will have taken account of all the provisions of the new Bill. That clearly applies in this case, as your Lordships know. The need to implement the recommendations of the Parliamentary Commission on Banking Standards has required very extensive amendments to the Bill in this House, and therefore it will not have been possible for the Bills which are being considered by Parliament in this Session to have taken full account of all the changes in the law which will be made by this Bill. Nor has there been time for the Government to consider all the Bills currently before the House to see if any consequential amendments may be required, or to follow all the amendments being proposed to these Bills. We have not, for example, had the opportunity to review the Pensions Bill, which may have provisions relevant to the subject matter of this Bill, or the Immigration Bill, which has some provisions on banking. We cannot rule out the possibility that it may be necessary for the Government to make consequential amendments to them.

I assure the House that the amendment introducing this power was considered by the Delegated Powers and Regulatory Reform Committee, and that committee has not expressed any concerns in relation to this power. I hope that, in the light of these assurances, the noble Lord will feel able to withdraw his amendment.

[Lord Brennan]

Will the Minister clarify, first, his reference to the Delegated Powers and Regulatory Reform Committee? Was its response made in writing, has it been published, and is it available in the Printed Paper Office? Secondly, and much more important, is that as his research appears to have been done, can he clarify whether on any previous occasion this power has actually led to the amendment of another Bill being passed in the same Session, but after the Act which gave rise to the power?

[Lord Newby]

I thank the noble Lord for that question. It is the normal practice of the Delegated Powers and Regulatory Reform Committee to include in one report its views on a number of Bills. I believe that that is what happened in this case and I will definitely write to the noble Lord if it has not.

[Lord Brennan]

Would it be possible for the Minister to confirm that because I asked specifically in the Printed Paper Office for all the relevant paperwork about this, and I was not given any report.

[Lord Newby]

I will absolutely confirm that, and I will write to the noble Lord on the second point, which I promise to do speedily.

Amendment 190 withdrawn.