Financial Services Bill

Lord Peston Excerpts

Monday 8th October 2012 Lords Chamber

[Lord Peston]

My Lords, we make the obvious point that getting it right is not the same as doing it quickly. We ought always to bear that in mind in your Lordships’ House. There is a straightforward solution to this. One is my noble friend’s suggestion for Report. Since I assume, particularly given the Leader of the House’s remarks, that we are not imminently in danger of being abolished, that we are still a self-governing House, we can therefore decide, if we wish to, one of two things: either my noble friend’s proposal, with which I strongly agree, that we would simply have Committee stage rules at Report stage for what is being proposed; the alternative is not to end the Committee stage until the Government can get their tiny mind around the Wheatley proposals and come up with their amendments.

I have read the Wheatley report. The proposals do not strike me as being intellectually very demanding—nowhere near as difficult as deciding on a railway line. Therefore, the noble Lord ought to respond positively instead of adopting this negative approach and remind himself that we will get only one chance to get this right. We ought to make sure that we do not bungle it.

[Lord Eatwell]

My Lords, I should make clear that I said that the Labour Party was broadly supporting the conclusions of the Wheatley report; not the Government’s policy because we do not know what that is yet. We look forward to seeing it. Perhaps we will support it; perhaps we will not. On the substantive matter, I welcome what I saw was the noble Lord’s support for a degree of flexibility at Report, referred to also by my noble friend Lord Peston. If it could be agreed in due course by the usual channels that for the Wheatley clauses a Committee-style procedure be permitted and the House agreed to that, then I think we could proceed with due speed.

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[Lord Sharkey]

My Lords, this is a probing amendment. Its purpose is to allow discussion of the issues surrounding crowd funding in the United Kingdom. The informal meaning of crowd funding is probably entirely obvious. However, as far as I can tell there is no generally accepted legal or technical definition of the term. Wikipedia describes crowd funding as,

“the collective effort of individuals who network and pool their resources, usually via the Internet, to support efforts initiated by other people or organizations”.

More particularly crowd funding also refers to,

“the funding of a company by selling small amounts of equity to many investors”.

This was the meaning directly addressed in President Obama’s JOBS Act of April this year which, among other things, gave the SEC 270 days to bring in appropriate regulatory regimes for crowd funding in order to encourage its take up and its expansion.

In the UK, as elsewhere, there are essentially three possible forms of crowd funding. The first is the donation model in which funders provide money to an organisation for no commercial or financial return. The second is the lending model, in which funders provide money by way of repayable interest-bearing loans. These two models are actively used in the UK and do not seem to face significant regulatory barriers, provided that loans do not involve the provision of consumer credit. However, neither of these is suited to the more speculative form of SME or start-up enterprises: donations because enthusiasm, although often surprisingly generous, will be restricted to a fan base, and lending because many organisations will be conventionally assessed as not credit-worthy.

The third method of crowd funding, investment, is potentially a significant source of funds for start-ups and similar high-risk ventures but it faces regulatory problems in the United Kingdom. There are two kinds of investment crowd funding: the equity model, where investors receive shares in the company; and the collective investment scheme model, where investors receive a right to a share in profits or revenue but no shares. As a general rule, it is not possible for a company in the UK to raise money by crowd funding using either the equity or the CIS models. With some limited exceptions, both these models fall within the UK regulatory regime’s prohibition of such activities. That is the problem about which I would like very much to hear the Minister’s views.

Specifically, does the Minister accept that crowd funding may be a very useful way of getting substantial funds into the UK’s SMEs, an area where our banks are currently underperforming? If so, does he acknowledge a degree of urgency in setting up an appropriate regulatory framework, and can he accept that the existence of high levels of risk in investing in small companies need not necessarily mean that ordinary people should not be allowed, or even encouraged, to invest their money in such enterprises? Perhaps, in this context, it is worth remembering the conclusion for the US jobs market of the Kauffman report: that for 20 of the past 27 years, all net new jobs came from start-ups.

My noble friend the Minister will know of the report published in February this year by the Association of UK Interactive Entertainment, entitled A Proposal to Facilitate Crowd Funding in the UK. This report rehearses the benefits to business of making crowd funding more easily accessible to ordinary people. It makes, in some detail, recommendations for regulatory change in order to achieve it. In summary, the report recommends that crowd funding be permitted generally and not restricted to some qualified class of investor; that any regulation be light touch; that there should be no absolute requirement that shares be issued to investors, so that the CIS model may be applied; that there should be no upper limit on what can be raised for projects, with certain conditions applying; and there should be an investment limit per person to limit individual exposure.

Perhaps I could ask the Minister to give his views on these proposals, to consider in a general sense how we may use crowd funding to both increase and speed up the flow of funds into the SME sector, and to give some indication of the Government’s intentions in this area and of timings. I beg to move.

[Lord Peston]

My Lords, the noble Lord has introduced his amendment as a probing amendment, which I take to mean that it is meant to be educative. My natural tendency is to agree with him, but I have great difficulty in that I do not have the faintest idea what he is talking about. In particular, I do not know what crowd funding is. The amendment says it should have,

“the meaning given in section 417”,

but there is no Section 417 in any of the documents that I have. It would help me enormously if he could extend my education and tell me what this is all about.

[Lord Stewartby]

My Lords, I, too, would like some assistance from my noble friend. It is not easy to understand, in large parts of this Bill, what it is trying to get at. I raise this under discussion of Clause 6 because that is what permits the transfer of regulation of consumer and small business credit from the Office of Fair Trading to the new Financial Conduct Authority.

I have had an approach about this from the Finance & Leasing Association. They told me that they do not seek an amendment to the Bill, rather a commitment by the Government to a sensible timetable, to ensure the Government get the rules right and avoid the loss of important consumer protections. This is because the Government have set a very ambitious target date of April 2014 for the creation of a new regime for credit regulation. They propose a twin-track approach which will include a slimmed-down version of the Consumer Credit Act with enhanced powers. The Government say they want to transfer as much as possible of the CCA and associated OFT guidance into this new rule book by April 2014. However the detail of the new rule book will not be consulted on until the second half of 2013, and the final rules will only be available in March 2014. This makes the implementation of an April 2014 date virtually impossible. I would be grateful for enlightenment and assistance from my noble friend.

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[Lord Peston]

Perhaps I may interrupt the Minister. As I listened to my noble friend, it suddenly dawned on me what we were talking about. It really does mean crowd funding and, following what my noble friend said, there is a very simple answer to it: do not do it.

[Lord Sassoon]

That is one way of dealing with it, but it is not the way in which the Government wish to deal with it, which I shall explain in a moment. I say to my noble friend Lord Stewartby that I have a hunch that before we pass this clause we will have a discussion about timetabling. If he will forgive me, I shall come back to the matter then, but if we do not I will make sure that I raise the timetable in question later.

Crowd funding is an innovative new source of funding for start-ups and other small enterprises. I share my noble friend’s hope that it will continue to grow in the coming years, so my answer to his first question is a resounding yes. However, on his second question, which is the subject of the amendment, while I understand my noble friend’s enthusiasm for establishing discrete legislative provision to bring this very new sector into regulation, I do not agree that it is needed at this stage and so cannot accept the amendment.

My noble friend raised the US JOBS Act. In the US, there was a very distinct problem and a pressing need, which led to the introduction of that Act. The situation is different in the UK. Among other things, there has been no clarion call from industry for more regulation. However, we should not be complacent, and the FSA is not waiting until there is a problem before doing things.

Platforms seeking to operate what are in effect collective investment schemes must obtain authorisation from the FSA. The FSA already has powers to take action against firms operating without appropriate authorisation. It is up to the FSA to work with platforms seeking to offer equity returns to their investors to ensure that they obtain relevant permissions before the activity that is most likely to apply here—arranging deals in investments—starts. This is happening already, with one such platform securing authorisation from the FSA prior to its launch.

Of course, the regulator must balance the need to allow innovative models to flourish with ensuring that consumers understand the risks involved with new platforms. In this regard, the FSA’s recent guidance on crowd funding makes clear its concerns, which are evidently shared by the noble Lord, Lord Peston. This is the right sort of regulatory response. It shows that we should not rush to create new regulated activities here.

I am also concerned that amending the Bill in this way could create confusion that stifled the growth of the new sector. There are currently many forms of crowd funding. We do not yet know precisely what definition my noble friend had in mind, but the vast majority of these platforms ask customers to make donations rather than investments. They have been very successful in doing that. The world’s largest crowd-fundng site, Kickstarter, for example, which will launch in the UK very soon, raised more than $100 million for creative projects in the past year. A platform such as that does not pose the same risks to investors, who expect no money in return for their donation, so we have to be mindful of the risk of legislating in a way that does not fully take account of the breadth of the businesses in this new area.

In conclusion, although industry standards and further FSA and FCA guidance may have an important role to play in future, my view is that the regulatory structure proposed in the Bill is suitably flexible to support the growth of the full variety of crowd-funding platforms, with a careful eye on the needs of the consumer throughout. With that, I hope that my noble friend will agree to withdraw his probing amendment.

[Lord Sharkey]

I thank the noble Lord for his answer. The noble Lord, Lord Peston, invited me to extend his education, but I think I should decline any such attempt. The noble Lord, Lord Barnett, did not believe that there was a definition there, and he was right—there is no definition. I shall not do it again now, but I did try to explain what forms crowd funding currently takes. Perhaps I did not give a clear impression of how important or what size it currently is, and that is my fault, but crowd funding exists and plays quite a large part in the landscape of small companies, both in the United States and already here in the United Kingdom.

I think I noticed an expression of perhaps amazement on the face of the noble Lord, Lord Peston, at the notion that people should donate $100 million to commercial enterprises for no return at all—an aspect of crowd funding that clearly he was not familiar with.

[Lord Peston]

I take it that if the thing goes ahead, it will be made clear to people putting money into this sort of thing that they are essentially going to a betting shop, where they may win or lose. That is what it is about. Since our country appears to be gambling mad at the moment, there seems no reason to prevent this new form of gambling from being introduced. However, as someone who knows—coming, as I have said before, from a large family of gamblers—that gambling is a total mug’s game, I hope there is someone around who tells people that crowd funding is a mug’s game.

[Lord Sharkey]

It is nice to know that the noble Lord, Lord Peston, approves of gambling. Returning to the Minister’s response to the amendment, I note the objections that he raises, some of which were raised by the noble Lord, Lord Peston, as well. I accept that this is a new area that is full of dangers for unwary investors, and I also accept the dangers of regulating an infant industry too early. However, we are about to see a significant expansion in this area, which we should all keep an eye on for the future. Having said that, I beg leave to withdraw the amendment.

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[Lord McFall of Alcluith]

My Lords, I will be brief and precise on Amendments 148, 149 and 174 which require consultation by the Treasury on draft orders. Clause 7(3) provides for parliamentary control in relation to the proposed orders under Section 22 of the Financial Services and Markets Act 2000 and proposed new sub-paragraph (2) says that no order should be made before Parliament unless approved by resolution of each House. Given the complexity of the Financial Services Bill and the capacity for muddle and wrong-headedness by all Governments over the past years, I think there is a case for enlarging the consultation.

In the 1990s, we were in Opposition in the House of Commons and recommended pre-legislative scrutiny. A number of Ministers took up the concept and it worked. I remember being involved in a three-clause Bill in Scotland that related to raves—clubs where young people found themselves dehydrated and where a number of lives were lost. The main clause in that Bill was Clause 2. We did pre-legislative scrutiny and visited many areas of Scotland. We came back and the then Minister, the noble Lord, Lord Selkirk of Douglas, said that the Government had reflected on the matter and that Clause 2 would be removed and redrafted. The lesson is that politicians can frequently get things wrong. Why do we not get this right by taking a little bit more time and extending the consultation? That is the thrust of this amendment.

[Lord Peston]

My Lords, I am a bit puzzled about the wording in the relevant paragraph. Of course, I agree with what my noble friend says about consultation. However, can the Minister explain why the word “would” appears in line 5 rather than “should”? Even if the Treasury thinks the order would have the described effect, it must certainly believe that it should have the effect. What is the point of the order if it does not achieve what it is trying to achieve? I am a bit puzzled about the word “would”. My noble friend’s amendment would make much more sense if “should” were inserted instead of “would”.

That leads me to my attempt to get my mind around what would actually happen in this case. It is immensely difficult because the provision substitutes material in this Bill for material in legislation that we do not have before us, which is always a problem. However, if we ask ourselves, “When would any of this order-making process occur?”, presumably the answer would be that it would occur when various outside bodies say that this matter is not being regulated, but must be regulated. In other words, what precedes the consultation is the fact that it is not certain at all that the Treasury would take the initiative in this. It is the acting body and is therefore the one that has to act when it comes to producing the orders.

Therefore, the built-in logic behind the entire new paragraph is the consultation process. Indeed, it is also part of the spirit of the age. One can go further and say that not merely is consultation part of the spirit of the age, but that interested bodies would undoubtedly be aware of these orders. Even if the Treasury does not consult them, those bodies will ensure that the Treasury knows what they think because they will get in touch with the Treasury and say either, “What you are doing is a good thing and we would like to support you”, or, “You do not know what you are doing and you ought to do it in a different way”. What my noble friend is putting forward helps the Bill to become much more sensible in practical terms, and it would become a fortiori more sensible if we were allowed to amend the language by inserting “should” for “would”. I think that would make infinitely more sense.

[Lord Davies of Oldham]

My Lords, I am grateful to both my noble friends who have spoken on this issue and very much agree with the arguments they presented. Amendment 149AB in my name merely seeks to take this matter one obvious stage further. My noble friends have put the emphasis on effective consultation so that the Treasury presents a position that is the result of informed judgment. However, the other part of informed judgment is that Parliament should reach a decision on what the Treasury has arrived at regarding such an important matter as the powers to amend Schedule 6 of the Financial Services and Markets Act. The Bill significantly changes the architecture, which is a phrase frequently used by the Minister. With our amendment, we are merely seeking assurance that, after effective consultation and deliberation by the Treasury, the orders are put before Parliament, whereby its views can be heard before anything comes into effect.

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[Lord Peston]

If the Minister will read a few lines further on in his own Bill, he will see the words,

“by reason of urgency, it is necessary to make the order”.

That can make sense only if the word “should” is used. It cannot possibly be a meaningful part of the Bill if the word “would” is used. The Treasury must believe that there is a reason of urgency for this to take place and so we infer that “should” is the right word. Otherwise, reasons do not apply, and it reads more like something happening by chance, so let it happen. However, that is not what this bit of the Bill is about. I hate to tell the noble Lord, but on this point I think I understand his Bill better than he does.

[Lord Sassoon]

On this occasion, I am quite confident in my use of the English language, even if the noble Lord understands the Bill better. Outside the Chamber we can debate who understands the Bill better. I am quite clear that “would” is the correct word here because it refers to something which is expected to have the effect of extending regulation. I shall not detain the Committee on what we are not discussing, so let us talk about what we are discussing.

Amendment 148 would require the Treasury to consult on the order made under Section 22 where it would result in an unregulated activity becoming regulated. The Government recognise the best practice established in this area by the Department for Business’s code of practice on consultation. I can assure the Committee that the Government will continue to observe the code wherever possible when conducting formal written consultations. However, I do not think that it would be appropriate to write this requirement into this legislation, as it is not written into many other pieces of legislation. Indeed, the Government generally consult on changes to the regulated activities order. I cannot find any case to date where the Government have introduced substantive changes without consultation. Having said that, it may not be appropriate in all cases: for example, if an urgent change needs to be made to bring an activity into prudential regulation that may cause a financial stability risk. For that additional reason, I think it would be wrong to require consultation.

Amendment 149 would require the Treasury to consult on the first Section 22A order and any subsequent orders which amend the scope of PRA regulation or which amend primary legislation. The Section 22A order sets out the scope of PRA regulation. Here, too, the Government agree—and I am happy to restate it—that it is preferable to consult, and indeed the Treasury will be consulting on a draft of the Section 22A order shortly. I do not think it is necessary to write such requirements into legislation.

It is also worth the Committee noting that both of these types of orders would be subject to the affirmative procedure in all cases. Parliament will always have the chance to consider these amendments, and to consider whether the Government have presented suitable evidence—through a consultation in the normal event—of the need for any change. I think that that backstop is an important point here.

I turn now to Amendment 149AB in the name of the noble Lord, Lord Davies of Oldham. He has tabled, I think, only one amendment out of the many hundreds that this Committee has already considered and because I made a concession on it, his batting order is going down from a 100% to a 50% success rate at a stroke. I agree with the noble Lord that orders made by the Treasury that amend Schedule 6 should be subject to the affirmative procedure as they concern changes to the PRA’s and FCA’s threshold conditions, which are the cornerstones of each authority’s regulatory approach. However, we have already provided for this. Clause 46(2), on page 130, includes orders made under Section 55C in the list of orders that should be subject to the affirmative procedure. Therefore it is a simple matter to understand that Amendment 149AB is not needed.

I move to Amendment 174, tabled by the noble Lord, Lord McFall of Alcluith. I will briefly explain the purpose of new Section 141A of FiSMA. It gives the Treasury and the Secretary of State a narrow and technical order-making power to amend legislation that makes reference to the rules of either regulator or to guidance issued by the FCA where the regulator has altered or revoked its rules. This is a sensible approach to ensuring that references to rules and guidance made by the regulator in legislation remain accurate and up to date.

It would not be appropriate to require the Treasury or the Secretary of State to engage in consultations before making amendments to legislation that are a direct consequence of changes to rules or guidance made by the regulator. This would cause unhelpful delays to the process of updating the affected legislation, causing possible confusion and uncertainty for firms and other persons affected. Of course, except in cases of urgency there will already have been consultation on the substantive changes being made to the rules or guidance, as this is required of the regulators.

I hope that with those explanations the noble Lord, Lord McFall, will feel able to withdraw his amendment.

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[Lord Newby]

My Lords, I agree strongly with the motivation behind the amendments of the noble Lord, Lord Eatwell. The process for approving new entrants to the market should be streamlined to the maximum possible extent because it is clearly a flaw in the current financial services market that while in many sectors there is strong competition, in some, particularly banking, we wish to see significantly more competition. In terms of giving an impetus to the speedy processing of applications, we strongly support his view. However, I hope that I can persuade him that the Bill already makes it clear how the two regulatory bodies are going to deal with applications for firms that will be jointly regulated. In Clause 9, proposed new Sections 55E to 55G set out in detail who is to determine applications for authorisation, while new Sections 55U to 55Z1 set out the detail of the procedure which the regulators have to follow. We have already attempted to clarify who does what.

Those who are applying to become a dual-regulated firm are required to make a single application for authorisation to the PRA, and there will be a single administrative process. The PRA and the FCA will be under a duty to co-ordinate which will cover all of their functions, including those related to authorisations. They are under a duty to set out in their memorandum of understanding, in high level terms, how that co-ordination will be delivered. To deliver the duty to co-ordinate, the two authorities are required to put processes in place that will allow for efficient co-ordination. They also need to establish a process for authorisation and variation of permission, and to communicate that to firms. The FSA does this at present, and guidance is available on authorisation from its website. I do not think there is a need for an express requirement in legislation about exactly what the regulators should publish.

I shall move on to Amendment 149AC. We are aware that the ESAs are to assist in preparing equivalence decisions relating to supervisor regimes in third countries under relevant sectoral legislation, such as Article 33 of the ESMA regulation. Where EU law provides for the ESAs to have a role in determining equivalence of an overseas regulator, of course the regulators must comply with EU law and recognise that decision. However, we believe that it would be inappropriate to extend the role of the ESAs by requiring our regulators to have regard to any equivalence decisions they make in contexts that are not required by EU law. But, of course, the question is really one of whether the regulatory bodies are going to take account of the overseas regulators supervising those firms which are applying for passporting into the UK. When the FCA or the PRA is assessing a firm seeking to passport in to the UK from outside the EEA, the opinion of an overseas regulator that knows the firm, its operations and its management extremely well is quite likely to be helpful. The FCA and the PRA must also consider how the overseas regulator supervises the firm and take this into account, but in doing so, they may well wish to consider any view that the EU regulatory authorities may have about the overseas regulator.

I turn now to Amendment 150B, spoken to by my noble friend Lady Kramer. The Bill already provides that the regulators may exercise their powers of intervention, including the power to vary permission, at the request of an overseas regulator. In considering any such request, the regulators are required to have regard to whether they are required by EU law to assist the overseas regulator. The relations between the FCA and PRA and the European supervisory authorities, which are not technically regulators in the same way, are set out comprehensively in primary EU law. For example, Regulation 1093/2010/EU establishing the European Banking Authority runs to 82 articles and covers in detail matters such as the role of the EBA in settling disagreements between national competent authorities, the limited circumstances in which the EBA may direct the national competent authorities to take action, the status of the national competent authority when it attends the EBA and the sharing of information between EBA and the national competent authorities. There is considerable scope for our regulators to work with the European supervisory authorities established in EU law. So while I agree with the importance of the two sets of bodies working closely together, I do not think that this amendment is strictly necessary.

We now come to Amendment 151 tabled by the noble Lord, Lord McFall of Alcluith, which, sadly, takes us back to a discussion of the use of the English language. I say sadly because the debate about whether “may” or “must” should be used has exercised some of the finest brains in the Treasury to a greater extent than almost any other provision in the Bill. I found myself getting drawn into the debate and I became extremely enthusiastic about something that I was then persuaded was not of as much significance as I had originally thought.

Amendment 151 is one of the cases where we have looked very carefully at whether we should change “may” to “must”. We have come to the conclusion that to do so would impose a disproportionate and unnecessary burden on the regulator and, indirectly, on existing and potential authorised persons. The reason for this conclusion is that the amendment taken literally—and people do sometimes take these things extremely literally—would require the regulator to consider, when taking a decision on an application for permission or whether to vary or cancel a permission or to impose a requirement on a firm, each relationship which was “relevant” to the matter in hand. The amendment does not introduce any kind of materiality thresholds; all relevant relationships would have to be considered.

Even for a relatively simple provider such as a sole trader IFA, the range of relationships that are potentially relevant to the matter could be very significant. For a complex firm such as Barclays, the range of relevant relationships would be absolutely mind-boggling. Therefore, we think it is very important to retain the “may” to keep proportionality to the level of relationships that would have to be investigated.

[Lord Peston]

My Lords, am I right in thinking that the noble Lord is talking about the “may” on line 27 and that he is well aware that there is a “must” on line 33? I get a bit bored with mays and musts, although I have had my fair share of them. However, I cannot make any sense of them, and if I switched them around, the Bill would look to me just as sensible or not. Could he tell us why the “must” is there?

My other question relates to the point that my noble friend Lord Eatwell made on the importance of regulatory authorities abroad. Is the position at present symmetric? In their regulations and regulated activities elsewhere, do they have a series of mays and musts to take account of what our regulatory authorities say about our firms? In other words, is there any danger that people overseas will prevent our firms competing with their firms under regulations where we are following the quite correct line—which I totally support—that competition is generally to the good? Therefore, we are broadly saying that we must welcome overseas competition rather than reject it. How much danger are we in from the mercantilist views that we know dominate French policy-making and that of others?

[Lord Newby]

My Lords, I can deal with the first part of that intervention more quickly and easily than the second. The first “must” in subsection (2) is there because it is an EU legal requirement. If we are asked to do something, we have to do it; we do not have the option of not doing it. There is a good reason for a “must” there.

With regard to the noble Lord’s second point, I was speculating about the Romanian or Hungarian or Finnish languages as he was speaking and wondering whether there was the same absolute distinction between “may” and “must” in every case. I am not an expert in every bit of regulation in every member state. I realise that this is a major deficiency but I do not think that it pertains very strongly to the amendments before us today. For the second time, the noble Lord has raised a potential other amendment that is not on the Marshalled List. If he will excuse me, I will go back to concentrating on the ones that are.