Financial Services Bill

Lord Phillips of Sudbury Excerpts

Tuesday 10th July 2012 Lords Chamber

Moved by

[Lord Phillips of Sudbury]

103: Clause 5, page 16, line 7, at end insert “and society”

[Lord Phillips of Sudbury]

My Lords, seven amendments in this group of nine are in my name and that of my noble friend Lady Kramer. All the amendments have support from other quarters: from the noble Lord, Lord Hodgson of Astley Abbotts, who supports several; from the noble Baroness, Lady Meacher, who apologises to the House that she has had to make a compassionate visit this evening; and from the right reverend Prelate the Bishop of Durham.

There is a vast constituency outside the House that is listening to our every word tonight. That may surprise some; however, the not-for-profit world, if I can call it that, or the social investment sector, to use another phrase, is fair and square behind these amendments. My noble friend the Minister will have already received a letter on 25 June, signed by 16 bodies. Your Lordships may be interested to know that they include Charity Bank, the Community Development Finance Association, the National Council for Voluntary Organisations, the Charities Aid Foundation, the Social Stock Exchange Association, Co-operatives UK, Social Finance and, no less in support of recognition of the social investment sector in this Bill, Big Society Capital, which was set up by the previous Government under the Dormant Bank and Building Societies Accounts Act 2008. There were also CFG—the Charity Finance Group—Triodos Bank and ACEVO. There are very many others. They all have one plea, and this group of amendments has one central aim—to distinguish in regulation between a Barclays Bank on one hand and at the other end of the scale, a small not-for-profit local organisation. I thought your Lordships would be interested in an unsolicited communication I had in the last week from the Perth and District YMCA, which is an exemplar of this not-for-profit sector. The development manager there wrote this:

“Just today I was at the official launch of the Living Balance Programme in Perth and District YMCA which is supported by the Department for Work and Pensions Innovation Fund and is structured as a Social Impact Bond. This project will provide a unique project for 300 young people over the next three years to progress towards a stable independent life style in their local community. Nearly two thirds of the investors in this Social Impact Bond were local private individuals who invested sums ranging from £5,000-£30,000 of their own money … I am convinced that we need to … create the opportunity for this kind of investment to occur in a way which is not so over burdened with prohibitive legislative barriers that the immense potential value of these opportunities is lost”.

That message is repeated from end to end of the not-for-profit sector. It wants the regulators to have a sensible discretion to distinguish, as I say, between these very different animals.

The Minister in the Commons made a plea that we must have a level playing field, with no distinction between massive international banks and a little local social endeavour. To the sector, and indeed to me, that is not a level playing field; it is a level killing field. One size does not fit all. What we need, and with the Bill we have a chance to do this, is to regulate proportionately, appropriately, sensibly and sensitively and to avoid stifling the very initiatives that were referred to in the previous set of amendments and which are vital for the success and advance of power in our embattled society.

I use the word “proportionately” because that is one of the six regulatory principles enunciated in the Bill, and it is classically needed in this instance. I am sure that I do not need to elaborate or enlarge on our present circumstance, but we in this country are now in a critical situation vis-à-vis the financial sector as a whole. This is not just because of the economic and financial crisis over the past three years; it is because we have had a really dispiriting series of revelations about the motives and modes according to which far too big a part of the financial sector has run, and continues to run, its affairs—a monolithic, obsessive preoccupation with profit and profit alone.

One of the beauties of the not-for-profit sector is that it contrasts almost wholly with that rather grey and demoralising picture of the financial sector. By contrast, it is made up of charities, mutual organisations, community interest companies, co-ops, friendly societies and so on, and all of them, not just as a matter of policy but as a matter of constitutional centrality—they have no choice in this—have a public benefit purpose, a social purpose, a not-for-profit purpose. By dint of this wholly different set of values and motives, they are able to reach the parts that the conventional financial sector has not reached, is not interested in reaching and will never reach. The answer to the maiden’s prayer for them is to allow them to go on growing dynamically, rootedly, accountably, socially and morally, vibrant as they are.

In case anyone thinks that this is not a sector worth worrying about, it might be worth repeating the statistics that the Young Foundation and the Boston Consulting Group researched: in 2010-11 the amount of investment by the sector was £165 million and, more importantly, if the regulation barriers could be lowered for it, the investment level would be expected to rise to £750 million. A report in 2011 by Social Enterprise UK shows that 57% of social enterprises predicted growth for this year. That is a 40% higher rate than for small and medium-sized enterprises, which, as noble Lords will know, are themselves much more dynamic in terms of development than the large companies. These small, socially innovative organisations have an infectious enthusiasm. They want to grow; they want to help; they want to do more.

I received a letter from the parliamentary affairs counsel to the City Corporation, which realises that it ought to get involved. He refers to the fact that big society capital will invest £50 million by the end of this year in these social bodies. It is in that context that Deutsche Bank is apparently launching a fund of £10 million and HSBC a fund of £4 million—small amounts, but, I believe, indicators of much more to come. Through its Bridge House Estates the City has allocated £20 million for social investment.

There are many other examples which will cheer us all. Peterborough prison has issued a social impact bond—a rather unlikely development. Bonds have recently been issued by the charity Scope. There is fast growth in what are called crowd funding and peer-to-peer lending, such as Buzz Bank and Zopa. Oxfam is engaged with a microfund to be used in the developing world. We have the prospective launch in London next year of the Social Stock Exchange. And so it goes on.

New Section 137R on page 89, to be inserted into the Financial Services and Markets Act 2000, stipulates under general supplementary powers that the rules by either of the regulators, the FCA or the PRA,

“may make different provision for different cases and may, in particular, make different provision in respect of different descriptions of authorised persons, activity or investment”.

My noble friend Lord Sharkey referred to that in what he just said.

These amendments will give a clear and essential steer to the regulators to enable them to use with imagination and flexibility the powers that they have under new Section 137R. They will offer a realisation of what great profit there is to this country and our society by liberating some of these small, non-profit organisations from heavy-handed regulation. Everybody accepts that such regulation may be necessary for huge financial entities that can cope with it and, by dint of what has happened recently, need it. We cannot pretend that one size fits all.

Lastly, we in the coalition—and I appeal to the Minister—must walk our own talk. The country is a little anxious about the extent to which we are doing that. If ever we have talked up the importance of social investment and the not-for-profit sector in finance, it is in this area. The big society idea is at the root of it. I have already referred to Big Society Capital. We had a paper from the Government in February last year, Growing the Social Investment Market. What was that about? It was about encouraging and not stifling the market that this Bill, unamended, will indeed stifle. We had the Red Tape Challenge and the task force in pursuit of it. My noble friend Lord Hodgson is involved in that. We had another paper in May this year called Unshackling Good Neighbours. What was that about? It was about promoting investment in social ventures. In the autumn the Cabinet Office is producing a response to Unshackling Good Neighbours, in particular to that bit of it which says that,

“regulation barriers make it difficult for social ventures and investment in them”.

Francis Maude and Nicholas Herbert have gone on record again and again extolling the need for social investment. I appeal to the Minister. Although it may be difficult in some ways, we must put something in this Bill. I ask him not to say, as he said to the previous group of amendments, that we will have to have a separate Bill. That will not wash. It is not good enough.

I end by saying that this vital sector needs the chance to grow and to do what nobody else is doing or can do. It is bottom up, it is rooted, it is ethically vigorous, it is public spirited and, above all, it is grounded in fellowship. With that introduction, I hope very much that, although there are only 14 of us here at this time, there may be some support for this group of amendments. I beg to move.

[Lord Hodgson of Astley Abbotts]

My Lords, my name is down to four amendments, Amendments 104, 120, 137 and 139, and I support very strongly what my noble friend Lord Phillips has just said. I take issue with him on only one technicality. He talked about “not for profit”. I think the words should be “not for profit distribution” because these small organisations must be able to accumulate reserves for the bad times, for the contracts that do not go quite as well as—

[Lord Phillips of Sudbury]

I am grateful to my noble friend for making the point. He is absolutely correct.

[Lord Hodgson of Astley Abbotts]

Apart from that, I agree with the thrust of his remarks.

I chaired the task force that produced Unshackling Good Neighbours, and I am glad to be able to tell my noble friend that we have already had the Government’s response and are meeting on 26 July to produce our follow up. The problem with this is not making the recommendations but making sure that they are followed through. As I have told the House before, I am completing the review of the Charities Act 2006 for the Government and will be publishing a report on that next week. The terms of reference for that review required me to consider the barriers to the growth of social investment.

This is a very interesting area. The market is immature and therefore carries with it some dangers, such as overexpansion, perhaps of too much money being raised before there are projects sufficiently ready to absorb that money, and of overoptimism. There is a weight of expectation about what can be done that we have to make sure is not disappointed. As my noble friend made clear, this idea has the capacity to transform the financing structures in the charity and voluntary sector and so radically increase the amount of funding and the number of people who will give support to those sorts of endeavours. As I have said elsewhere, how do we persuade someone who would give £50 to invest or lend £500? How do we turn this social investment chrysalis into a butterfly?

There are lots of regulatory challenges, and not all of them are in my noble friend’s department. Not all of them are actually for the Government; they are also for the professions and the sector. As my noble friend said, we need to send signals from this area because this is the keystone that will set in train other serious changes. Therefore, the enabling provisions contained in Amendments 104, 120, 137 and 139 are important because they recognise, and ask the regulator to recognise, the distinctive features of social investment and regulate appropriately in an even-handed way. The hour is late. I could go on for a lot longer, but this is important, and I very much support what my noble friend said.

Amendment 104ZA is tabled in the name of the noble Baroness, Lady Hayter. That amendment is not suitable, because it requires the FCA to promote the growth and development of social finance and social investment. The role of a regulator is not to promote but to enable. It can promote good behaviour and good approaches, but it should not promote a particular form of finance, because that could lead to the disillusionment that I have referred to. I quite understand her good intentions, but they do not help us. Nevertheless, I very much support Amendments 104, 120, 137 and 139, and I hope that my noble friend will be receptive to this important part of the big society and localism, on which we as a party and a Government have placed such stress.

--- Later in debate ---

[Lord Sassoon]

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

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

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

Secondly, where the intention behind the amendments is to—

[Lord Phillips of Sudbury]

I am sorry to interrupt my noble friend, but he did make a provocative remark just now, I suspect without realising it. He said that I was asking in these amendments for the FCA to “take forward” the social investment market. That is not the case. These amendments are couched extremely carefully, and not in any proactive way. To take Amendment 104, they merely ask the FCA,

“so far as is compatible with acting”,

in accordance with “its operational objectives”, to take,

“account of the distinctive features of social investment”,

and not to inhibit the development of it. On no basis can that be characterised as asking the FCA to “take forward”. It is merely asking the FCA to note the particularities of this sector and not to impede it.

[Lord Sassoon]

My Lords, we will have to disagree on the construction of some of the words here. Taking some of the amendments in the group, I appreciate that some of them are couched in the way in which my noble friend has just elaborated. However, for example, Amendment 103 inserts into new Section 1B(4) the words “and society” at the end of a very critical recital of what the FCA must do. It says it must,

“discharge its general functions in a way which promotes effective competition in the interests of consumers and society”.

I accept that it is all driven with an override,

“so far as is compatible with acting”,

in a way that advances the consumer protection objective, but it would add something which is tantamount to asking the FCA to be proactive in driving forward the social objective.

--- Later in debate ---

[Lord Sassoon]

My Lords, one of the problems is that I am speaking here to a group of amendments. If we had longer or they were all degrouped, we could tease out one from another in more detail. I appreciate that some are more directive than others. However, perhaps I may move on to my second area of difficulty here. It probably will not help but I have a number of difficulties with this group of amendments.

Where the intention behind the amendments is to ensure proportionate regulation of this budding social investment sector, I reassure the Committee that the FCA will indeed take a proportionate and risk-based approach. Both regulators must take a proportionate approach to the regulation of small or socially orientated firms, particularly in comparison with large and complex banks.

My noble friend Lord Phillips of Sudbury referred to new Section 137R, which enables different rules to be made in relation to different authorised persons. I could also draw the Committee’s attention to new Section 1C(2)(a), which requires the FCA to have regard to the differing degrees of risk involved in different transactions. Another is new Section 3B(1)(b), which requires the FCA to have regard to the principle of proportionality. Therefore, I believe that there are appropriate layers of protection there without this series of amendments highlighting the social investment sector in the way that they seek to do.

[Lord Phillips of Sudbury]

My Lords—

[Lord Sassoon]

Perhaps I may finish this part of the argument and then of course I will let my noble friend come in again. I believe that this proportionate approach that I have described will be vital in supporting effective competition, as well as helping the social sector, and the requirement to make regulation proportionately has to be an important tool in delivering that. However, equally, consumers have to be reassured that if they deposit money with, or buy financial products from, socially oriented financial institutions, they will be subject to the same level of protection and security as would be the case with any other institution. My noble friend may come back and say that that is not what the words actually say. He compared the activity of the big banks with the very well meaning institutions—which I accept they are—in this budding sector. Nevertheless, we have to be very clear and careful in making sure that those who deposit money are subject to the protection that they would expect, regardless of whom they transact with. I believe that in this area the Bill as currently drafted will deliver a proportionate balance for both regulated firms and consumers. I will continue to listen to the full range of arguments on this important issue and we will continue with important strands of work.

My noble friend Lady Kramer referred to the ability of financial advisers to advise on social investments as an asset class. I agree that this is a concern. That is why it is one of several regulatory issues that are currently being considered by the Cabinet Office review. Therefore, there are other avenues through which these issues are being actively considered, as they should be.

[Lord Phillips of Sudbury]

I am grateful to my noble friend for giving way. I am sorry to detain the Committee at this time of night but this is an important group. My noble friend Lord Hodgson of Astley Abbotts made one extremely telling intervention. I recognise what a difficult task my noble friend the Minister has in piloting this incredibly complicated measure through this place. He called in aid—reasonably, because I myself referred to it—new Section 137R, which is headed “General supplementary powers”. I quoted from the first part of that new section in what I said. My point, which I do not think my noble friend has taken account of, was, and remains, that unless there are some indicators in the first part of the Bill as to the considerations that are legitimate for the regulator to take into account, being naturally conservative, it will not take them into account. It will not differentiate. The wording in Amendment 103 therefore adds “and society” to the part of the new section that instructs FCA as to what it must do. That section says:

“The FCA must, so far as is compatible with acting in a way which advances the consumer protection objective or the integrity objective, discharge its general functions in a way which promotes effective competition in the interests of consumers”.

The Minister objects to the addition of the words “and society”. Surely we have learnt over the past three years that the objectives of consumer protection, integrity and competition depend on a financial sector that, in promoting competition, does not just take into account the interests of its customers but also of society at large. Society is what social investment is about. It slightly gives the Government’s game away for the Minister to argue as he did. I repeat that this important section that he referred to, which gives the FCA and the PRA the power to make rules, seems to cut off the prospect that he afterwards says is there; namely, the power to differentiate between different types of financial organisation, including the social financial organisations.

I am sure this is a discussion we perhaps had better have outside the Committee. It is late at night. I am only registering—I think I have some support in this—disappointment that the Government are not construing their own provisions in a way that seems consistent with how my noble friend started when he said they were wholly behind the development of the social finance sector.

[Lord Sassoon]

I will keep saying it and no doubt we will have to disagree on this. On the narrow point of new Section 137R, that is a power to make different provisions. However, the other relevant provisions that sit with it are duties. There is a duty to act proportionately and a duty to have regard to different degrees of risk. When it sets rules, the FCA will have to explain and justify those matters in the consultation processes it goes though. It cannot simply escape from this.

I will again directly address the points made my noble friend Lord Phillips of Sudbury on Amendment 103. The same thing applies to Amendment 111. There are certain things that we can expect of the FCA and there are other things that would place entirely unrealistic expectations on it. When the FCA is assessing whether there is effective competition in a market, we can expect it to consider the needs of consumers and act on its assessment. However, the needs of society as a whole are another matter entirely. It is not, and cannot be, the responsibility of the FCA to consider, even in a passive way—which I agree is different here from the way that it is formulated in some of the other amendments—what the best outcome for society is at any given point. It simply does not have the mandate to do that. It would not have the expertise or the powers fully to act on its findings. This is not in any way to say that these are not important matters. It is simply that I contend, as with the previous group of amendments, that these are judgments not for the FCA but the Government. The Government will not shirk these judgments.

I have referred to a number of the initiatives that are going on and there are others that I could mention, such as the Treasury’s current review of financial barriers to social enterprise. Recommendations from that review will sit along with the community interest tax relief revisions that were announced at the Budget. There are multiple strands of work at the Treasury and the Cabinet Office that are aimed, among other things, at making it easier for investors to invest in community development finance institutions. Those must go on. They are not the proper province of the FCA.

--- Later in debate ---

[Lord Sassoon]

I understand. I will check on that but I hear what my noble friend says. The FSA is under pressure in a lot of areas. I stress again that I do not mean to say that there are no barriers. I have explained the ways in which we are looking at them but this is a Bill about the regulatory structure. There are other avenues through which the structure of the industry is being looked at, not least through the Bill that will enact the Vickers reform. In the most fundamental ways we are prepared to take on the structure of the industry. It is just that we want to keep this Bill and this architecture to what it is intended to be, which is about financial regulation and not about wider social issues, however important they are, even though there is great interlinkage with what we are talking about in the Bill.

I should do justice to Amendment 109, which is the last one that I have not directly touched on. It is another amendment over which I have some concerns. It seeks to ensure that the FCA considers social responsibility in advancing its market integrity objective. Social responsibility sits rather oddly alongside the other matters listed in new Section 1D that elaborate on what is meant by integrity. All the matters in the non-exhaustive definition of integrity in that section have a clear expectation of action associated with them. The FCA will act to prevent or root out and punish activities such as insider dealing or other market misconduct and abuse as well as money laundering, terrorist finance and corruption; it will test the reliability and robustness of computers and wider systems and controls to see whether it can guarantee the operational soundness, stability and resilience of the system, its orderly operation and the transparency of the price-formation process. These are all concrete actions, critical to ensuring that the financial system is effective in meeting the needs of people who use it and is, I suggest, rather different from social responsibility which very much stands out from that list.

Before I let my noble friend come in again, I want to repeat that determining what social responsibility is and how it should be delivered is a matter for the Government.

[Lord Phillips of Sudbury]

I am grateful to my noble friend for giving way and hope this will be my last intervention. In new Section 1D, the integrity of the UK financial system—which is of course crucial, because it is one of the FCA’s operational objectives—is said to include soundness, stability and resilience. In Amendment 109, I have suggested adding “and social responsibility”. The Minister asks what on earth social responsibility has to do with the FCA which is all about banking things such as stability and soundness and so on. My point is that we are dealing here with a financial sector that marches to a completely different drum. It is about social responsibility: that is its purpose. For that not to be an element in the section of the Bill which, in effect, defines integrity, first, does not face that reality, and, secondly, demeans it. Thirdly, I hark back to the matters which the two regulators have the duty to have regard to when making rules and so on. Lastly, I put it to the Minister that if we had social responsibility in this list, it would mean that in future the regulator could and indeed should look at, for example, mis-selling. Mis-selling is not a crime, it does not impact on the soundness, stability or resilience of the bank, but it is none the less a practice which I am sure he will agree has been powerfully damaging to all concerned. That phrase in this part of this section would, I believe, put the regulator on its mettle to look beyond the conventional issues and take account of the social impact of some of the practices of the banks.

[Lord Sassoon]

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

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

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

[Lord Lucas]

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

[Lord Phillips of Sudbury]

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

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

[Lord Hodgson of Astley Abbotts]

Does the noble Lord not accept that we have a very immature sector still? We have not got the right corporate forms that will combine the different streams of investor, whether it be a Government, a charity which is running the scheme, a grant-giving charity or private investors, who may be corporate or private individuals. We must be very careful not to put too much weight on the structure too early because if we arouse expectations about what it can deliver and it crumbles away, not only will the sector be disappointed but—dare I say it with my noble friend on the Front Bench?—the regulator will say, “I told you so”. We need to be very careful about that.

[Lord Phillips of Sudbury]

I wholly agree. That consideration is not at all incompatible with the intent of this group of amendments—indeed, my noble friend has strongly supported the group. It is partly because I share his concern about the immaturity of this new branch of the financial sector that I want it to be incorporated within the regime that will follow on from this massive piece of legislation.

At this time of night and with this tiny number of people present, the Minister can be safe in the expectation of there not being a vote called, but I say to him that we must, by hook or by crook, have included in the Bill by Report some form of words which recognises this new sector and gives it proper allowance and scope to develop and thrive, because, as everybody agrees, including the Government, it has the potential to be hugely important in the future. If the Minister will agree to meet between now and Report, which I hope will be after the Summer Recess, we may be able to concoct something which satisfies the new financial sector and those of us who supported the amendment. I do not think that that is beyond the wit of man. I beg leave to withdraw the amendment.

Amendment 103 withdrawn.