Financial Services Bill

Lord Sassoon Excerpts

Monday 12th November 2012 Lords Chamber

[Lord Naseby]

My Lords, I was not intending to take part in this debate. At one time, I was chairman of the Children’s Mutual, which was a friendly society/insurance company. At the weekend, in Northampton, I had discussions with some friends whom I would call middle-class savers. Not a single person, frankly, was the least bit prepared to pay a fee. It goes deeper than that. One’s own children are not prepared to pay fees up front.

There may have been much wrong with the old system in that it was not as closely scrutinised as it should have been in terms of the total cost to the saver. Nevertheless, here we are three and a half years into a major austerity programme and sufficient resources are not available for people who are genuinely wanting to or having to save. I do not know what the minimum fee will be and perhaps my noble friends on this side will be more up to date on that. I cannot see that it can be less than £500, if not considerably more.

I say to my Front Bench that it is all very well ploughing on because this has to happen in January but, as an aside, I reflect on how the FSA took three and a half years to realise that the projections on pensions were totally out of court. We have all been living with a base rate of 0.5% for a couple of years. Here we have projections approved by the FSA at, I think, 5%, 7% and 9%. That was totally out of court and nothing happened from the FSA. There had jolly well better be a plan B somewhere in the hip pocket because I very much fear what will happen. During the first three or four months nothing much will happen but, thereafter, there will be a major crisis unless there is a plan B ready to deal with it.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, my noble friend Lord Flight has spoken eloquently on the issue of the retail distribution review both on this and a number of other occasions, both when we have been discussing this Bill and at other times as well. Clearly, his concerns go to the heart of the RDR. I respect him for the force and strength of his arguments and for the clarity with which he has put them. However, I think that my noble friend Lord Hodgson of Astley Abbotts, in his short remarks, takes a more realistic and pragmatic view of some of the things that are necessary in the RDR and of the practicalities of where we are now some five or six years into the process which was initiated back then by the FSA.

The RDR certainly goes beyond the requirements of the markets and financial instruments directive; that is true. It is to be implemented at the end of this year. It will, among other things, as we have heard, prevent product providers from offering commissions to advisers. These rules will go beyond the requirements of the directive, which does not prevent product providers paying inducements to intermediaries. I think that it is a bit of a leap from there to say that the EU has taken a positive view that commissions should be paid in the way that they have been to date, as I think my noble friend possibly recognises.

The Government are supportive of the RDR, which is intended to address long-running problems that impact on the quality of advice and consumer outcomes in the UK retail investment market. The financial detriment caused to consumers as a consequence of poor, biased financial advice leading to the mis-selling of products cannot be overstated and has led consumer groups such as Which? to support the measures in the RDR. For example, following the FSA’s pensions review in 2002, 1.7 million consumers received compensation totalling £11.8 billion due to pension mis-selling alone. More recent scandals such as Arch Cru, where between 15,000 and 20,000 people lost out on thousands of pounds because they were told that high-risk investments were low risk, demonstrate the devastating effects of poor financial advice. Indeed the FSA has estimated detriment to consumers to be in the region of £223 million per annum, so we cannot wish the problem away.

To tackle the problem, the RDR will raise the professional standards of investment advisers, address the potential for adviser remuneration to distort consumer outcomes and improve transparency for consumers. As part of this, the rules banning commission payments to advisers will tackle the risk as well as the perception that commission paid by product providers may bias advice, and rules requiring advisers to agree their charges upfront will promote transparency for consumers. Taken as a whole, the Government’s view is that the RDR should improve consumer confidence and trust in investment advice and it fits with the Government’s wider agenda on increasing transparency in the market.

I am not going to repeat all I said in answer to my noble friend’s recent Question, which led into the points about training. Again, while he and my noble friend Lord Naseby are quite right to raise concerns around the transition, I think that my noble friend Lord Hodgson of Astley Abbotts is right to point out the need for and desirability of professionalisation, but also that the bar has not been set excessively high. I do not want to trade data, but I think that this is quite important. The FSA’s latest research shows that the proportion of advisers who meet the RDR’s new qualification requirements has increased from 50% in summer 2011 to 71% in spring 2012. The FSA research also shows that 93% of advisers are still on track with their prediction—93%, not 91%. I know that my noble friend challenges that, but the FSA has looked at this very carefully and its advice and research shows that 93% are still on track with its prediction to complete the appropriate qualification in time.

Having said all that, I should just spend a minute on the amendment itself. As we discussed in Committee, the FCA and the PRA will be required to have regard to the principle that any burden they impose should be proportionate to the benefits that flow from it. This proportionality principle will apply to any proposed requirement whether it originates in EU law or purely domestically, so it already covers gold-plating. I would also point the House to government Amendment 44, which we will be debating in due course, and which adds a new regulatory principle giving the regulators the duty to have regard to the desirability of sustainable UK economic growth. That is a principle that will apply also to both the FCA and PRA. I am sure they will take it very seriously when they consider gold-plating. It will also be pointed out to them as a hook, as it should be, to avoid unnecessary gold-plating. So, in short, I do not believe that the amendment is necessary, nor does it fit with the Government’s wider aims in this area. I hope that my noble friend will feel able to withdraw it.

--- Later in debate ---

[Lord Barnett]

My Lords, I strongly support my noble friend in her amendment. The noble Lord, Lord Blackwell, seems to be replying for the Minister, telling us why it is not necessary. Is it harmful to have this amendment in the Bill? If so, let him tell us how rather than asking whether it is necessary. As I would have expected, the case has been made very well indeed by my noble friend Lady Hayter and supported elegantly and eloquently by my noble friend Lord Peston. I hope the Minister will not take any notice of the noble Lord, Lord Blackwell, when he replies.

[Lord Sassoon]

My Lords, I always take a lot of notice of my noble friend Lord Blackwell. However, Amendments 25B and 31A raise a very important issue. The revelations during the summer about the attempts to manipulate LIBOR and Euribor demonstrated, if any demonstration were needed, that perhaps a considerable number of individuals in the banking sector have failed to live up to the most basic standards of professional conduct and that must, of course, be put right. We are tabling our amendments to this Bill to bring the setting of LIBOR within the scope of the regulatory regime and make it a criminal offence to attempt to manipulate benchmark rates, but that is only the first step.

The critical issue here, which I think has been rather forgotten in this debate, is that the Government acted very quickly to establish the Parliamentary Commission on Banking Standards and the noble Baroness, Lady Hayter of Kentish Town, made a passing reference to it. The noble Lord, Lord Peston, suggested that I may fob the House off by saying I have another version—he would say an inferior version—of this in the Bill. I absolutely will not say this. I will say there is a superior answer to this very big problem coming from the Parliamentary Commission on Banking Standards. I entirely accept that there is a serious issue to be dealt with but the commission is established, it is doing its work and it will look at precisely what is needed to deal with the challenge.

[Lord Peston]

I must be a bit thick; I thought that the Parliamentary Commission on Banking Standards was not due to report until this Bill is passed into law. Where will its recommendations, assuming it makes any, then be passed into law?

[Lord Sassoon]

I will come on to that if the noble Lord, Lord Peston, will hear me out. Of course it is no good having a commission if its recommendations are not going to be taken seriously or enacted if necessary. We should remind ourselves of how this House is represented on the commission. It is quite striking that I do not see my noble friends Lady Kramer or Lord Lawson of Blaby in their places this afternoon, nor indeed the right reverend Prelate the Bishop of Durham or the noble Lords, Lord McFall of Alcluith and Lord Turnbull. Why are they not here? I believe it is because the commission is at work today looking into these very critical questions. Experience and authority is being brought to bear on these issues in order to identify ways to put the highest standards of ethics and professionalism at the heart of the UK banking system and I believe that we should leave the commission to do its work.

I know, as do other noble Lords, that the commission will examine all possible solutions and of course the introduction of codes of conduct should be one of them. We have heard different views about the effectiveness of codes of conduct, but it is quite right for the commission to look at that. The commission has the membership and the tools it needs to do a very thorough job in this area and I do not think we should pre-empt it. It has the power to interview witnesses under oath and to send for the necessary people and papers. It has already heard evidence from, among others, Paul Volcker, the former chairman of the Federal Reserve, Martin Wheatley the chief executive designate of the FCA and from various members of the Independent Commission on Banking. The commission has already gathered an impressive range of written evidence from stakeholders, including the major banks, regulators and consumer groups, and that evidence was published last Thursday.

So, given that the commission’s work is ongoing, it is not the right time to make decisions on this very important matter. To do so would be to pre-empt and undermine the conclusions of the commission, which is investigating this issue so thoroughly.

[Lord Barnett]

My Lords—

[Lord Sassoon]

I will give way to the noble Lord, Lord Barnett, in a moment but perhaps I may answer specifically the question of the noble Lord, Lord Peston.

The Government look forward to receiving the commission’s report and recommendations and will consider them with great care. It is due to report by the end of the year. As to when we might legislate, as the House knows, the Government will introduce the banking reform Bill, which was published in draft last month, into Parliament in the new year. That Bill may well provide an appropriate vehicle to implement any of the commission’s recommendations that require legislation. So we certainly will not lack a possible legislative vehicle, in the right timeframe, when the recommendations are made by the commission.

[Lord Barnett]

My Lords, the noble Lord has not hesitated, quite rightly, to put the LIBOR scandal amendments in this Bill. Now he is saying that he does not want to put in the code of conduct in case the commission comes up with it. In that case, why has he put the LIBOR scandal amendments in the Bill?

[Lord Sassoon]

My Lords, the Government kicked off a number of inquiries and reviews immediately we became aware of the LIBOR scandal. Martin Wheatley, the managing director of the FSA and the chief executive designate of the FCA, carried out one of the reviews which have led directly to the amendments in this Bill. We have acted on his amendments specifically addressing criminal offences and so on around LIBOR in this Bill. We also set up the commission to look at the wider question of professional standards and the way that banking operates and it will report by the end of the year. We will have a legislative vehicle in the new year, if required, to take up its recommendations, which the Government will take very seriously.

It is not that we are dragging our feet or want to stop these issues being addressed. It would just seem foolish to pre-empt a commission of great eminence which is doing enormously important work as we speak. I hope that, on that basis and the confirmation I have given about what is going on, the noble Baroness will be persuaded to withdraw her amendment. While the Government agree with the need to restore public trust in banking, we should not jump to legislate now but do so once the parliamentary commission has had time to do its work.

[Lord Peston]

I am still a bit lost. As I understand it, the Minister cannot at this point commit the Government to bringing in any specific Bill that they have not brought in yet. However, setting that on one side, the more important point is that all of my remarks, as he will be aware, were addressed to the whole of the financial services sector. Is it possible to have a banking Bill in which amendments will be put down referring to the code of conduct for the whole financial sector? In my view, we will be told that either the short or long Title will not let us do it. That is why I argue that this is the obvious vehicle for this, and nothing the noble Lord has said so far tells me that this is not the obvious vehicle.

[Lord Sassoon]

My Lords, we have published the Bill in draft already, so it is already on the slipway in that sense. I am not equipped to get into questions about what precisely the scope could be in that Bill. I believe it is wide enough. If it is not, the Government will find other legislative vehicles in which to introduce this. However, I am reminded that although I loosely call it the banking reform Bill, it will actually be titled the Financial Services (Banking Reform) Bill and therefore the scope will be plenty wide enough to bring in a code of conduct right across the piece. I hope that provides further reassurance to the House.

--- Later in debate ---

[Lord Peston]

We can speak for clarification and to ask questions. We cannot make substantive points.

[Lord Sassoon]

My Lords, I spoke about the role of the Parliamentary Commission on Banking Standards when discussing the previous group of amendments. I am sorry that the noble Lord, Lord Barnett, doubts the seriousness with which the Government intend to take its recommendations. It is a joint commission of the two Houses—something that any Government would take extremely seriously. We acted to initiate the setting up of the commission so I am disappointed that the noble Lord seeks to tweak my tail on this one. When it comes to a legislative vehicle, I could not have made it plainer that we have already published a draft Bill. The Financial Services (Banking Reform) Bill is on its way. That provides potentially a perfect legislative vehicle if there are things that come out of the commission, as no doubt there will be, that require legislation. The issues raised by Amendments 25C, 25E and 26C are firmly within the remit of the commission and it would be wholly inappropriate for us to jump the gun in a semi-considered way rather than waiting for the magisterial output of the commission in a short time.

Amendment 26D would add a new paragraph (f) to proposed new Section 1D(2) to be inserted in FiSMA 2000 under this Bill. It refers to,

“the fairness and integrity of policy and conduct of those directing or operating in the financial markets”.

That is on the same theme but seeks to place specific emphasis on issues of integrity and fairness by making changes to the FCA’s objectives. As we have heard from my noble friend Lord Phillips of Sudbury, Amendment 27A would specify that, in considering the effectiveness of competition, the FCA may have regard to the extent to which the,

“methods or culture of any competition may undermine the integrity objective”.

I sympathise with the amendment to the extent that it is clear that when the FCA considers taking action, it will need to consider all its objectives. Recent events have demonstrated how important it is that the regulator has a mandate to take action to protect and enhance the integrity of the UK financial system.

The Government have given the FCA the three operational objectives, as we have been reminded, of competition, consumer protection and integrity so that it determines the right balance between them in individual cases. The regulator cannot unduly prioritise any one objective and neglect to consider the others. My noble friend Lord Hodgson of Astley Abbotts has already given another construction, which perhaps is more balanced, of proposed new Section 1B(4) and I am grateful to him for that.

This is a complex interaction of provisions. In one case we are talking about a competition objective but also, in the context of proposed new Section 1B(4), a duty designed to ensure that the FCA considers competition as a means to, and in the context of, delivering other objectives. But that needs to happen only as far as it is compatible with the integrity and protection objectives. I believe that it is a keenly balanced series of interlocking provisions here, of which these are only two. Of course, there are further elaborations of just what the integrity objective and the other objectives involve. Further, it is important to “have regard to” under this new section. I believe that the balance is right and that there is no need to adjust the structure of the competition objective to require the FCA to consider integrity in the way proposed here.

Similarly, the FCA’s integrity objective will come into play when the FCA is exercising its general functions in relation to conduct. While it must think about whether competition is working in the interests of consumers, I do not believe that it is for the FCA to police the markets to establish and enforce what fairness is. I do not believe that fairness should form part of the explanation of the term “integrity”. It is a separate issue.

There are other issues about the interrelationship between the two new authorities. Proposed new Section 3D requires the PRA and FCA to co-ordinate their functions in areas of common regulatory interest where one may have relevant expertise or wherever one may have a material adverse impact on the objectives of the other. This means that, while it is right that the PRA must focus on its safety and soundness objective, where its actions may impact adversely on consumer protection it will have to listen to the FCA, which has a strong consumer protection objective.

In summary, I accept the wider point about the importance of these issues. As this short debate has teased out, these issues are very complicated. They are best addressed through the Parliamentary Commission on Banking Standards. In the light of that, I ask the noble Baroness to withdraw her amendment.

[Baroness Hayter of Kentish Town]

I thank noble Lords for their support on the amendment. I actually think that the Minister is wrong. This is not complicated; this is about integrity. The noble Lord, Lord Hodgson, had it right. We are not talking about how to impose rules. We are talking about something within the people who work in this industry. The problem is that the significant influence function has not worked. Sir Fred Goodwin was appointed under it. It was not working, it has not worked, and we need something different. We need it in the Bill.

The Minister talked about the report of the Parliamentary Commission on Banking Standards and what is going to come out of that, but that was not set up when the Bill was written. Would the Minister have accepted the code and the amendment on professional standards if Libor had not happened and if a banking commission had not been set up? The Bill was intended to mean no more failures and no more of that behaviour. We are talking about integrity. I had not planned to divide the House on this. However, as the Government have just voted against a code of conduct, I am so tempted now to put it to them that we should vote on professional standards to see whether they really want to say that they have a Financial Services Bill to make changes to the way we regulate but they do not want professional standards in that. For once in my life I will resist temptation. I beg leave to withdraw the amendment.