Financial Services Bill

Lord Sharkey Excerpts

Wednesday 18th July 2012 Lords Chamber

If you make a plea to people in industry, that does not seem to work, so we need to be much more firm. It is with that in mind that I ask that we make this simple change from “may” to “must”.

[Lord Sharkey]

I support Amendment 112 in the name of the noble Lord, Lord McFall. As the Bill stands, the use of “may” instead of “must”, when listing matters to have regard to in considering the effectiveness of competition in the markets under discussion, seems to have two problems. The first is that it makes the competition objective less strong than the consumer protection objective, in which the FCA is given a list of things that it must have regard to. In the competition objective, the FCA is given a list of things that it may have regard to. Why is this? Why is the consumer protection objective definite about what the FCA must have regard to, while the competition objective is not? Surely it would be more sensible to have these objectives on an equal footing and in both cases supply the FCA with a list of things that it must have regard to.

The second problem is that the use of “may”, regarding what the FCA takes into account in considering the effectiveness of competition, seems to render the whole clause without much force or substantive meaning. Why list the factors that the FCA may have regard to if it actually does not have to do so? Either the factors listed are important to consider or they are not. If they are important, surely the FCA must consider them. If they are not important and can be disregarded by the FCA, as the Bill seems to provide, why are they there at all? I hope that the Minister may see the virtue of “must” and might agree to the noble Lord’s amendment.

[Lord Sassoon]

My Lords, I am infinitely flexible; it depends how long we go on this evening but I can see one or two amendments coming up on which I can be more accommodating than I will be on this one.

I shall start with perhaps the easiest part: the questions from the noble Lord, Lord Tunnicliffe, around Amendment 111A. I am delighted to see the noble Lord joining the fray. We have now had four players on the Front Bench from the Opposition; I wish that we had such depth of reserves on our side. However, I will battle on.

Amendment 111A seeks to bring the activities of market makers into the scope of the FCA’s competition objective. I reassure the noble Lord and the Committee that the activities of market makers are already very much covered by the objective. Put very simply, to operate as a market maker firms will have to obtain permission to deal in investments as principal, and that is a regulated activity. That means that such firms are performing a regulated activity or a regulated service, and noble Lords will see that new Section 1A(1)(e) clearly states that markets for regulated financial services fall within the scope of the FCA’s objective, so the FCA can indeed shine its regulatory light on market makers as on any other part of the sector. For completeness and to clarify, as far as recognised investment exchanges or RIEs are concerned, they can be exempt from the general prohibition under Section 285(2) of FiSMA, but even their activities are brought within the scope of the competition objective by virtue of subsection (1)(b) of new Section 1E in the Bill. I hope that that deals with that.

Turning to Amendment 112, competition can mean many things to many people. To indicate what the Government might want the FCA to look at in deciding how to advance its competition objective, subsection (2) of new Section 1E sets out a number of matters to which the FCA may have regard in assessing the effectiveness of competition in a given market. It is an indicative and, importantly, a non-exhaustive list. The FCA cannot dodge or duck out of its overall competition objective. Had we not put the non-exhaustive list of examples down there we might not be expressing the concern that we have. There would be the simple competition objective and that would be that.

Given the list, let me explain a bit more why there is danger in changing “may” to “must”. That would mean that the FCA would always have to consider all the issues set out in new subsection (2). The FCA should not necessarily have regard to all of that list when looking at particular competition questions. There could be unintended consequences.

If the FCA wishes to take action to promote switching, the consideration of barriers to entry will not be as important as the ease with which consumers can transition between providers and how that is affected by the structures of the market or behaviours of incumbents. To enable the FCA to generate the outcomes that we want under the competition objective it is important that the list is expressed in the terms that it is. This does not make the basic objective of the FCA weaker in this area. It just means that we need to give it a degree of discretion to be able to target the particular issues that they are looking at at any one time.

That addresses the amendments that are being spoken to and I hope that the noble Lord, Lord McFall of Alcluith, will consider not pressing his amendment.

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Moved by

[Lord Sharkey]

114: Clause 5, page 17, line 34, after “market,” insert—
“( ) developments in the markets for unregulated financial services that are in the interests of consumers and businesses,( ) the desirability of establishing a new authorisation regime for direct financial platform providers to protect consumers and providers,”

[Lord Sharkey]

I shall speak also to Amendment 119. Both amendments are to do with financial innovation and particularly with peer-to-peer lending. They add to the factors the FCA may have regard to—or must have regard to, if the Government eventually accept Amendment 112—when considering the effectiveness of competition. The first amendment would require the FCA to have regard to developments in markets for unregulated financial services that are in the interests of consumers and businesses and to have regard to the desirability of establishing a new authorisation regime for direct financial platform providers to protect consumers and providers.

That means, essentially, that the FCA would have to look carefully at new, unregulated services and would have explicitly to weigh the merits of regulating peer-to-peer lending organisations. Peer-to-peer lending has already passed the $1 billion mark in the United States, where it is regulated, and it is growing very fast in the United Kingdom. Many commentators see peer-to-peer lending as a direct way of dealing with the banks’ failure to lend to individuals and to small businesses. Andy Haldane of the Bank of England has even suggested that these non-traditional lenders could eventually replace banks.

The Government acknowledge the potential of this new lending model and have made £100 million of seed money available. However, this new model of peer-to-peer lending is not covered by existing financial services legislation and that leaves it exposed to very serious dangers. This new industry, unregulated, is extremely vulnerable to rogue players entering the market. All it takes is one rogue player, one big scandal and a lot of losses for ordinary lenders for the model to be discredited and to fail. That would be a very undesirable outcome. We desperately need new and innovative financial services to provide real competition for existing banks and to fund those areas of commercial life, particularly SMEs and start-ups, that the banks are so obviously failing to fund. It is not as though innovative, real-world consumer-orientated financial services are in good supply. In fact, it could be argued that peer-to-peer lending and crowd funding are the only significant financial innovations that are around at the moment and likely to benefit the real economy.

At Second Reading, the Minister said in response to suggestions that peer-to-peer lending be taken into regulation:

“The Government do not think that statutory regulation is appropriate at this point. The sector is very small and such regulation would be a barrier to new entrants and innovation”.—[Official Report, 11/6/12; col. 1261.]

The industry does not agree with that. The leaders of the industry are acutely alive to the danger to their business model presented by a rogue operator. They would welcome regulatory protection for consumers and providers. This protection need not be onerous. Indeed, any regulatory regime should be judged for suitability not only on the protections it provides but on how little of a barrier to entry and innovation by proper operators it offers. In fact, this is one of those occasions when the market, particularly for crowd funding into SMEs, requires regulation in order to expand. We need IFAs to distribute these products if we are to enlarge the market, and IFAs absolutely require regulation before they will consider doing that. We also need regulation that will allow these products to be located inside tax-efficient wrappers.

This is one of those asymmetrical cases where no regulation risks the complete destruction of the sector and some regulation carries only a small risk of discouragement, if any, and the strong probability of encouraging wider distribution and uptake. At Second Reading, the Minister also said,

“this is a matter that we will keep under review”.—[Official Report, 11/6/12; col. 1261.]

That is precisely what these amendments would require the FCA to do. It is important that we have that commitment in the Bill and I hope that the Minister will recognise that the balance of risk and reward here argues in favour of these amendments.

Before I close, I would like to ask the Minister for clarification. It may be that the Bill already brings peer-to-peer lending under regulation. Clause 6(3) amends paragraph 23 of Schedule 2 to FSMA 2000. This paragraph brought into the scope of regulation rights under any contract under which one person provides credit to another if the obligation of the borrower to repay is secured on land. The present Bill amends paragraph 23 by removing any reference to secured on land and substituting the phrase,

“Rights under any contract under which one person provides another with credit”.

Does this change in practice bring peer-to-peer lending under regulation, as it might appear? If it does not, as is probable, despite the apparent clarity of language, then I hope the Minister can give sympathetic consideration to the amendments. I beg to move.

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[Lord Sassoon]

No, my Lords, I am not saying that. There are plenty of different tax treatments for all sorts of regulated and unregulated activities. I see the issues as separate. However, I have indicated a couple of areas in which changing the tax treatment would be difficult and would run counter to some of the broader accepted principles by which we run the tax system. But I would not link the two things explicitly together.

[Lord Sharkey]

There was a question in the debate about the scope of my suggestion. The amendments were drafted deliberately widely so that they create a “may” or a “must” for the FCA when it considers competition so that it looks at new developments in the market that may be in the interest of consumers.

I have been encouraged by a lot of the debate. There is an almost universal consensus that regulation might be important and might be a very good thing. I think I am perhaps a little encouraged by what the Minister has said, but I will read Hansard carefully tomorrow to check that I am still encouraged. There is one issue here that needs stressing, which is the matter of urgency. It takes only one rogue operator to go bang in a very serious and public way to sink this whole area. The Government should perhaps be a little more alive to that particular problem and the risk of that happening. Having said that, and looking at the clock, I beg leave to withdraw.

Amendment 114 withdrawn.