Bank of England and Financial Services Bill [HL]

Lord Sharkey Excerpts

Wednesday 11th November 2015 Lords Chamber

Moved by

[Lord Sharkey]

24: Clause 21, page 17, line 45, leave out paragraph (c)

[Lord Sharkey (LD)]

My Lords, this is essentially a probing amendment and I shall be brief. Clause 21(3)(c) amends Section 64B of FSMA 2000—the responsibilities of authorised persons in relation to rules of conduct—by omitting subsection (5). The subsection to be omitted says:

“If a relevant authorised person knows or suspects that a relevant person has failed to comply with any conduct rules, the authorised person must notify the regulator of that fact”.

This seems a perfectly straightforward, reasonable and clear duty to impose on the relevant authorised persons. Who could imagine or want a regime in which misconduct was known or suspected and there was no obligation to report the fact?

I asked the Minister at Second Reading why this obligation to report to the regulator was being abolished, and I wondered, of course, whose interest was being served by its abolition. The impact assessment helps here, in that it notes that,

“the removal of the SM & CR obligation to report breaches of rules of conduct should result in savings (mainly for larger banks and building societies) … This cost reduction should mainly benefit larger firms because of the large numbers of staff they employ”.

There is no mention of any other impact as to conduct or misconduct. The only impact listed is a financial benefit, mainly for larger banks and building societies. The Minister addressed the question in his letter to me of last week. He said that,

“the requirement for firms to report all suspected or confirmed breaches of the rules of conduct has proved to potentially be a very costly obligation for firms, especially the larger firms which employ large numbers of staff, as they have to put in place detailed systems and controls to ensure compliance …The regulators can ensure that they are notified of any information about employee misconduct in a more proportionate way in their rules”.

This raises more questions than it answers. How does the Minister know that the obligation to report misconduct is, “proving potentially very costly”? Who has told him so? What evidence have they provided? How was this evidence assessed? How did he guard against the obvious danger of special pleading? What independent views were solicited? Critically, how did he assess the cost benefit of removal of the obligation to report misconduct against the cost of unreported misconduct? Can the Committee see the evidence base for all this?

I note that the Minister defends the removal of the obligation to report misconduct by saying that there are other non-statutory ways the regulators can assure they are notified of misconduct. Does he mean the FCA general notification rules, SUP 15.3.1(3)? Do not these rules impose a non-statutory burden equal to that imposed by the statutory obligation that the Bill removes? If they do not, does that not suggest they are weaker, or has the Minister in mind new rules?

What all this means is that we are being asked to repeal a statutory safeguard without knowing what its non-statutory replacement may be. That seems an unsatisfactory situation. In addition to answering the questions that I have just asked, could the Minister at least postpone activation of this measure until Parliament has had a chance to assess whether the current FCA rules are likely to be as effective as the current statutory obligation—or, if there are to be new rules, could he introduce them via statutory instrument to give Parliament a chance to scrutinise them? I beg to move.

[Lord Davies of Oldham]

My Lords, I shall also speak briefly and, largely, to endorse the arguments put forward by the noble Lord, Lord Sharkey. The impact assessment does not give a rationale for why the Government have made this decision, which we seek at this point. It would be useful to understand the reasons for the decision having been taken; without such information, we are not quite clear as to the advantages. Who was consulted on this, and what are the benefits to consumers and regulators? Surely it would put more pressure on the regulators to identify wrongdoing. Have the Government conducted investigations that take any of this into account? The Minister has a chance to reassure both of us who have spoken in this short debate on the reasons for the Government’s position.

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[Lord Bridges of Headley]

I am not saying that. I am saying that the process as a whole is potentially too onerous. I heed what the noble Baroness says, and of course whistleblowing is important. I shall continue, and we can continue to have this debate.

Finally, firms would need systems to ensure that the information is captured and transmitted to regulators, but it does not stop there. Having been notified of a suspicion, the regulators would have to decide whether to investigate and then, if appropriate, to consider what action to take. No doubt there would be many cases where there was only suspicion and nothing more and no action would be taken, but all cases would have to be investigated to some extent, and it would be difficult for regulators to do nothing at all once they had been notified.

Noble Lords should also note that, although the Government believe that an inflexible requirement to report all known and suspected breaches of conduct rules by all employees subject to them is inappropriate, the regulators can impose more targeted proportionate rules in this area if it supports the pursuit of their objectives.

The noble Lord, Lord Sharkey, raised costs. The costs in the impact assessment are based on the detailed cost-benefit analysis published by the regulators when they set out how they would implement the regime. I understand it is available on the FCA website, but I will write to the noble Lord and all interested Peers on this point. On that basis, I ask the noble Lord to withdraw the amendment.

[Lord Sharkey]

I thank the Minister for that answer and those clarifications. I cannot help feeling that removing the statutory obligation and replacing it with something that is still not yet entirely clear is perhaps not the best way of proceeding. However, under the circumstances, I beg leave to withdraw the amendment.

Amendment 24 withdrawn.

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Moved by

[Lord Sharkey]

25: After Clause 21, insert the following new Clause—
“Unsolicited marketing of debt management services
The Treasury shall require that the FCA amend the rules in its handbook governing unsolicited marketing so that they apply to debt management services.”

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[Lord Sharkey]

My Lords, I will be very brief. I know that the Committee is keen to move on to the simple and straightforward government amendments. This amendment is designed to do just one thing, which is to persuade the Government to ban cold calling in the service of debt management providers.

Cold calling lead generation and cold calling directly is banned for mortgages and has been for a long time. It was banned because it was felt that it generated high risk for consumers. Cold calling lead generation for debt management providers is a much higher risk for consumers. The FCA published its thematic review of debt management advice in June of this year. It makes extremely worrying reading.

The FCA acknowledged that debt management is one of the highest-risk activities in consumer credit. Its review found that: customers are not sufficiently made aware of the nature of the service being offered, including any fees they may be required to pay; customers are not being made aware, as is compulsory, that help in managing debt is available free of charge; the debt advice provided may not be in the customer’s best interests and debt solutions that are not suitable, affordable or sustainable are offered; customers are recommended or sold additional products that may not be in their best interests; the nature and level of fees charged by some fee-charging debt management firms is such that they affect the customer’s ability to make significant repayment towards their debt; and firms do not market themselves in a manner that is clear, fair and not misleading.

There is other stuff, too, about the lack of protection of client money. It is all extremely damning. I know that the Minister and the FCA are fully aware of this problem and of its scale. For example, StepChange, a free debt management advice company, had more than 500,000 people contacting it for advice in 2014 alone, which was a 56% increase on the number for 2012.

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[Lord Ashton of Hyde]

My Lords, the Government share the concern of the noble Lord, Lord Sharkey, about long-standing problems in the debt management market. Indeed, I have had the pleasure of answering questions from the noble Lord on this subject, and had a subsequent meeting with him and officials from the Treasury. We agree that it is imperative that vulnerable consumers in this market are treated fairly by firms and provided with the services that meet their needs.

As the Committee will be aware, responsibility for consumer credit regulation, including debt management firms, transferred from the Office of Fair Trading to the Financial Conduct Authority on 1 April 2014. The ensuing, more robust regime is dramatically improving consumer protections. The Government have ensured that the FCA has wide enforcement powers to take action where its rules are breached. There is no limit to the fines that it can levy and, crucially, it can force firms to provide redress to consumers.

Debt management firms are in the first group of firms to require full authorisation, with the FCA thoroughly scrutinising firms’ business models and practices. Every debt management firm will have to demonstrate compliance with the FCA’s rules and principles, including the requirement to treat customers fairly. Firms which do not meet the FCA’s threshold conditions will not be able to continue in the market. Decisions on those authorisations are due to take place—the first ones by the end of this year.

The FCA has also introduced tough new rules to protect consumers in the debt management sector, and the FCA actively monitors that market. It has flexible rule-making powers and, if it finds further problems, it will not hesitate to take action. The FCA requires that all advertisements and other promotions must be clear, fair and not misleading, and it is able to impose tough sanctions where wrongdoing is found.

Regarding the noble Lord’s specific points about unsolicited marketing, the financial promotions regime applies to those providing debt management services. The FCA requires that unsolicited marketing by phone, text or email makes clear both the identity of the firm and the purpose of the communication so that the consumer can decide whether to proceed. This was highlighted by the noble Lord, Lord Sharkey.

The FCA also requires regulated debt management firms that accept leads from lead generators to satisfy themselves that business has been procured fairly and in accordance with data protection and privacy in electronic communications law. More broadly, in 2014 the Department for Culture, Media and Sport published its Nuisance Calls Action Plan. This set out the actions being taken by government, regulators, consumer groups and industry to tackle nuisance calls.

Importantly, the FCA has already committed to undertake a review of unsolicited marketing calls, emails and text messages from consumer credit firms, which will begin early next year. The Government believe that requiring the FCA to take a particular course of action before this review has taken place would limit the FCA’s ability to exercise its powers independently and would not necessarily achieve the desired result.

In answer to the question, “Why not act now?”, asked by the noble Lord, Lord Tunnicliffe—and I think that the noble Lord, Lord Sharkey, implied that even if he did not say it directly—it is worth noting that, if additional requirements for debt management firms were introduced at present, those firms would be required to alter their internal processes. That would cause disruption to the FCA’s ongoing authorisation process, which is due to begin producing results within the next couple of months.

I shall take advantage of the offer from the noble Lord, Lord Tunnicliffe, to write to him on the caller ID review timetable, because I do not have that to hand.

In summary, the authorisation process is well under way and will not take a year, and the FCA review of unsolicited marketing calls will begin early next year, so I submit that the noble Lord’s amendment is not appropriate at this time. I therefore ask him to withdraw it, confident in the knowledge that he will continue to hold the Government to account on this subject.

[Lord Sharkey]

I thank the Minister for that answer, a lot of which was, as I knew it would be, very encouraging. There remains just one issue. This is going to take some time, during which a substantial number of people will be exposed to risk. I think that that is unnecessary. The mortgages example suggests that we can, without interfering with the FCA’s processes, do something simple and quick now to stop this abuse. Having said that, I beg leave to withdraw the amendment.

Amendment 25 withdrawn.