Financial Services Bill

Lord Stoneham of Droxford Excerpts

Monday 12th November 2012 Lords Chamber

[Baroness Hayter of Kentish Town]

My Lords, financial services is perhaps less problematic than broadcasting at the moment. Amendment 25D stands in my name and that of my noble friend Lord Eatwell. This is perhaps the key amendment in all the ones that we will discuss today. We will simply not get this industry back on track and working in the interests of its savers and borrowers until firms put clients’ interests above their own bonus levels, remuneration or promotion prospects. Rather as doctors take care—above all else—of their patients, so must the banks, the insurance companies, those who lend us money and those who care for our savings put our interests centre stage.

These amendments seek to ensure that where consumers put trust in a firm’s discretion, and are vulnerable to the exercise of that discretion, the firm must act in their best interests. Trust is key to this industry. As John Kay wrote in his July review for the Government:

“Financial intermediation depends on trust and confidence: the trust and confidence that savers who invest funds have in those they choose to manage these funds”.

This goes to the heart of the behaviours, ethics and very thought patterns of this vital industry. Surely, as we have heard already today, we have enough evidence from LIBOR, precipice bonds, mortgage mis-selling and interest rate swaps that cultural change is needed in this industry. The costs of the PPI scandal, which has already been referred to, are now being picked up by those very offending banks. I believe that this amendment is in their interests. If they were stopped from doing these things beforehand, they would not then have to put things right afterwards.

The PPI scandal has sometimes been blamed on the lack of early intervention by the FSA, on the insufficiently rapid transmission of intelligence from the Financial Ombudsman, or on absolutely anything or anyone other than the mis-selling banks themselves. Had those banks had a duty of care towards clients, or been required to consider their best interests, there is no way that they could have continued to sell those products once they realised how few of their purchases would actually be covered by them.

Surely it is strange that where a saver puts their money into a trust-based pension scheme it is governed by trustees who have fiduciary duties to act in the best interests of beneficiaries, but that if that same saver puts their money in a contract-based pension scheme or similar scheme run by commercial providers, the FSA’s rules governing such contracts impose no duty on providers to put beneficiaries’ interests first. That cannot be right. It is not what savers expect of their provider.

The amendments would ensure, in an enforceable way, that authorised persons act in the best interests of their clients. As I argued in Committee, the Bill expects consumers to,

“take responsibility for their decisions”—[Official Report, 11/6/12; col. 1255]—

but without placing a corresponding requirement on firms to act in the best interests of their clients. This lacks balance. As the Kay review says:

“Stewardship is incompatible with conflict of interest”.

Kay calls for all those involved in the equity investment chain to observe fiduciary standards in their relationships with clients. Thus financial services should owe their customers the same duty of care as a lawyer or other professional by acting honestly, fairly and professionally in the best interests of their customers and in managing conflicts of interest. It is no good relying on rules to ensure this. Such requirements on firms have been in the FSA’s principles for business, yet consumers have still been shabbily treated.

We want there to be a duty of care in the Bill to ensure proper oversight and to emphasise its importance both to the regulators and the regulated. Such a duty of care will ensure that financial services can no longer profit unfairly at the expense of their customers. It is not enough—in case the Minister is going to say it—to leave this simply to the banking commission. It should be central to the Bill.

The Kay review calls for the application of fiduciary standards of care by all those who manage or advise on the investments of others. That is what we seek in these amendments and what I hope this House will now support. I beg to move.

[Lord Stoneham of Droxford]

My Lords, I support the amendment. The issue behind the amendments in this group is that the investment industry’s duties to savers appear to be poorly understood and observed. As the Law Commission has confirmed, where firms are managing other people’s money or giving them financial advice, they have strict fiduciary duties to act in those people’s interests. This includes both individual clients and institutions such as pension funds which represent large numbers of underlying savers.

Fiduciary duties are stricter than FSA rules, yet they are not universally accepted within the industry. There is anecdotal evidence that firms often seek to exclude or restrict their liability for breach of fiduciary duties through contractual terms which may not be read or understood by the lay trustees of pension funds. Even where they are accepted, it is very clear that they are not being applied. In the past week, the FSA has published a “Dear CEO” letter on conflicts of interests among asset managers which found that,

“many firms had failed to establish an adequate framework for identifying and managing conflicts of interests”,

and that,

“in most cases senior management failed to show us they understood and communicated this sense of duty to customers”.

In other words, firms are often not meeting even the FSA’s standards regarding conflicts of interest, which are lower than fiduciary standards.

As these are common law duties, they do not form part of the FSA’s regulatory approach. Indeed, there is confusion over whether it is appropriate for the FSA to enforce them, with some arguing that it is for beneficiaries to pursue court actions if duties are breached.

Where pension savings are concerned, this is unrealistic and unsatisfactory as a means of achieving high standards of care across the market. An explicit, best-interests principle in a Financial Services Bill would give the FCA a powerful tool to ensure that consumers’ interests were protected.

The concern is that the Bill’s new wording is significantly weaker than that proposed by the Joint Committee and may not provide a high enough level of protection for consumers. It lacks clarity in what might constitute an appropriate level of care, thereby leaving open the very question it was intended to resolve. Where those managing people’s long-term savings are concerned, the problem is precisely that there is confusion and misinformation about what is the appropriate level of care. Explicit confirmation that those managing other people’s money must act in their best interests would be a clear and effective way to help achieve the Joint Committee’s intention. Amendment 25D would provide that confirmation, since anyone managing somebody else’s money would meet the criteria of discretion and consumer vulnerability.

The noble Baroness, Lady Hayter, drew attention to the fact that this issue has the potential to seriously undermine the aims of auto-enrolment. In trust-based pension schemes, it is clear that the trustees are there to act in beneficiaries’ best interests. Indeed, as the ABI pointed out in oral evidence to the Joint Committee, one positive feature of the National Employment Savings Trust—NEST—is that it has a trustee structure that looks to protect its members. However, many savers are likely to be auto-enrolled into contract-based pension products where, as things currently stand, no such protection exists. Since the House of Lords considered the Bill in Committee, we have had the Kay review of UK equity markets. It recommended that:

“Regulatory authorities … should apply fiduciary standards to all relationships in the investment chain which involve discretion over the investments of others, or advice on investment decisions. These obligations should be independent of the classification of the client, and should not be capable of being contractually overridden”.

This amendment seeks to address a number of objections to similar amendments raised in the Commons and in the Lords in Committee. First, it does not rely on the term “fiduciary duty” but rather seeks to enshrine the common sense principle that underpins these duties—that where consumers rely on a firm’s discretion, that discretion must be exercised in the consumers’ best interests. Secondly, it would not supersede or restrict the specific standards to be laid down in FCA rules but rather would provide an overarching principle that the FCA should bear in mind when setting those rules. Thirdly, it would not apply across the board but only where appropriate—that is, where consumers have a particular relationship with providers that justifies a best-interest standard.

When we looked at a similar amendment to Amendment 25D in Committee, my noble friend Lord Sassoon expressed sympathy with the intent but argued that it was a matter for the FCA to make detailed rules on, rather than to be included in the Bill. However, as I have already said, part of the problem is that the common law status of fiduciary duties makes it unclear whether it falls within the FCA’s remit to uphold them, hence the need for an explicit reference in the Bill. It has also been suggested that refusal to amend the Bill in this way indicates a lack of political support for robust action to challenge the interests of financial intermediaries. Indeed, this could make the FCA feel that it has limited room for manoeuvre. Therefore, I hope that my noble friend will be more prepared to consider accepting the amendment and, at the very least, that he will give some indication of the support that the Government will give to the full implementation of the Kay recommendations.

[Lord Peston]

My Lords, in supporting my noble friend’s amendment I reread this section of the Bill, and I realised that I did not understand it at all. On the face of it, we are discussing here the consumer protection objective—that is, a series of statements most of which could be read as totally vacuous. In fact, as I read them again, I immediately thought, “What does it leave the FCA to do, rather than simply tell them?”. There are remarks like:

“the general principle that consumers should take responsibility for their decisions”.

If that is a general principle, why do any of the other principles hold?

There is,

“the needs that consumers may have for the timely provision of information and advice that is accurate”,

and so on. Anyone who knows anything about systemic risk knows that the relevant amount of information is massive and that few people on this planet would be capable of processing it in order to come to a view.

My noble friend’s amendment at least seems to have some impact on the FCA possibly doing something. Reading the Bill, I have great difficulty seeing what the FCA then does. Perhaps the Minister can tell us.