draft Financial Services and Markets Act 2000 (Regulated Activities) (amendment) order 2016

Richard Burgon Excerpts

Monday 7th March 2016 General Committees

[Richard Burgon (Leeds East) (Lab)]

It is a real pleasure to serve under your chairmanship this evening, Ms Buck, and it is always a pleasure to serve opposite the Minister. As she says, the draft order amends provisions in the Financial Services and Markets Act. The House of Commons Library tells me this is the 34th order amending that Act. The draft order is about the regulation of a number of activities, including peer-to-peer lending and mortgage lending.

On peer-to-peer lending, we are aware that the innovative finance ISA will launch next month, following the Treasury consultation at the end of 2014 and the policy announcement in last summer’s Budget. Peer-to-peer lending is already a fast-growing sector of our financial services industry and the Government anticipate that the launch of the new ISA could significantly increase the number of individuals making use of the sector.

There is ongoing debate about the merits and potential pitfalls of peer-to-peer lending, about the significant returns that can be made on loans in an age of low interest rates and about the risks to lenders. The proposal to make the provision of advice to lenders on entering into a peer-to-peer loan a regulated activity appears to be entirely sensible, although, as ever, we have a number of questions.

First, I note that the Yorkshire Building Society has estimated that over 400,000 savers are expected to invest in this field, but there are questions about the readiness of the financial advice sector to advise on the new products. The Treasury consultation found that the majority of existing ISA managers said that they were not currently considering offering peer-to-peer loans within ISAs. The “Alternative Finance” report produced by Intelligent Partnership found that of 130 advisers, just 9% expect the peer-to-peer sector to form part of their advice process in the next 12 months.

The Association of Professional Financial Advisers’ response to the Treasury consultation states:

“We believe that this is a very nascent industry and that until it has an established track record, it should not be considered a mainstream investment for retail clients. We therefore welcome the fact that firms, holding themselves out as independent financial advisers, will not be required to consider investment in P2P agreements when making personal recommendations to clients.”

The FCA has since said in its consultation document on changes to its handbook that

“we are not proposing that firms holding themselves out as independent should be obliged to consider P2P agreements when recommending retail investment products to a retail client.”

It says that the sector is

“at an early stage of development”.

With that in mind, will the Minister set out why advice about the peer-to-peer ISA is being treated in such a way? Will there be a future review about a change of approach? When might one be carried out?

In addition to our questions about advisers’ requirements and their awareness of the products, we have general questions about the timing of the launch and ongoing developments in regulating the peer-to-peer sector. Adair Turner, the former Governor of the Bank of England, who raised concerns in interview on the “Today” programme, is the most prominent individual to do so in recent weeks. There has also been significant coverage of the collapse of the unregulated Swedish peer-to-peer firm TrustBuddy. I am aware that peer-to-peer lending firms have issued robust responses in their defence. In particular, Christine Farnish of the Peer-to-Peer Finance Association did so in the media and when I met her recently.

Sue Lewis from the Financial Services Consumer Panel was among a number of people who responded to the Treasury’s consultation. She said that investors must be aware of the risk:

“It is important that anyone considering saving in a peer-to-peer ISA understands the risks associated with it, and they should be covered by appropriate levels of protection.”

She flagged up the FCA’s intention to consider whether the remit of the financial services compensation scheme should be expanded to include peer-to-peer lending in 2016. The Treasury’s summary of the responses to the consultation said that a minority of respondents made the case for its inclusion. Will the Minister clarify the Government’s opinion of covering peer-to-peer investments with the financial services compensation scheme? When will the FCA carry out that review? Would it have been sensible to have concluded such a process before the launch of the innovative finance ISA?

This is the second order on the implementation of the mortgage credit directive, which will come into force this month. The first was debated in Committee in March 2015, before the general election. The explanatory memorandum to that order says that the UK is already in advance of many European countries in adopting the directive. The European Mortgage Federation stated that the UK’s mortgage market review already goes beyond the core provisions of the directive. The Council of Mortgage Lenders stated that UK lenders are ahead of most of their European counterparts in implementing the directive. UK firms have been given the opportunity to adopt the revised rules up to six months early. Many have chosen that option, and are therefore already complying with the directive’s requirements.

On the second-charge lending market becoming regulated by the FCA and subject to its mortgage rules, in 2014 the Financial Services Consumer Panel said that it is “odd” that that is not already the case, given that

“the second charge market has consistently suffered from a higher rate of repossessions than first charge mortgages.”

The panel said it was concerned that there is a regulatory gap between the consultation date and the directive’s implementation date this month, and that the FCA will not collect performance or sales data on second-charge mortgages. Will the Minister comment on the effect of that gap? Has the Department since responded to those concerns?

Furthermore, the directive distinguishes between business buy-to-lets and consumer buy-to-lets, which are classified as such if the borrower or an immediate relative of theirs has ever lived in the property or intends to live in it in the future. How does the Minister expect that to be implemented? How many mortgages does she expect will be affected in that way, and is there any possibility of misidentification or misallocation of the distinctions between consumer and business buy-to-let? What are the risks of that occurring?

Finally, on small-firm lending, the order will exempt from referral to finance platforms applications made by a broker instead of directly by a business. What impact might that have on small and medium-sized enterprises’ access to finance, given the ongoing concerns, of which we are all aware, about bank lending to small businesses, which we know are vital for innovation in our economy? I have no doubt that we could discuss the development of alternative finance, the mortgage markets and small-business lending at further length, but I will draw my comments to a close.