Financial Services and Markets Bill

Viscount Trenchard Excerpts

Committee stage
Monday 6th February 2023 Grand Committee

[Lord Moylan (Con)]

My Lords, I will also speak to Amendment 241, also in my name. I hope this will be the least controversial mini-debate on the Bill, because I do not think anybody in the Committee is other than opposed to financial exclusion. We favour financial inclusion, especially in a modern digital age. What is normally meant by financial inclusion is the opportunity for people of limited means or living in marginalised circumstances to participate in the financial and banking system—something that is all the more necessary now that people are so dependent on access to it, not least for benefits but also for other, ordinary means of getting about in life and so forth. Who can be against that? A number of amendments in this group tend towards strengthening the obligations on the regulators to promote financial inclusion, and I am happy to lend my general support to them.

Amendments 55 and 241 in my name relate to a different sort of financial exclusion that has grown up over the last 25 or 30 years: the general tendency to exclude the retail investor from the opportunities to invest in regulated products. For example, we have gone from a situation 30 years ago where it was possible to buy gilts—UK government bonds—at the Post Office, or to bid for new issues of gilts at an average price through cutting out a coupon in the newspaper, to a situation where it is very difficult for ordinary people to buy government bonds.

In the case of highly rated corporate bonds, an EU regulation incorporated from its prospectus directive has set the minimum denomination of new issues of bonds at €100,000, which we have applied of course. The result is that very few sterling bonds are in denominations small enough for ordinary investors to buy, and even they are long-dated issues that are running off, so soon there will be no more unless we take some action.

The days of Sid are long gone. Nowadays, when companies do new share issues—what have come to be known as IPOs, initial public offerings, or even subsequent offerings—corporate treasurers are simply uninterested in engaging with retail investors, partly because the burden of additional regulation involved deters them from doing so. Shares are generally placed in private placements with institutional investors, because it is easier and quicker—no room for the retail investor.

There have been two reasons for this. The first is overcaution on the part of regulators. They feel responsible for regulated investments, so they do not want anyone to lose any money unless they are a really big player. The easiest way of preventing smaller players such as retail investors from losing money and complaining is to prevent them from investing in the first place. The second is the reluctance of corporate treasurers to engage with the retail market, because they have no incentive to do so, only additional burdens.

This might have been motivated by a good sentiment for protecting investors, but the results have been completely perverse. Nothing prevents retail investors investing in unregulated investments, so we see people out there quite freely putting their money into spread-betting; contracts for difference, which are similar to spread-betting; and even some things misleadingly known as mini-bonds, on which they regularly lose their shirts. Indeed, one issue of mini-bonds, from London Capital & Finance, was unregulated; it was ambivalent whether or not the regulator had actually regulated it. Noble Lords will recall that, last year, we had to pass a special Act of Parliament to allow the Treasury to indemnify those investors, because they had potentially been misled on the legal position. The core point is not that we had to indemnify them; it is that they were perfectly able to invest and to lose their shirts. But we stopped them—regulators and the circumstances prevent them—from investing in much safer, regulated products.

Amendment 55, in my name—I am grateful for the support of my noble friends, Lord Trenchard and Lord Naseby, and the noble Baroness, Lady Kramer—puts a new objective on the Prudential Regulation Authority to ensure that, as part of its work, it aims to minimise the barriers to retail participation in regulated products in the financial market.

Amendment 241 deals specifically with the narrow point that denominations of corporate bonds are required at the moment to be a minimum of €100,000 and replaces that with what we were used to many years ago, by having £1,000. That would make them accessible to retail investors.

I have had conversations with brokers—and I am grateful for them—who deal with retail investors in the City. I know that they are already in contact with the Treasury and that the Treasury is sympathetic to these arguments. There is nothing in what I say that will come as a surprise to the Minister, and I hope that, when she stands up, she will say many warm words in support of both my amendments, which I would appreciate. But I am concerned that there should be more than simply warm words and unbankable promises about what regulators might be asked to do in the future, so my inclination at the moment is that legislation would be a jolly good way forward. I beg to move.

[Viscount Trenchard (Con)]

My Lords, I declare my interests as a director of two investment companies, as stated in the register. I support my noble friend Lord Moylan in his Amendments 55 and 241, to which I have added my name. My noble friend has explained the purpose of his amendments very well and he spoke persuasively on this subject at Second Reading.

I was involved in much of the privatisation programme of the 1980s, and the Government’s efforts to increase the shareholder base, especially the retail shareholder base, were rather successful. Regulation has increasingly stymied retail investors’ ability to buy equities and bonds since that time, and I strongly support my noble friend’s wish to bring back Sid. New issues of equities used to be widely available to retail investors, but additional regulatory requirements now discourage corporate treasurers from including retail tranches in public offerings.

Amendment 55 requires the PRA, in advancing its general objective, to minimise barriers to wider securities ownership. This will create a better balance of factors, which it must take into account without in any way weakening the stability of the UK financial system.

As my noble friend mentioned, the prospectus directive is a strong candidate for early reform, in particular its requirement for a minimum transaction amount in a corporate bond issue of €100,000, which obviously excludes most retail investors from the market.

I also support Amendment 241, for the reasons that my noble friend has well explained to the Committee.

My noble friend Lord Holmes of Richmond proposes a new financial inclusion objective for the FCA. I welcome the steps that the Treasury and the DWP have taken to support financial inclusion. Could my noble friend the Minister tell the Committee how the welcome decision to release £65 million of dormant assets funding to Fair4All Finance has improved access to fair, affordable and appropriate financial products for those in financial difficulty? How do the Government intend to honour their commitment to protect the long-term viability of the UK’s cash infrastructure as we move inexorably towards a cashless society.

The Money and Pensions Service, in its national well-being strategy published in 2020, set out an agenda for change containing various ways in which to help people manage their money more effectively. I welcome this and other steps that the Government are taking in this area. I am also mindful of the fact that the Government have legislated to create a consumer financial education body, and I ask my noble friend what plans the Treasury has for that body. I welcome what is being done, and I am not sure that it is sensible to give a further objective to the FCA in this area, because it would dilute the attention that the FCA must give to its existing objective and two new ones—both the one already included in the Bill, the competitiveness and growth objective, and that proposed by my noble friend Lord Lilley, the predictability and consistency objective.

I also have sympathy with Amendment 75, in the name of the noble Lord, Lord Tunnicliffe, on financial inclusion, and I look forward to what he has to say. When I look at the matters to which the FCA must have regard in furthering its consumer protection objective, I am surprised that retail investors are allowed to invest at all. I am not sure that Amendment 75 would help reduce the barriers to market participation by ordinary investors.

I have sympathy with Amendment 117, because I think it will help if the FCA has a duty to address the issue. But I cannot support Amendment 228 in the name of the noble Baroness, Lady Kramer, because it may unfairly prescribe a bank’s ability to decide within reason the businesses that it wants to undertake, and its obligations to its shareholders and depositors to invest their money wisely. I am also not sure how the noble Baroness would define low-income communities. Our markets have been adversely affected both by the impediments to new authorisations and by unwarranted restrictions on the businesses of licensed banks. The result of this is often the reverse of what is intended, by dissuading new entrants from seeking authorisation, which negatively affects competitiveness and consumer choice.

[Lord Tunnicliffe (Lab)]

I rise to speak to this group, particularly my Amendments 75 and 117. The group contains the important amendment which would give the FCA a “have regard” duty for financial inclusion within its existing consumer protection objective. The FCA’s and the Government’s argument is that its consumer duty means that it does not need a financial inclusion “have regard”, but there is a fundamental difference between the two. A consumer duty deals with people who are able to access products. I want to know how the FCA—and, incidentally, the Government—will be required to consider those who are not yet consumers.

We are not arguing for a new primary or even secondary objective, and very much want to wait for the outcome of the FCA’s consumer duty work. A “have regard” duty is the proportionate approach to ensure that those who are currently excluded are supported to become consumers and begin to benefit from the new consumer duty that we have heard so much about. We are not being radical or party political in this; we have Lib Dem and Cross-Bench support for Amendment 75. Nor are we alone: the Phoenix Group, a FTSE 100 company, is also arguing for the FCA to have regard to financial inclusion.

I hope that the Minister will consider this amendment favourably and, if she does not, I want to know why not, and what the Government will do to tackle financial inclusion issues, including the poverty premium—the fact that people who can pay for things only monthly rather than in an annual lump sum pay more.

We also have in this group Amendment 117, which

“would require the FCA to report on financial inclusion”

yearly. Perhaps the Minister would value having evidence on how to fix the manifold problems in this area, enabling HMT and stakeholders to feed in too.