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Financial Services Bill

Volume 739: debated on Wednesday 18 July 2012

Committee (4th Day) (Continued)

Clause 5 : The new Regulators

Amendment 104ZB

Moved by

104ZB: Clause 5, page 16, line 7, at end insert—

“( ) As part of the FCA’s consumer protection and integrity objectives, the FCA will raise standards of professionalism in financial services by mandating a training and competence regime which must—

(a) apply to all approved persons exercising controlled functions, regardless of financial sector,(b) specify minimum thresholds of competence including integrity, and professional qualifications, continuous professional development and adherence to a recognised code of conduct,(c) be evidenced by individuals holding an annual validation of competence.”

My Lords, I am impressed that I will be standing opposite an immaculate Whip, which I am sure will make for a good day’s work on the Bill.

The amendments in the first group—

My Lords, I hesitate to interrupt the noble Baroness who is carefully moving her amendment, but I remind noble Lords that a substantial number of Peers wish to take part in the Committee stage of the Bill. Will noble Lords please leave the Chamber a little more quietly so that we can hear the noble Baroness?

I thank the noble Baroness for that assistance.

The amendments would raise the standards of professionalism in the financial industry; partly by adding professional standards to the definition of integrity, partly by introducing a code of conduct and partly by mandating a training and competence regime. That is only what other professions expect: training, a code, a qualification, CPD and proof of competence.

Part of the reason that we trust lawyers and doctors, architects and surveyors, is that they meet these requirements with proof of competence. That is why we trust them with our wills, our conveyancing, our divorces and our lives. A code of conduct enables us to know what is expected of them in terms of behaviour, ethics and integrity, as well as in particular skills and standards.

Let me quote from just one such code—that for solicitors. It reads:

“You must: …act with integrity ….act in the best interests of each client … provide a proper standard of service to your clients”—

—although, having checked lots of codes of conduct, I find that surveyors have to,

“always provide a high standard of service”,

so perhaps we could have some trading up there.

So you have to act in the best interests of clients, provide a good standard of service to your clients and not behave in a way that is likely to diminish the trust that the public places in you or the profession. If only bankers and the rest of the industry had signed up to that and it had been enforced by their professional body or regulator. Sadly, we have learnt the hard way that the culture and behavioural traits of those working in the financial services sector have not been sufficient with regard to professionalism, integrity and competence.

It is not just me. Hector Sants argued in 2010 that some of the causes of the financial crisis were deeply rooted in the behaviour and culture which resulted in bad actions and decisions. Recent scandals, whether PPI, LIBOR, interest rate swaps, or endowment mortgages, should ensure that we make the Bill require the FCA to get the sector to improve standards of ethics, culture and behaviour. Redress and penalties are not sufficient, for the mischief is already done. While we endorse the amendment in the name of the noble Baroness, Lady Kramer, and the noble Lord, Lord Sharkey, I ask them why, when we had the opportunity of an independent review into the causes of all this mayhem and therefore the opportunity to draw broader lessons about the causes and the means to avert future misbehaviour, they failed to support us in the Lobbies. Their intervention on LIBOR in this amendment, simply to ensure that the penalty falls on the right half of the bank, although welcome, seems, I have to say, a rather timid response to a major scandal. We wish the noble Baroness well on the Joint Committee and we hope that her inquiring mind will fall on the wider issues covered in this group, which I trust she will also support today.

We know that the higher a practitioner’s commitment to professional standards, the lower is the likelihood of consumer harm and the higher is consumer trust and confidence. This is the case for the whole industry, not just the retail sector. As the Chartered Institute of Securities and Investments has said:

“It cannot be tenable … for the wholesale sector to have significantly lower standards than the retail market in terms of qualifications, CPD and ethics”.

The Minister may say that the varied nature of financial services and different needs of customers means that it is very hard to have a single qualification, but that is the case for doctors and lawyers. An ILEX member does not have the same qualification as a specialist family court QC, nor a GP the same as a cancer surgeon, but that does not mean that there cannot be mandatory qualifications for all, appropriate to their responsibilities. Qualifications can easily keep pace with the complexity of financial services to adapt to the changing nature of consumers, of products and of the external environment. If we are to restore trust and confidence we must upskill the workforce, the profession, both in technical standards and in ethics. We need a new code of conduct for bankers.

Stewardship banking relies on the idea that banking is a trusted profession, not a fly-by-night activity. If we are serious about banking regaining the status of teaching, medicine and law, we must act. Those professions have a code of conduct that lays down what is expected of people. We need the same for banking. Anyone who breaks the rules should be struck off, whether for manipulating markets or gaming indices, or deliberate mis-selling. People should not be able to work in banking again if they mis-sell a product. Confidence will not return until we strike off those whose conduct lets us down.

The second amendment in this group, in my name and that of my noble friend Lord Eatwell, is driven by the same belief: that professional standards are key to good behaviour in a sector that displayed a notable lack of integrity, standards and ethics. We cannot simply hope for change, we must work for change. This amendment would add professional standards to the definition of integrity and therefore to the FCA’s operational objectives. It would force supervisors to examine the extent to which firms have demonstrated their commitment to such standards, making them a core part of the FCA’s work and remit.

As long ago as 2002 Howard Davies, then the FSA chairman, admitted that despite the FSA’s principles being based on ethical values, it was,

“not clear that this ethos is fully understood or applied consistently by everyone working in the industry”.

Amendment 110ZB attempts to make amends for this oversight. Professional standards need to be embedded in a firm’s ethos and this must be supervised by the regulator. Left to themselves, too many firms simply do not pass muster. We need to enhance the integrity of our financial services sector in order to ensure good consumer outcomes and drive up standards. The FCA must send clear signals to the firms it regulates about the behaviours it expects and the professionalism that must be evidenced. These amendments are part of enabling that to happen. I beg to move.

My Lords, I shall speak to Amendment 110ZC, which stands in this group in my name and that of my noble friend Lord Sharkey. I thank the noble Baroness, Lady Hayter, for her kind words. This amendment illustrates why I and, I suspect, this House and the other place had a preference for a parliamentary committee, which will report by the end of the year, over a judicial committee which will report in a couple of years, because the issue addressed in it would certainly have been resolved one way or the other by that point and, I suspect, with damaging effect. I hope that the Government will respond to the amendment by telling me that it is completely unnecessary, but it arises out of deep concern following various newspaper reports that have discussed the size of the liability that may fall on the banks involved in LIBOR manipulation. We are talking not just about the fines that come from the regulators—they are significant but small in the way of things for banks—but about the liabilities that may arise from the various actions that are now under way and others which I am sure will join them.

As the Committee will know, two cases are already under way in the United States. One is in the Southern District of New York, which is a class action lawsuit titled “In re LIBOR-Based Financial Instruments Antitrust Litigation”—the use of “antitrust” obviously has significant consequences—and the second is in the northern California district court, filed by Charles Schwab against a series of banks, including a number of UK banks. Charles Schwab claims in its complaint that “significant harm” has resulted from the mispricing of,

“tens of billions of dollars in LIBOR-based instruments”.

Its complaint outlines the methodology of comparing the banks’ LIBOR quotes with some market-based yields and CDS spreads. Some excellent work done by the securities analyst Cenkos estimates that the LIBOR quotes were understated by 30 to 40 basis points in some cases. Cenkos does a simple calculation to show that if LIBOR had been mis-stated by even five basis points over four years, on £1 trillion-worth of notional contracts, the damages would be £2 billion. We are therefore looking at multiples of billions of potential charges.

It struck us as we were looking at this and reading some of the stories about Barclays considering separating the bank into an investment bank and a retail bank—that is the direction in which we are going in this country through ring-fencing, and I am very much in favour of it—that there might be scope for organisations to decide that those liabilities generated by LIBOR manipulation could happily be sited in the retail part of banks rather than the investment part. I am afraid that that view comes with some cynicism, as many of us now would not put anything beyond the decision-making powers of some bank boards and directors.

We are seeking from the Government some stern comments to the effect that we have got this entirely wrong and that safeguards are in place. If it is not the case, we hope that someone will quickly pay attention, because the decisions that could set this process in train could happen fairly quickly. I think that every one of us here and the public at large would be shattered if that was the conclusion to this aspect of the scandal. This is in no way meant to be a comprehensive response to the amendments; it is one particular issue that struck us as being in need of immediate comment.

My Lords, I listened with enormous interest to the noble Baroness, Lady Kramer, and am sympathetic to what she said, but I cannot see how the amendment fits into this section of the Bill. If I have read it correctly, new Section 1D(2)(b) states that the integrity of the financial system includes,

“its not being used for a purpose connected with financial crime”.

As I understand it, these people have engaged in financial crime and been fined for it already. If the noble Lord, Lord Carlile, is to be believed, they will be brought before the courts to be examined some more. What unfair allocation does the noble Baroness have in mind? If some American investors have lost a great deal of money as a result of criminal activities by people connected with British banks, it would not be unfair if those banks had to meet the cost of those criminal claims. Is she saying that that would be unfair, or have I totally misunderstood the purpose of the amendment? It is most likely to be the latter.

I would hesitate ever to say that the noble Lord, Lord Peston, had misunderstood any issue. Perhaps I can clarify. This is a probing amendment, and I cannot pretend that it is drafted with skill or placed in the Bill where, ultimately, a sophisticated legal mind— or, perhaps, the noble Lord—would put it. We felt that it was an issue that needed to be raised promptly. I fully accept that if courts decide that there is liability, that liability will be met, but if the institutions are dividing themselves into separate pieces and there is flexibility on where the liability is then allocated—into a retail entity or the investment banking entity—that is of acute interest.

This sounds a bit like tax avoidance in a new version. If they separate the institution into two parts, they will then claim that there is a part that is not guilty. Is that the point of the amendment?

My Lords, I want to intervene briefly on two amendments. One is that moved by my noble friend, Amendment 104ZB. I congratulate her on it and draw particular attention to paragraph (c), which is enormously important. Paragraphs (a) and (b) stand by themselves and no one will want to argue with them, but I particularly congratulate my noble friend on paragraph (c), which deals with the need to ensure that all those involved in managing money or advising retail investors should keep abreast with changes in financial markets, which, as we all know, have been great in the past 10 or 20 years, and in financial products.

The range of financial products available is enormously confusing. Inevitably, it totally confused retail investors. It is enormously important that IFAs are kept abreast of developments so that they can give good advice to their clients. Among the complex and dangerous instruments that have emerged have been all sorts of derivatives used both for hedging purposes—thereby reducing risk if they are used intelligently and properly—and speculatively and extremely dangerously. That can be an acceptable product for a very sophisticated investor to use as a way to leverage his or her risk if he or she is determined to do that.

Just as it is so important to ensure that doctors are kept abreast of changes in medical science, which in a career of, say, 40 years, can revolutionise the subject, it is enormously important that that should happen in financial services. An “annual validation of competence” would be an excellent discipline that will itself create a market. Professional organisations, business schools and others will arrange regular courses for people in the financial services industry who are affected by the clause and need to keep up to speed. I hope that those courses will involve some test or examination at the end, so that it will be possible to use that as validation. That will greatly reassure the public. I congratulate my noble friend on proposing this extremely intelligent contribution to the Bill.

I also congratulate the noble Baroness, Lady Kramer, first, on being selected for the very important committee. Even those of us who thought—and still think—that a judicial inquiry is the right approach give our very best wishes to those who have taken on the important task of carrying out the parliamentary inquiry. The credibility of Parliament is at stake here, as is that of our financial services industry, so it is enormously important that people of the highest intellectual calibre and integrity have been selected. I know that the noble Baroness falls under both those categories, as does my noble friend Lord McFall, who is sitting behind me, and I also delighted that he has been nominated for the committee. That is very reassuring to us all.

The noble Baroness raises a very important issue. There are several possible costs which may emerge to banks if they are found guilty of manipulating a market, in this case the LIBOR market. There are the regulatory fines, which—as the noble Baroness says—are probably the least important in monetary terms, and some of which are already foreseen in the regulatory reports. There is then the prospect of substantial damages for successful antitrust suits that may be brought by the Department of Justice in the United States or possibly the European Commission, or by other antitrust bodies in the future. Then there are the damages that may be awarded by courts, which are much more likely to be awarded if there are criminal convictions in advance of the civil actions.

These damages can be enormous; one thinks immediately of two categories of person or corporate that may be negatively impacted by the rigging of the market such as the LIBOR. First, there are the derivative traders, who will have found that the product in which they are dealing, such as interest rate futures or derivatives options based on interest rates, has been completely falsified so that when they come to their closing day the price is quite different from what it otherwise would have been. That sort of loss could be easily quantified and there will be substantial suits from derivative traders and dealers of that kind. Secondly, there are those who have borrowed on a LIBOR basis and who may find that at certain periods the LIBOR was falsified upwards. I leave all this open, as we do not know yet. In other words, they were paying more than they should have by way of interest rate—base rate and margin—and will obviously seek to recover that. Again, that can go into enormous sums.

The noble Baroness, Lady Kramer, is absolutely right to focus on the temptations that will exist here. If a bank has investment banking and commercial banking divisions, there is an obvious reason why it might want to ensure that all these losses emerge in the commercial banking division. It is not particularly because it hates retail depositors but because it knows that Governments tend to stand behind them, both with a retail deposit scheme and—if the bank gets into real trouble and is large enough that its failure might have a systemic impact—with the lender of last resort, which is the central bank in the relevant jurisdiction. That would not happen with the investment banks. People may well say, “Let’s take all these losses in the commercial banking division, and if the worst comes to the worst the central bank will pick it up”, which basically means the taxpayer.

One can easily see, therefore, that there is a perverse incentive present here. The noble Baroness is absolutely right to identify this problem, which, it is hoped, is entirely theoretical. No-one has ever conceived of doing anything of this kind. I trust that this is the case; I am sure the noble Baroness also hopes that it is not the case. However, we need to think about these things in Parliament. We need to ensure that the law is robust and that it deters wrongdoing as well as punishes wrongdoing when it occurs. That is the spirit in which the noble Baroness has presented this amendment and I greatly welcome it.

My Lords, I, too, congratulate the noble Baroness on her appointment to the Joint Committee. I hope she will be able to do something that, from what I have seen, the committee has not been able to do before; namely, focus on the job in hand. She said—and I disagree with her strongly—that this Joint Committee would be enough to do the job completely. I cannot see that happening from what I have seen of it now, although I am sure she will not be grandstanding as members of the committee are doing today. My noble friend Lord McFall will probably do a better job; I congratulate him too on his membership of the Joint Committee.

I strongly support my noble friend Lady Hayter on this amendment. I am concerned by the broader issue of the FCA. The Government have changed the name from the FSA to the FCA. I am not sure that the FCA will be any better at dealing with the problems that have arisen about LIBOR or anything else, or with all the mistakes that were made. Perhaps the Minister will have in his brief the number of FSA staff who have now simply changed their letters and become members of the FCA. While I am digressing slightly, perhaps I could digress a little more and ask the Minister if he can do what the noble Lord, Lord De Mauley, could not do earlier; namely, to answer my question about why the Government decided to make a statement about an important issue of loan guarantees on the “Today” programme this morning and not in the House. I look forward to hearing the Minister on that.

The whole issue of what the FCA is going to be able to do within the Bank of England disturbs me a great deal. I am not at all sure that it should have been done in this way. To give huge powers to the Bank of England, as I said, is hardly likely to help, judging by what has happened in the past. We now know from the governor of the Bank and others that they knew nothing whatever about what was going on, which is rather surprising, to say the least.

The noble Baroness, Lady Kramer, was able to bring LIBOR into this whole issue in her amendment. Like my noble friend Lord Peston, I am not quite sure how she managed to get it there but she did, and the best of luck to her. I hope that she gets a reply. For the moment, though, I wonder what changes the Minister hopes to see that will improve what went on before. The FSA was clearly not successful in the role that it had been given. I would like to see some of these amendments approved so that we can see the FCA doing a better job. I wish that that might be true but I am bound to say that I look forward to what the Minister will tell us about how great this new FCA will be. For now, though, I will leave it with him and, as I say, perhaps he can digress slightly and answer my other question.

My Lords, I hope that the Committee will agree that it is probably better, given the number of members of the committee here, if I stick to matters relevant to this group of amendments rather than wandering off into the long grass from where I might never come back. All three amendments in this group relate to concerns that have arisen in connection with the recent LIBOR scandal, and in that context I am sure that the Committee would like to thank not only my noble friend Lady Kramer and the noble Lord, Lord McFall of Alcluith, but my noble friend Lord Lawson of Blaby, the noble Lord, Lord Turnbull, and the right reverend Prelate the Bishop of Durham for kindly agreeing to join the parliamentary committee on banking standards, which goes to the heart of the concerns raised in the amendments.

I turn to the issue of professional standards. Amendment 104ZB seeks to place requirements on the FCA to impose a training regime. The object of the regime is to specify minimum standards of competence and integrity, and it will include continuous professional development and a code of conduct. Amendment 110ZB seeks to extend the non-exhaustive definition of the integrity of the UK financial system by adding a reference to the professional standards of those working in financial services.

As a former chairman of the IFS School of Finance—what was previously called the Institute of Bankers—I believe as firmly as anyone that professional education has to be a cornerstone of standards in the banking industry. Personally, I wish that more banks would insist on more of their employees going through structured professional education, not just at the start of their careers but right through them. In answer to the point made by the noble Lord, Lord Davies of Stamford, there are indeed providers of these courses of great distinction, including the IFS School of Finance, and many bankers go through them. However, we would all like to see many more going through them and on a continuous basis.

Having said that, particularly in the light of the LIBOR scandal, we must ensure that our regulators have the right powers to set and enforce high standards of behaviour in the financial services industry. That is why we have invited Parliament to set up an inquiry into standards in that industry. While I share many of the concerns of the noble Baroness, Lady Hayter, that does not mean that I can support these amendments, which I consider unnecessary and to be coming forward at the wrong time. Neither amendment gives the FCA powers to impose standards of integrity and competence that it does not already have. The FCA’s integrity objective contains an indicative and non-exhaustive list of matters that are relevant to the UK financial system operating with integrity. The conduct of those working in financial services is already covered by the objective, even if it is not listed here. The list contains a number of matters relevant to the LIBOR example, including the soundness of the system and the orderly operation of markets. These can be ensured only if standards of professionalism are maintained by those in the industry.

The Minister agrees with me that it is highly desirable that there should be regular courses for people working in the financial markets, so that those advising the less sophisticated can be kept up to date. Yet I cannot understand why he resists the suggestion that that should be a statutory, mandatory requirement—that, as my noble friend’s amendment lays down, such people should be forced on an annual basis to have their qualifications validated. What is his reason for resisting that?

If the noble Lord, Lord Davies, would permit me to complete the argument, I have explained that the FCA has an integrity objective, under which standards of professionalism need to be maintained by those in the industry. Within the overall integrity objective the FCA already has a mandate and powers to deal with these issues. It will specifically have powers to impose standards, including training and qualification, on individuals. Training, qualifications and minimum standards will be of considerable importance to the issue of re-establishing a proper banking culture. They are matters which will be relevant to the regulators’ consideration of applications by persons wishing to become approved to carry out significant influence functions, but it is a big step from that to the FCA mandating a training regime across all areas of financial services.

The forthcoming reviews, including that of the parliamentary Joint Committee, will show whether my analysis is right, or whether the committee believes that the FCA needs additional powers. To answer at least one of the challenges from the noble Lord, Lord Barnett, I refer back to the existence of the committee; this is going to be central to what it is looking at. I see one member of the committee nodding assent, but I think it is obvious.

From what we know about the LIBOR scandal is it not valid to infer that, whoever these people engaging financial intermediation are, they are not a bunch of professionals? Is someone not going to have to be responsible for raising professional standards, or if not raising them then introducing them? I am surprised that the Government do not take this as seriously as they should.

My Lords, we take it extremely seriously and that is why we thought that it was right to set up the Joint Committee. Unlike the noble Lord, Lord Barnett, I do not doubt that it will get through its work efficiently, effectively and quickly.

I recognise that we are giving it a big challenge and I am grateful to it for taking the challenge on, and for the terms of reference, but we should wait to see what it comes up with in this area. Even if it came up with nothing, there are adequate provisions. On another point that the noble Lord, Lord Barnett, raises, what will be different with the FCA? One of the things that will be different is that the Government are publishing new threshold conditions for all regulated firms. Indeed, they have been published today on the Treasury website in advance of the relevant clauses being debated in due course. They include tougher standards on the probity of staff and management in regulated firms. The noble Lord, Lord Barnett, is right to insist that tougher standards should be imposed by the FCA than the FSA, and that is exactly what we are doing. As ever, he is right on the ball and goes to the heart of the matter.

That brings me briefly to the second point on these two amendments, which is to endorse their timeliness and to emphasise, as I have already done, that we should wait for the outcome of the Joint Committee’s inquiries. I confirm that we will consider very carefully the recommendations of that committee, including any recommendations for legislative change.

Let me turn to Amendment 110ZC. I will not dwell on the debate about the effectiveness or defectiveness of the drafting, which was identified by the noble Lord, Lord Peston, and owned up to by my noble friend. I shall not dwell on that as that was not the point of the amendment, but it is nice if amendments work in the Bill because we are talking about amending the Bill. This amendment raises an important point about not unfairly penalising the retail arms of our big banks in penalties that may arise for the manipulation of LIBOR. I put on the record again that it is important to recognise that the FSA found for attempted manipulation of dollar LIBOR, not sterling LIBOR. We know there are other investigations going on but, as the noble Lord, Lord Davies of Stamford, pointed out, at the moment we do not know whether the attempted manipulation had any effect, whether up or down. In any case, it is going to be very difficult to calculate the net effect.

There are two considerations: how things stand under FiSMA and the impact on the structure of the forthcoming Vickers Bill, the banking reform Bill, which will change the effect of the intended amendment significantly. If we take the current position, under Section 206 of FiSMA the FSA has the power to impose penalties on an authorised person who commits misconduct, and the FCA will have this power in future. We should be clear about that, but it is not a matter for the regulator to decide how the firm in question decides to pay and account for the penalty, and the regulator’s powers therefore do not extend to directing the firm in this respect. However, the critical point is the effect of the Vickers reforms because, as the Committee knows, we will be making very substantial changes to the banking landscape through the banking reform Bill when we come to implement the proposals of the Independent Commission on Banking. Once the Vickers proposals have been implemented, ring-fenced banks will be authorised persons in their own right, and they will not be liable to pay fines imposed on other authorised persons, so the substance of my noble friend’s concern will be addressed for the long term, not just in the case of this particular LIBOR scandal.

The regulator will also be required to make rules restricting the payments that a ring-fenced bank may make to other members of the group. This will make it difficult for another company in the group to require the ring-fenced bank to contribute towards the payment of fines. We need to get this right for the long term. Where fines fall should link to the authorised person and where there is an overriding concern to separate out parts of the industry, as Vickers has identified, that should be the driver for where fines fall. On the basis of these explanations, I ask the noble Baroness to withdraw her amendment.

Is that it?

I will start with a small correction. The Minister said that these amendments arose from LIBOR. If he had picked up my hints when I anticipated him—code for “That’s what his friend said in another place when it was going through Committee in March”—he would know that two of these amendments predated LIBOR.

Just to be clear, I said that these relate to concerns that have arisen in connection with the recent LIBOR scandal. Of course, they arise in relation to the conduct of the industry more generally. I fully recognise that and I did not in any way exclude that from my remarks.

Not purposefully; I did not mean it like that. But these amendments are built on many other things. I thank those who have contributed to this debate—the noble Baroness, Lady Kramer, as well as my noble friends Lord Peston, Lord Davies and Lord Barnett. On a small issue, if there are new requirements on the Treasury website today, perhaps they could be shared with Members of the Committee.

I think the Minister gave us the ammunition that we are asking for. In talking about his role as chair of a training organisation or an accreditation organisation, he said that he wished more banks did structured training. That is the point we are trying to make. Because they do not all do it, we want it mandated. He also said that there will be a higher entry bar for new approved persons. But this is not just about people coming into this industry; something needs doing now. That is also what these amendments are about.

Most worrying, however, is that there was no reference to a code of conduct. That is why I was slow to get to my feet; I was awaiting another page. Obviously, the Government do not feel that is needed in this industry for financial professionals on whom we rely as clients and consumers. It is highly regrettable that the one thing the Minister did not bother to answer on was the need for a code of conduct. I do not know what it is about that that he cannot accept. I do not know why he cannot accept the demand for proof of competence. As was made clear, there need not be one proof of competence for everyone in this field; there can be a range of them. We are not asking for a single mandate; we are asking for the FCA to come up with a regime that would have competence requirements.

Finally, my question, like that of my noble friend Lord Barnett, is this: what will improve without such amendments? If this is just the FSA becoming the FCA, will we see anything different? I believe we need some signals about a code of conduct and raising standards. This may be something we need to return to later but for the moment I beg leave to withdraw the amendment.

Amendment 104ZB withdrawn.

Amendments 104A and 104AA not moved.

Amendment 104B

Moved by

104B: Clause 5, page 16, line 30, at end insert—

“(9) The FCA shall work with the Department of Education to secure the provision of teaching on financial literacy at both primary and secondary level.”

My Lords, everyone will be aware that the F:SMA included a key brief to the FSA to advance financial education. My observation is that pfeg and some of the other charities have done a reasonable job, and that certain banks such as RBS provide reasonable courses, but that still in our schools financial education is extremely mixed. If people have not had financial education at school, it is unrealistic to think that they will get it as adults when they need it. It is an absolute prerequisite of life today that children growing up should become what I will call financially literate. We all have to look after ourselves so much.

This amendment is not exactly what I would wish. I would like financial education to be part of the required curriculum in schools and I have asked a question on that matter in the past. However, I have put forward this probing amendment to see whether the Government have to offer rather more than we have at present in terms of making sure that there is universal financial education in our secondary schools.

My Lords, I have felt passionately about financial education for a long number of years and I support the probing amendment in the name of the noble Lord, Lord Flight. I first became interested in the issue in the late 1990s in the aftermath of the personal pensions mis-selling débâcle when many highly educated and sophisticated people were mis-sold products, largely because of the impenetrable nature of the language in the retail product being presented to them and, harking back to some of the issues raised in the previous debate, the less-than- adequate performance of some independent financial advisers.

Since then my concern has become even greater as we have seen more mis-selling scandals, such as payment protection insurance and inappropriate hedging instruments for small businesses against interest rate movements. Added to that, there is constant pressure on people to get involved in financial instruments at very great cost—everything from store cards through to payday loans. There should be a fundamental understanding on the part of people that when they take out something like a payday loan, it is not a printing error when the rate of interest is in four figures. It is there deliberately as a means of making money.

This issue comes up regularly. FSMA looked at it. Every time there is a debate on financial services, financial literacy is raised. It has become motherhood and apple pie. However, a point will come when we start to take this seriously. I was lucky enough to go to a school in an area that had a mutual bank, the Airdrie Savings Bank, which continues to exist as the last surviving mutual savings bank. It provided certain financial education in schools. I have to say that there was probably a subplot because I still have the little silver bank and I still retain a passbook for the Airdrie Savings Bank. I have no doubt that the Royal Bank of Scotland did exactly the same when it did its work in schools. That is laudable, but at the end of the day the issues are now too great to leave it to charitable and well meaning organisations. There is a need now, for the well-being of the citizenry as well as the well-being of our financial services sector, to put financial literacy firmly on the curriculum, and I would hope not just here in England but in Scotland as well. I support the amendment in the name of the noble Lord, Lord Flight.

My Lords, I support what my noble friend has just said. For a number of years, I was chair of the ombudsman council of the PIA, which later merged into the FSA. We used to discuss the reports from the ombudsman and one of the things which bothered us enormously was the level of illiteracy in financial services. We began to worry about this and to wonder what we could do about it. Eventually we set up a sort of panel of interested, qualified people who would talk to schools and so on to ensure that we were doing at least something to try to remedy what we saw was an enormous problem with regard to education. Therefore, I very much support what my noble friend has said. She is absolutely right. We did our best then, but we were taken over and I have no idea whether the FSA continued what we had begun. Certainly we wanted to do that and we did it and it was quite popular for quite a long time. I hope that this amendment is taken seriously by the Government because it is a very important issue.

My Lords, my noble friend has moved a very interesting amendment. We may be in danger of confusing two issues. The noble Baroness referred to impenetrable language. I quite accept that, but that is a question not of financial literacy but of improving the form in which the communication is made. To try and deal with financial literacy is a much narrower issue than impenetrable language. I support her entirely, but I would also add the form and content. How often do we get a letter from our credit card company saying that it is going to amend the terms in which the credit card is offered? It is four pages of closely packed print and what do we do but drop it straight in the waste paper basket. However, the company has complied with the requirement. In those cases, the famous phrases “less is more”—less information, better focused—is what we should be all about.

That is an important point though not exactly what my noble friend was driving at. I think my noble friend was driving at something designed to deal with people at an earlier stage of their life. In particular, it has relevance to Amendment 104C, in the names of the noble Lords, Lord Peston and Lord Barnett, about the unavoidability of some risk. One of the issues that has somehow got about in the world is that we can actually insulate people from risk. When we have financial literacy lessons, we need to emphasise to everybody that there is no product anywhere that does not carry some level of risk. I am looking forward to hearing the two noble Lords on this issue in a few minutes. I have only one question on my noble friend’s amendment. Who pays for all this?

My Lords, at present it is effectively paid for via the charges of the FSA, which then go in a charitable form to pfeg and others and which is inadequate. However, one could turn it the other way round—one could do it how one wants. With schools teaching English literature, that is part of their budget. In my view, schools should be obliged to teach financial literacy and that should be part of their budget as well.

My Lords, I am very sympathetic to the amendment and to what has been said by my noble friends. Unlike them, I am much less optimistic about what can be achieved, if anything. First, I will give the personal side. When I was at school, I was indebted, and have been indebted for the rest of my life, to my teachers for the guidance they gave me on the subjects that were taught in school. My love of English literature and my love of mathematics are two very good examples. However, if someone had said “Now we are going to have a class in finance”, I cannot believe that it would have been other than a turn-off. It would not have been what I went to school for.

Times have changed. I agree with that. However, the other thing is that is amazingly difficult to explain to people even the most elementary examples of financial literacy. To give one example, which is one of my bête noire, I come from a family of gamblers. I know that gambling is a mug’s game because to be a successful gambler, there are only two possibilities. Either one is corrupt and has some inside information or one is claiming—with the bookmaker creaming 10% off the top—that one is 10% cleverer than anybody else around, and there is absolutely no reason to believe that. When I have tried to explain that elementary proposition in financial literacy, I have found it impossible to persuade anybody at all. That is my personal experience. It does not mean that we should not try, but it does mean that there is a genuine question mark over what we can achieve. I am not saying that we should not try, but I am pessimistic.

I turn to the technical side of financial literacy. Perhaps noble Lords have read a brilliant speech given by Andrew Harvey of the Bank of England in 2009. It is on the Bank of England website. My strong advice to noble Lords is to look it up under “Speeches” rather than “Publications”. I wasted a good hour knowing that it was there but unable to find it. It is a brilliant analysis of the behaviour of financial intermediaries—which is after all the essence of financial literacy—and it is based on network analysis, which is a rather esoteric part of mathematics. I will read one paragraph from Andrew Harvey’s lecture, which I strongly recommend.

Sorry—Andrew Haldane. I am not good on these things. Names are one of my Alzheimer’s problems. Mr Haldane says, in a typically short paragraph of his brilliant lecture:

“This evolution in the topology of the network”—

that is, the network of financial intermediaries—

“meant that sharp discontinuities in the financial system were an accident waiting to happen. The present crisis is the materialisation of that accident”.

Financial literacy means being able to understand those two sentences. I am not a bad mathematician but even I had difficulty with the topology of networks. That is the problem in this area. What you can teach at the level at which the noble Lord, Lord Flight, wants to teach, is very little indeed. As I said, that does not mean that we should not do it, but we should not delude ourselves that we can produce a financially literate population because most people simply do not have the mathematics to understand this kind of work. I cannot believe that anybody could write a non-mathematical explanation of what Andrew Haldane said.

Nothing I have said should stop us from trying—I am not going against the noble Lord, Lord Flight, on this—but financial literacy is not the easiest thing to achieve.

Does the noble Lord not agree that two or three basic things could be taught relatively easily? The first is the impact of inflation and how it affects the value of savings. The second is the impact of compound interest and the costs and returns of borrowing. Those two subjects do not require the brilliant mathematics of which the noble Lord alone is capable. Quite realistic, real-life examples could be given to people in their final two or three years at school.

I have had a little experience of this. In my younger days in the Treasury we tried to persuade senior Treasury officials that capital investment projects ought to be dealt with by discounted cash flow. We were talking to senior officials who were brilliantly clever, but it was nearly impossible to teach them even about compound interest. When we had taught them compound interest, they had no idea how to convert it into discounting. Again, I am not saying that we should not teach compound interest in schools—quite the contrary. All I am saying is that it is not easy.

I support the amendment of my noble friend Lord Flight. Financial literacy is not sufficiently taught in schools. Perhaps the Department for Education could encourage the BBC, which is very weak in the area of discussing business, let alone business education, to ask Robert Peston to do a programme on it.

My Lords, I agree not with the pious nature of the amendment of the noble Lord, Lord Flight, but with the realism of my noble friend Lord Peston. I chaired a workplace retirement income commission last year for the National Association of Pension Funds. We have seen a flight from defined benefit schemes to defined contribution schemes. As a result, we invited a Harvard professor to examine and explain the defined contribution scheme. He told us that he was unable to understand his own defined contribution scheme, never mind anyone else’s. Therefore, while financial education may be good, it is not the whole show.

My Lords, although I acknowledge the issue, I do not believe it is that difficult. I observe that my own parents learnt basic accounting some 90 years ago at ordinary grammar schools in London as part of the general certificate. That stood them in pretty good stead. Even in my time, when I was doing basic economics, what I learnt was pretty fundamental to understanding what equity was, what debt was, and so forth. The courses that are up and running are pretty effective—for example in my own school, of which I have been a governor for many years—although I do not say that they are perfect. One of the problems is that since the Second World War, money has almost been thought of as dirty within the educational world. This is something to shy away from. One of the crucial things is for the schools themselves to have staff who can be taught to teach and be enthusiastic about the subject.

My Lords, we support this amendment in the name of the noble Lord, Lord Flight, although in saying that, like a number of noble Lords, we worry that it does not go far enough in simply calling for the FCA to work with the Department for Education. Surely all children and young people should have access to a planned and coherent programme of personal finance education so that they leave school with the skills and confidence to manage their money effectively. Knowing how to manage money and be a savvy consumer is a vital life skill in an increasingly complex world. Education is about giving young people the skills and knowledge they need to get on in life, which is why we should get behind a campaign, so that every child should not only learn the three Rs at school, but also learn about pensions, savings, borrowing and mortgages.

As we have heard, personal financial education is covered in the primary curriculum at present, but it is only there as part of the non-statutory framework for PSHE—personal, social, health and economic education. There are, of course, opportunities with a number of subjects across the curriculum to learn about financial matters, including citizenship—compulsory for all 11 to 16 year-olds—mathematics, business studies, careers, and enterprise education. However, we think this important life skill should be made compulsory, as the previous Government were indeed planning to do in the last Session of the preceding Parliament. Sadly, there has been no legislative progress for the past two years.

As the Minister will be aware, an e-petition calling for financial education to be a compulsory part of the curriculum got more than 100,000 signatures last year and led to a Westminster Hall debate, which is worth reading in Hansard. Many Members of your Lordships’ House will know of Martin Lewis of the website moneysavingexpert.com, who has been campaigning on this issue for several years now, and was indeed the man behind the petition. He has recently corresponded with the Prime Minister, and the most recent exchange was an open letter to the Sun, which provoked a response which I would like to share with your Lordships’ House.

The Prime Minister writes to “dear Martin” and thanks him for the letter. He goes on to say,

“It is true that young people should have access to good quality personal finance education, so that they leave school with the knowledge and confidence to manage their money effectively”.

He goes on:

“The PSHE non-statutory programmes of study include elements aimed at ensuring that, by the time they leave school, pupils should be able to manage their money, understand and explain financial risk and reward and identify how finance will play an important part in their lives and in achieving their aspirations”.

This goes some way toward answering some of the points made by my noble friend Lord Peston. The Prime Minister goes on to say:

“This economic wellbeing and financial capability strand of PSHE was only introduced in September 2008 and Ofsted reported in 2010 that schools had not yet got to grips with this”.

We understand some of the reasons for that now. We are aware that some aspects of PSHE are patchy and, as you say, there are some schools that are not able to access good resources. However, the letter concludes:

“We believe it is important that schools are given the freedom and space to provide a truly rounded education, including important things such as finance education”.

However, Martin Lewis’s response to the letter says it all. He thanks the Prime Minister for his comments, but he says that,

“financial education must be deemed a core skill. It’s the cheapest way, long term, to prevent millions being screwed by scandals such as PPI, bank charges and endowments, to help people keep energy costs down and tackle our debt epidemic”.

The letter finishes:

“So far, your government’s only commitment has been Schools Minister Nick Gibb saying: ‘It'll be looked at in the curriculum review.’ That's good, but please ensure this isn't political double-speak for being filed in the bin”.

We believe that every child deserves to be supported in the development of the behaviours, attitudes and skills which will allow them to effectively manage their finances in order to fulfil their potential. However, it must be part of the core curriculum, and it must be compulsory. The recent Impact Review of Financial Education for Young People conducted by MAS, confirmed that attitudes to money are formed early. All the experts in this area agree that financial education has to begin as early on in a young person’s school career as possible and should continue in a progressive way year on year.

We agree with the amendment of the noble Lord, Lord Flight, but regret that it does not go far enough, simply calling for the FCA to work with the Department for Education. As Martin Lewis said, that sounds to me a little like political doublespeak for filing it in the bin.

As the Minister will be aware, a Private Member’s Bill was introduced recently in the Commons, which would require financial literacy to be included in the national curriculum. So the Government have the luxury of a choice here. They can take the low road and accept the amendment from the noble Lord, Lord Flight, or the Minister could take the high road and indicate today the Government’s support for the Private Member’s Bill, which would get us to where we all surely want to be on this motherhood-and-apple-pie issue.

My Lords, Amendment 104B, as my noble friend Lord Flight has explained, would require the FCA to work with the Department for Education to secure the teaching of financial literacy in primary and secondary schools. I am sure, as the voices around the House have confirmed, that we all agree on the importance of financial education for young people and indeed for adults. The Government share this view.

As the noble Lord, Lord Stevenson, said, finance education is currently taught as part of non-statutory personal, social, health and economic education. I think that was how the previous Government set it up. The Department for Education is reviewing PSHE education, including whether any aspects of it should become statutory as part of the basic curriculum, and will be carefully considering the position of finance education. The Money Advice Service is feeding into this review.

However, the FCA is being set up as a focused conduct of business regulator. The Money Advice Service is the appropriate body to work with the Department for Education at an operational level on matters of financial literacy. MAS was established by the FSA, and its objectives are set out in new Section 3R of FiSMA, as inserted by Clause 5 of the Bill currently before your Lordships. They include an objective,

“to enhance—

(a) the understanding and knowledge of members of the public of financial matters”.

I cannot see how MAS could discharge this function without working closely with the Department for Education.

MAS was established by the FSA as an independent body with similar oversight arrangements to the FOS and FSCS. It has a statutory function to enhance the understanding and knowledge of members of the public of financial matters and their ability to manage their own financial affairs. The FSA must take such steps as are necessary to ensure that MAS is, at all times, capable of exercising its consumer financial education function.

The FCA will take on the FSA’s responsibility for consumer protection and conduct regulation, and will oversee MAS in the same way as the FSA does now. MAS will continue to have operational independence. To give the FCA responsibilities in the area of financial education would not only risk diluting its focus but would duplicate the role of MAS. So, in short, I do not believe that this amendment is necessary. I ask my noble friend to withdraw it.

I wonder whether the Minister can answer my point about the Private Member’s Bill which is going through the other place. It seems to me to offer a way forward on this issue. If he cannot give me a reply today because he has not been briefed on this matter, perhaps he could write to me.

My Lords, I think I addressed it, although I did not express it in those terms. I said that the department is reviewing PSHE education, including whether any aspect of it should become statutory. That was intended to be my response. The noble Lord knows the Government’s approach to Private Member’s Bills.

My Lords, as I said, this was intended, largely, as a probing amendment. I am glad that MAS is continuing with its role. I am strongly of the view that financial literacy should be part of the core curriculum. The teaching of it at present is mixed and, in general, I do not think it is adequate. We have had a useful discussion of the subject and I beg leave to withdraw the amendment.

Amendment 104B withdrawn.

Amendment 104BA

Moved by

104BA: Clause 5, page 16, line 30, at end insert—

“1BA Memorandum of understanding between FCA and Office of Fair Trading

(1) The FCA must co-ordinate with the Office of Fair Trading (OFT).

(2) In particular, the FCA and the OFT must prepare and maintain a memorandum of understanding which sets out their respective roles and responsibilities and how they will work together.

(3) The FCA must—

(a) lay before Parliament a copy of the memorandum and any revised memorandum, and(b) publish the memorandum as currently in force in such manner as it thinks fit.”

My Lords, Amendment 104BA stands in my name and that of my noble friend Lord Eatwell. Much will change in the OFT, partly as a result of the Public Bodies Act, the forthcoming Enterprise Regulation and Reform Bill, and this Bill, with responsibility for consumer credit moving from the OFT to the FCA.

This amendment is not so much about that but about the all-important competition role of the OFT, until that, in due course, moves to the CMA. That includes competition references and market studies, as well as super-complaints and promoting competition. Meanwhile, as we know, and welcome, the FCA has also taken on a new remit to promote competition in financial services.

On 14 June in another place, Mark Hoban for the Government welcomed the fact that the Office of Fair Trading and the Financial Conduct Authority will take forward the ICB recommendations to improve transparency across all retail banking products. If the OFT retains the right to conduct market studies in relation to financial service markets, the ABI is concerned about the risk of duplication and/or the lack of co-ordination between the FCA and the OFT. Therefore, the ABI feels that the OFT should be subject to a statutory duty to cooperate and to produce an MoU. It would certainly be the preference of the ABI for the FCA normally to take the lead on competition matters, and for the OFT to undertake market studies only in exceptional circumstances.

Meanwhile, the consumer world, not dissimilarly, would like the relationship between the FCA and the OFT changed from that set out in the Bill. The consumer world would like the FCA to have the same powers as a number of other sectoral regulators to make competition referrals themselves—that is, the equivalent of Section 131 powers. I am attracted to that but have not tabled an amendment specifically on that at this stage, in the hope that this amendment will give the Minister the chance to explain why he has not replicated such an enabling power within the present Bill. Without such a power, the FCA will still have to refer cases to the OFT for market analysis before a referral to the Competition Commission can take place. It sounds—and I guess it will be—a bit slow. It also adds additional, possibly unnecessary, hurdles. The Joint Committee agreed. It said:

“The Government should review its decision on the FCA’s competition powers. The FCA should be given concurrent powers alongside the OFT to make market investigation references to the CC. The FCA will need greater competition powers to achieve its recommended objective than is currently set out in the draft Bill.”

We know from the debate in the other place that the Government, however, prefer the FCA to continue to have to make a referral to the OFT, which would allow the FCA to draw on the expertise of the OFT. However, the Government have agreed that they will review whether the FCA should have specific competition powers in five years’ time.

It is hard to see why a new authority, set up with a specific and new remit to promote competition, should not have the requisite powers. But perhaps we will hear the rationale when the Minister replies. Meanwhile, the OFT is itself keen to establish greater clarity for interested parties on how the OFT—and subsequently the CMA—and the FCA will work together, and the OFT is very happy for this issue to be raised today. The OFT judges it important for effective debate on the Bill that there is an understanding of how the OFT and FCA will work together.

There is, of course, also the matter—a smaller matter, perhaps—of the handover of consumer credit responsibility from the OFT to the FCA, and various transitional issues. The handling of these should no doubt also be included in any MoU.

The current OFT acknowledges that a key issue will be the publishing of a memorandum of understanding setting out the respective roles of the OFT and the FCA, their responsibilities and how they will work together. Indeed, I understand that the OFT has already begun working with the FSA on a draft MoU and is keen to establish greater clarity for those two parties and for those of us looking from the outside.

I am aware, although my eyesight is not that good, that the Minister has a file entitled, “say no to everything”. I hope in this case that he might drop that and just agree that an MoU may be without that remit. I beg to move.

My Lords, my Amendment 173D covers essentially the same point, but is in that part of the Bill that deals with the practical operation of the competition objective for the FCA. There is clearly a risk of duplication or lack of co-ordination between the OFT and the FCA, so Amendment 173D proposes a legally binding MoU setting out how the two bodies will co-operate together and who will do what. It should be made clear that the FCA would normally take the lead on competition matters in financial services and the OFT would undertake market studies in exceptional circumstances. The competition objective for the FSA is very well worded, very clear and extremely appropriate. Consumers need a healthily competitive market. I am still of the view that the PRA should have a competition objective. It is the lack of competition that led to a cartel in banking. Whenever you get a cartel you get bad habits, so, in my book, a major aspect of having a much healthier banking system is having more competition.

My Lords, Amendments 104BA and 173D both relate to co-ordination between the FCA and the OFT. Amendment 104BA would require the FCA to co-ordinate with the OFT and to prepare and maintain a memorandum of understanding to be laid before Parliament and published as it sees fit. Amendment 173D, in my noble friend’s name, is similar, but the duty to co-ordinate, and to establish an MoU, relates solely to the promotion of competition. Amendment 173D would also require the MoU to make it clear that the OFT will conduct a market study into a financial services market within the regulatory remit of the FCA only in exceptional circumstances.

Before turning to the question of the need for statutory provision for co-ordination between the FCA and the OFT, it might help if I explain the approach taken elsewhere in the Bill. The Bill provides for a properly focused regulatory system in which the individual regulators have clear roles and responsibilities and the right tools to deliver them. It is right, therefore, for the Bill to provide explicitly for co-ordination and MoUs between the key players in the system for regulating financial services—the Bank of England, the FCA, the PRA, the Financial Ombudsman Service, the Financial Services Compensation Scheme and the Treasury—so that they can work together effectively without the boundaries between their roles and responsibilities getting blurred, and of course the legislation sets out a procedure for laying these documents before Parliament.

Clearly, the FCA will need to work closely with the OFT and, in due course, the Competition and Markets Authority. In fact, the FSA already has an MoU with the OFT on a non-statutory basis and the FSA is already working with the OFT on putting in place a memorandum with the FCA.

To address the need for particularly swift and effective co-ordination in cases where a large number of consumers have suffered detriment, such as the mis-selling of payment protection insurance, the FSA has put in place additional formal mechanisms for co-ordination such as the Coordination Committee of the FSA, the OFT, the FSCS and the FOS. Statutory duties to co-ordinate and maintain MoUs are not needed to underpin that co-operation. That already happens and is effective.

On the specific issue of competition, which Amendment 173D addresses, the FCA, as the lead regulator for financial services, clearly will need to work closely with the OFT, as the central competition authority. Of course, the regulators will have to co-ordinate their work so that their own resources are used effectively and duplication is avoided. Although they will need to take into account their respective regulatory objectives and priorities, powers, expertise and resources, I contend that we should allow the regulators, based on careful consideration, to develop an effective protocol for working with each other in order to promote competition.

I am particularly concerned with the part of the amendment that would stipulate, from the outset, that one of the regulators—the OFT—could only be involved on an “exceptional” basis. Such a rigid approach would not help the regulators to deliver arrangements which focus on the best way of promoting competition. I note that the OFT does not have a statutory MoU with any other of the sectoral regulators with which it currently works to promote competition.

The noble Baroness, Lady Hayter, made reference to the OFT and suggested that it would be inefficient if there were two sets of market studies, one after the other. She makes an important point. If the OFT receives a referral from the FCA which is accompanied by appropriate evidence and analysis, the OFT may go straight to the consultation stage without conducting a further market study of its own. There is precedent for this in the OFT’s approach to the audit market. In that case, when the OFT received the report of the House of Lords Economic Affairs Committee, it went straight to consulting on a reference to the Competition Commission, rather than conducting its own market study.

I hope that I have persuaded your Lordships of the importance of flexibility in this area. Although my file does not say, “Say no to everything”, as the noble Baroness, Lady Hayter, suggested, in this case I do ask her to withdraw her amendment.

My Lords, I very much agree with my noble friend Lady Hayter and with the noble Lord, Lord Flight, that competition is the best means of consumer protection. There are occasional counterexamples, but overwhelmingly that is what matters. However, it occurred to me while listening to the noble Lord’s reply that I do not now know which is the primary body in dealing with competition in the financial intermediary sector. Is there a straightforward answer to that? If I had been asked to guess, I would have guessed that it must be the new Competition and Markets Authority, because its remit is about competition, whereas the FCA’s remit is not. Can we have an answer to that? If we do not know the answer, could we be told the next time we meet who is the prime mover in this?

I am pretty sure that the noble Lord is correct in his analysis, but if there is any change to that, I will write to him.

My Lords, the fact that the Minister does not know the answer to that seems to me to make the case for why we need an MoU. In fact, in his answer he went through the sorts of things that the OFT and the FCA would need to look at—their objectives, their resources and their method of working. We are not setting out what those should be. We are simply saying that there should be an MoU that sets out those sorts of things, things such as when one will take the lead and when the other will.

I accept, sadly, that the specifics in the amendment of the noble Lord, Lord Flight, which we were attracted to, are probably more than we could hope for from the Government. However, as the Minister has admitted that there need to be MoUs for all the other key players—the Treasury, the Bank of England, the FOS, the compensation schemes and so on—it would be extraordinary not to have one for what he now accepts is the prime competition authority: the OFT currently, but the CMA eventually. I hope that the Government will think about this again. The lack of an MoU for the prime competition authority would seem to create a slightly opaque situation for the other market players that want to know who leads on certain items. In the hope that the Minister will think about that, although he did not promise to, I beg leave to withdraw the amendment.

Amendment 104BA withdrawn.

Amendment 104C

Moved by

104C: Clause 5, page 16, line 35, at end insert—

“( ) the need to inform and educate consumers with special emphasis on the unavoidability of some risk;”

My Lords, the amendment stands also in the name of my noble friend Lord Peston. It is fairly self-evident, referring to,

“the need to inform and educate consumers”—

which I assume everybody is in favour of—

“with special emphasis on the unavoidability of some risk”.

Life is full of risk, certainly in the financial area— I hope that everybody accepts that. New Section 1C(1) states:

“The consumer protection objective is: securing an appropriate degree of protection for consumers”.

If the Minister is unable to accept our amendment, I hope that he can explain what,

“appropriate degree of protection for consumers”,

the Government have in mind. It is unclear to me what is “appropriate” in this case. I hope that,

“emphasis on the unavoidability of some risk”,

can be considered seriously. When my noble friend talked a little earlier about his experience in school, he said that he did not think that he would not have been terribly interested if anybody had taught him about financial affairs, but I think that risk would be fairly simple to explain even to most teenagers at school. In those circumstances, this amendment seems reasonable to me and I hope that the Minister will be able to accept it. I beg to move.

My Lords, it strikes me that the Bill slightly buries “buyer beware”, which was in FiSMA, and that we are creeping towards a culture where a lot of people think that if they lose money on any investment they are entitled to compensation. I do not wish to be overly harsh but it is fundamental, as the noble Lord said, that people understand risk and graduations of risk. That is backed by financial education.

My Lords, in agreeing with my noble friends Lord Barnett and Lord Peston in their amendment, I agree also with what the noble Lord, Lord Flight, has just said. He did not used the famous Latin phrase “caveat emptor”, perhaps because we are not supposed to use Latin any more—that is the case in the courts; it may be not so here. If it is convenient to the Committee, I shall speak to Amendment 106, which is grouped with my noble friends’ amendment.

The Bill states that the Financial Conduct Authority, in assessing the degree of consumer protection that is desirable,

“must have regard to … the needs that consumers may have for the timely provision of information and advice that is accurate and fit for purpose”.

The noble Baroness, Lady Oppenheim-Barnes, has kindly joined me in Amendment 106, because, while we agree about information and advice having to be accurate, we are not happy about the phrase “fit for purpose” and would prefer it to be replaced by “intelligible”.

“Fit for purpose” is a vague and uncertain phrase. As the consumer organisation Which? has said in briefing to me and no doubt to others, it is a woolly phrase and invites the question: whose purpose? It has become fashionable to use the phrase “fit for purpose” for all sorts of reasons, and despite its perfectly respectable origins in Section 14 of the Sale of Goods Act and indeed previous common law, it is now used to such a wide extent in all sorts of circumstances that it would be better replaced in the Bill with “intelligible”.

My Lords, I was delighted to add my name to that of the noble Lord, Lord Borrie, on this amendment. We go back a very long way to when I first entered the Department of Trade and Industry. The position of director-general of fair trading was coming up for renewal and my officials said to me, “Well, you will obviously want to appoint somebody from your own side, Minister”, to which I replied, “There is only one person with whom I would be entirely satisfied”. That was the noble Lord, Lord Borrie, and this has proved to be the case ever since.

This amendment is important. Perhaps I am not so happy with the term “fit for purpose” because I spent a great deal of my consumer life trying to find a better one, which I never did satisfactorily, in order that people could pursue their Sale of Goods Act rights. However, I will have more to say on this later—on Amendment 108, I think—when we reach that.

My Lords, I supplement what my noble friend Lord Barnett and others have said about the built-in risk of pretty well every financial instrument that one might acquire. This amendment is very much in line with that made earlier by the noble Lord, Lord Flight, on education. Therefore, again I must add my cautionary note that it is very hard to persuade people that the world is full of risk, particularly when it comes to instruments that look risk-free—for example, a government bond, which our Government have never reneged on. However, if it is a bond fixed in nominal terms, there is always the risk of inflation so that the real rate of return is highly risky. In a second example, the date of repayment of the bond can be an issue, so that even with a perfectly honest Government who intend to pay on the due date, if you have to cash the bond in at a different date then there is risk involved. It is vital that people understand these kinds of examples.

The other risk, and I am not quite clear how we can approach it, essentially stems from the possibility that the people one is dealing with are corrupt. To take the obvious example, if you are offered a particular asset with a high nominal rate of return, is this because the financial intermediary offering you that asset is particular inefficient or because they are up to no good and the only way they can lay their hands on this money is with a high rate of interest?

It is often immensely hard to disentangle whether you are running a risk by acquiring such an asset, and perhaps the great WC Fields’s dictum is relevant here:

“Never give a sucker an even break”.

The world is full of people like WC Fields, but how is the ordinary person to know if they are dealing with one? It seems to me, therefore, that the relevant authorities have a responsibility at least to take on board their duty to be of assistance to people, partly in an educative way, and partly by controlling the behaviour of people themselves.

I very much look forward to hearing the noble Lord’s reply on the question of risk. However, to summarise, my main point is that if you are living in an area where there is no risk, then you are dead.

I shall make a couple of comments in favour of the amendment. As I understand it, its general sense is to state that there is a duty of care. The medical profession and the legal profession have an explicit duty of care. An interesting seminar brought together economists, lawyers and philosophers in Oxford over the past year and a half, working towards trying to say something sensible about this. As I understand it, the amendment is intended to say that, of course, we have to understand that there are risks, but that we know of specific examples where customers have had cheerfully and aggressively marketed to them investment instruments that the vendor itself, Goldman Sachs, was betting against. The gist of the amendment—and other things that I would like to be in the Bill in a much more explicit and in-your-face way—is to assert that there should be a real duty of care.

My Lords, I very much support the amendment, as I said when speaking to my noble friend’s amendment a few minutes ago. There is a real danger of failing to distinguish between risk and fraud. They get intermingled in the public’s mind. Clearly, fraud is absolutely unacceptable and needs to be chased down and prosecuted with all possible vigour. Too often, in this compensation-culture era, a risk that goes wrong is seen as fraud: “I should not have lost money”. One difficulty with the interesting concept, proposed by the noble Lord, of duty of care is that although you can explain very clearly to people the risks that they are taking, when it does not happen as you and they hope—things are volatile—they are inclined to forget that they were given the appropriate warnings. Our emphasis must be on making sure that risk is understood; and that fraud is unacceptable; but that the two are completely distinct. There is a confluence in the public mind, sometimes encouraged by the way that the newspapers report it, of two issues. There are plenty of cases where fraud has happened—that is wrong—but there are also cases where people have taken risks which they anticipated would deliver them huge returns. When they did not, because they were highly risky, they did not see themselves in any way responsible; they sought someone else to blame.

My Lords, I was particularly grateful to hear the words of the noble Lord, Lord May of Oxford. We will shortly come to a specific amendment about a duty of care. I hope that he will be here to repeat his words in 20 minutes or whenever we reach the amendment. I also hope that the Minister can pick up a briefing note that says “support”. His face tells me possibly not.

At Second Reading, I talked about caveat emptor, not having realised that it is no longer the accepted term. I have concerns about it because it is rarely used as an excuse for ordinary consumers to say, “Oh, I lost money”; it is far more used by producers to say, “Well, we told you so”, even if it was, as the noble Lord, Lord Hodgson, said on an earlier amendment, on page 4 of small typed script of something that had been sent to them. I remain of the view that responsibility for ensuring that consumers know what they are buying rests with the provider by producing intelligible and appropriate information. We will turn to the issue of duty of care shortly.

The Joint Committee on the Bill wrote that, should it be essential for the FCA to have regard to the behaviour of consumers, the FCA duty should be amended as set out in Amendment 105, in my name and that of my noble friend Lord Eatwell. As the Joint Committee stated,

“provision of information alone will not significantly improve consumers’ ability to make well-informed decisions. The information needs to be easily understandable and accessible”.

There is widespread suspicion that many purveyors of financial products deliberately try to keep certain customers in the dark. That confusion can mean that some, blinded by graphs and numbers, sign up to a product and later down the track find themselves caught by certain clauses and conditions of which they had, sadly, been unaware.

An issue just as difficult, of course, is the ability to compare prices and thus to shop around—an essential element of the much-vaunted caveat emptor, or competition, on which the Government rely to improve services. Martin Wheatley, the chief executive-designate of the FCA, has described the difficulty for consumers in comparing products such as bank accounts, which are structured in a way that makes it really difficult to establish whether the product is good value. We all know of practitioners who talk in terms so remote from the common-sense understanding of contractual agreements that people are unaware of what they are signing up to. This was undoubtedly the case with the recent interest rate swaps.

Asked whether firms had a duty to go beyond their legal responsibility to consumers, Mark Hoban MP said in another place:

“It is in the interests of firms to ensure that consumers do understand the products that they are buying because it then minimises the risk of problems further down the track”.

Although I agree with those sentiments, that answer seems to be about not having to pay redress later, rather than trying to prevent the mischief in the first place. Unless we do something to reduce such occurrences—today we have already mentioned PPI, personal pensions and mortgage endowments—we will have learnt nothing from what has gone wrong.

However, as the amendment moved by my noble friend Lord Peston makes clear, it is not simply language—the “crystal mark” of plain English—that is important. This is about explaining the risk to which the consumer is signing up, or for which they are paying money so that someone else takes that risk in exchange for the payment. So they might buy a product that covers the risk of inflation but does not cover longevity, or vice versa. Or a product might cover their life expectancy but not that of their surviving spouse. The permutations are endless. What is key is that, in addition to the language being clear, the limits of the product should be clear so that—in the famous words—there are “no surprises”. If I buy a bottle of Coke I will know its size, volume, sell-by date and taste. Regulation has sorted out much of that. We need to give this regulator the ability to expect no less from the providers of services which they are selling to largely unsuspecting customers.

In the other place, the Minister said:

“The Government recognise that there can be significant information and capability asymmetries between firms and consumers”,

and that poor “provision of information” could be a key factor in,

“a consumer ending up with an unsuitable product”.

He therefore fully supported,

“the intention behind the amendments”—[Official Report, Commons, Financial Services Bill Committee, 1/3/12; col. 261]—

in the other place, and therefore the intention behind the amendment that is in my name in this group. I hope that the Minister will now go further than his colleague in the other place, who accepted only the intention behind the amendments, and that he will accept the amendments as they stand. If it would make him feel better, perhaps he could agree to the intention now and bring back a suitably worded amendment on Report.

My Lords, this group of amendments is concerned with the information provided to consumers, so that they are able to make empowered choices and decisions. Amendment 104C seeks to add a new ‘have regard’ subsection to the list of matters that the FCA must consider in advancing its consumer protection objective—namely,

“the need to inform and educate consumers with special emphasis on the unavoidability of some risk”.

I agree with the noble Lord that consumers need to understand that there will necessarily always be an element of risk involved in engaging in a financial transaction, and that they must consider carefully their own risk appetite and the ability of their personal finances to absorb any loss, and enter in to any contract with full information. We cannot pursue a zero-failure regime in financial services, and consumers must understand this. The regulator cannot shoulder the responsibilities that consumers should take for their own decisions and actions, but it can take steps—as my noble friend Lord Hodgson said—to ensure that consumers have the best possible information when they make those choices.

Both financial education—which we spoke of earlier—and effective conduct of business regulation have a role to play in educating consumers about risk. The Money Advice Service will have a key role in improving financial literacy so that consumers understand the difference between available financial products and their uses, what information they should seek out before entering into a contract or transaction, and what rights they have when things do not go to plan. We covered the role of the MAS when we discussed Amendment 104.

On that point, the majority of those consumers who are more at risk than anyone else from misleading terms are those least likely to benefit from financial literacy tests. They will be properly informed only if this is done in a manner, and with the type of wording, that would be simple to understand, not complicated.

That is right, my Lords. In fact, when we debated the previous group of amendments I spoke about the deliberations that the Department for Education is going through on that exact point, so I thank my noble friend for that.

The FCA will set the conduct-of-business regime within which firms will operate and the requirements with which they will have to comply. Just as the FSA does today, placing firms under detailed obligations to assess the suitability of products for individual clients, as well as specifying that warnings must be given to consumers who express an interest in buying a product that does not appear appropriate for their needs or their tolerance of risk. In addition, these requirements specify which risk factors must be highlighted in the case of specific products—for example, income withdrawals or the purchase of short-term annuities.

However, none of this means that it is the FCA that should be required to have regard to the need to educate consumers about the unavoidability of risk. The FCA is not a consumer education body—that is the role of the Money Advice Service—and neither is it an interlocutor between firms or advisers and consumers. So I cannot agree with that amendment.

The noble Lord, Lord Barnett, asked what an appropriate degree of protection would be. “Appropriate” is used to allow the FCA to differentiate between the different needs that consumers may have. The detail is set out in the FSA’s rules and will be transferred into the new FCA’s rules. I will not offer to send the noble Lord a copy of them because I suspect they might be quite voluminous, but if he would find it helpful I am sure I could send a reference to that particular point in them.

Before the Minister goes on to the next amendment, my noble friend Lord Barnett’s and my amendment, if I may draw his attention to it, appears in a clause that is headed “The consumer protection objective” and refers to the FCA. How can the Minister make the illogical leap of saying that that does not concern the FCA? It says categorically in the clause that it concerns the FCA; its acronym appears under the consumer protection objective, in the words,

“the FCA must have regard to”.

It therefore seems entirely reasonable that the FCA should have regard to what my noble friend and I have suggested. You cannot possibly say that someone else should have regard to it, when the FCA is clearly a body that must do so.

My Lords, I hope I have explained that the FCA is doing that through its conduct-of-business regulations and that the issue of education is dealt with in the ways that I have explained.

As a matter of elementary logic, though, the Minister cannot wriggle away and say that the FCA is doing it some other way. This amendment is about consumer protection and the FCA must have regard to that. I would like an answer to why the Minister will not accept an amendment that says that the FCA must have regard to it in this specific way.

My Lords, I think that I have said that the FCA has regard to it, but I cannot go much further than I have.

Is this not just part of the muddled thinking that took place at the beginning of this whole process when the word “consumer” was changed and the name became the FCA? Consumer protection lies with the FCA, whether the Minister sees it or not. Given the muddled thinking, and given that the Money Advice Service—which, by the way, was lacerated a few months ago when it went to the Treasury Select Committee—is not a consumer protection body, we need a little rethink. The Minister should take the pills and come back, and then we can get some clarity.

I am sorry that the noble Lord is confused. I do not see the confusion that he does. Perhaps I may move on to Amendments 105A and 106.

I would still like a rational answer to what I have put to the Minister. The least he can do is to say that he would like to think about it and come up with the right answer. Apart from anything else, it would do him a world of good.

My Lords, I think that I have given the right answer but I am happy to write to the noble Lord, Lord Peston, if I can express it in a way that he might find more acceptable.

On Amendments 105A and 106, it is important to note that if we are to create the conditions in which consumers can make better choices for themselves, we need to address some of the asymmetries of information between consumers and providers that still prevail in financial services. I think that that is a point that noble Lords are making. That is why the Government added new subsection (2)(c) to new Section 1C, which will be inserted by Clause 5, before the Bill’s introduction to the parliamentary process. This provision requires the regulator to consider,

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

This provision complements the FCA’s new power to require firms to withdraw a financial promotion and disclose the fact that it has done so, as well as a new power to disclose at an early stage to the public that disciplinary enforcement action has commenced against a firm or individual. The FSA will carry out a root-and-branch review of transparency and disclosure on the part of firms and the regulator to be completed ahead of commencement of the Bill.

I agree with many of the points made by the Committee in terms of the improvements that we want to see, but I do not agree that Amendments 105A and 106 are necessary. I argue, for example, that referring to information being “fit for purpose” is, in modern idiom, a better way of achieving the aims that we all share. “Fit for purpose” is an umbrella term that includes, for example, information being legible, intelligible and appropriately presented. Information could not be fit for purpose if it was not also those things.

“Fit for purpose” is also broader and allows the regulator to differentiate between the needs of different consumers, to adapt its approach and perhaps to place additional requirements on firms where it considers this necessary. There may be requirements that we cannot anticipate at this point. Using a broad term such as this therefore gives flexibility and allows the regulator to be responsive to changing circumstances and market conditions. Being too exhaustive in the Bill could be unhelpful. However, it is also not appropriate, as the detailed requirements will be set out by the FCA in its rulebook.

I therefore argue that Amendment 105A is unnecessary, as fit for purpose already captures information being intelligible and appropriately presented. Amendment 106 could restrict the FCA’s ability to design a regime on the provision of information to consumers, as “intelligible” is a narrower term than “fit for purpose”.

Before the noble Lord moves off that particular amendment, perhaps I may point out that the provision also uses the word “advice”. He has covered only the information that has to be clear, but not the point about access to advice.

My Lords, I apologise if my argument covered only one aspect, but it should be taken to cover both.

The noble Lord, Lord May of Oxford, to whom I am grateful for his intervention, asked about a duty of care. Subsection (2)(e) of new Section 1C, which is headed “The consumer protection objective”, states that providers should,

“provide consumers with a level of care that is appropriate … to the … risk … [of] the investment … and the capabilities of the consumers”.

I hope that that is helpful.

I hope that I have made it clear that the Government are fully committed to improving the provision of information to consumers, and that I have succeeded in convincing the noble Lord to withdraw his amendment.

My Lords, I do not think that the Minister has convinced anyone. I think he said that my noble friend Lord McFall was confused, but he was not confused. None of us is confused except about the way that the Bill is drafted. The whole of this section refers to consumer protection objectives. We also have new Section 1G, on the “Meaning of ‘consumer’”, and new Section 1H. The whole lot should be removed, because we are now told that the MAS will have to deal with it. The Minister has not convinced me, and I hope that we will come back to this at a later stage. For the moment, I beg leave to withdraw the amendment.

Amendment 104C withdrawn.

Amendment 105

Moved by

105: Clause 5, page 16, line 38, after “of” insert “ability, disability and vulnerability generally”

My Lords, I shall speak also to Amendment 136. Amendment 105 inserts the terms “ability, disability and vulnerability” of consumers into new Section 1C which is entitled: “The consumer protection objective”, as the noble Lord said. Given that only one body—the FCA—is referred to within this section, it cannot be deduced otherwise than that the FCA has a consumer protection objective. That issue has to be cleared up.

The noble Lord, Lord May, made a very good point about the duty of care. The duty of care issue has been sidestepped by the Government. The Minister referred the noble Lord, Lord May, to subsection 2(e), which states that,

“those providing regulated financial services should be expected to provide consumers with a level of care”.

Being expected to provide consumers with a level of care is a world apart from a duty of care. That issue has to be debated further.

I mentioned the terms ability, disability and vulnerability because they are crucial to consumer protection. I shall deal first with the ability to understand. Noble Lords have mentioned that we have seen examples of products being shrouded in complexity. I well remember that back in 2002 I looked into split-capital investment trusts. These products were being sold on a retail basis to individuals, and nobody could understand them. Indeed, I got the architect of the splits in to the committee and asked him a question. Believe it or not, his name was “Dotty” Thomas. I said, “Dotty, did you understand what you were producing?”, and Dotty said, “No, I didn’t understand”. An unmarried 35 year- old woman came to see me. She had put £40,000 away for the care of her mother. Within three months, that £40,000 became less than £400. When looking at consumers and duties of care, it is important that we understand the issues and how products are being sold, even down to the mundane level. We are talking about ability here. Let us take two credit cards, both with an APR of 8%. Given the algorithms involved—we needed to recruit a professor of mathematics from Cambridge—two cards with the same APR can have a 75% difference in payment. Who is on the losing end with complex products? It is the consumer, so the issue of ability is very important.

The industry keeps telling us that innovation is at the heart of financial services and that if you stop innovation, you stop creativity. Most weeks, I go up and down to Glasgow on a plane. If the pilot said to me when I got on, “Mr McFall, would you like to have an innovative flight to Glasgow today where the plane goes upside down?”, I would say, “No. Give us it simple. Get me there”. That is what consumers want from financial products: simplicity and what is written on the can about what they get out for every pound that they put in. We do not have that. Paul Volker made the point a while ago in a speech in London in which he said that over the past 40 years there has been only one innovative product in the financial services industry: the ATM. Everything else, you can forget. So when they tell us that we have innovative products, I suggest caution.

The noble Baroness, Lady Liddell of Coatdyke, mentioned the mis-selling of personal pension plans when she was a Minister. The compensation scheme cost over £12 billion. The money put aside for payment protection insurance, which I was asked by the industry to negotiate with consumers just a couple of months ago, is £8 billion. The LIBOR scandal, according to the FT last Saturday, will cost about £20 billion. If we add 20, 12 and eight, we get £40 billion. Let us look at some of the countries that had a GDP of less than £40 billion in 2011: Luxembourg, Cyprus, Ghana and Uruguay are just four I have picked out. The scale of the problem is enormous. We are living in a world where consumers do not have the ability to understand the complexities—and I include everyone here—so we need to do something about it.

I mentioned earlier that I was asked to chair the Workplace Retirement Income Commission for the National Association of Pension Funds. What people are paying for their pensions is enormous. I note on the Daily Telegraph front page today that fees can halve the value of your pension. When someone puts their money in a pension pot, they do not know what they are going to get out at the end of the day because of the complexity that arises. So the issue of consumer protection and consumers’ ability is central to the debate on the Financial Services Bill. As I mentioned earlier, I challenge anyone to understand the ins and outs of their portable defined contribution pension schemes.

I also mention disability and vulnerability because one of the complaints I got regularly from the good people working in the financial services industry in our banks and building societies on every high street up and down the land was: “John, I am asked to sell the ‘product of the month’ and I am getting pushed by my bosses to do that. If Mrs Quinn, 75 years of age, comes in, I push the same product to her as I push to her grandson James Quinn, who is 26 and starting out in life. I know in my heart that that is the wrong thing to do”. I know a number of people who have resigned from their bank as a result of that, so the vulnerability element is important.

The asymmetry of knowledge between the consumer and the industry is enormous and we need that balance to be reasserted. I have said to the industry, which has many decent people working in it, that regulators and politicians will not solve this problem because we come to it from the side. The ones who will solve the problem are the ones who are in the industry. And if they solve that problem, if they have that self-regulation, then there will be less need for stricter regulation and there will be the rebuilding of trust and confidence in the industry. This proposed new Section 1C is central to the future of the financial services industry. I regret that the term “consumer” was taken out of the name of the body known as the FCA.

So vulnerability, ability and disability are central to the issues which confront the industry. If the industry takes that seriously, with a push from the FCA maybe we will have a better future. There is a long way to go but this proposed new section is crucial in ensuring that we get a better financial services industry. I beg to move.

My Lords, I support the views of the noble Lord, Lord McFall, on split-level trusts. When I was a private client investment manager I came across these extraordinary products, which offered marvellous returns. Income shares were offering 8% and capital shares looked very exciting in the forecasts and prospectuses of what would happen if the market went up 5%, 10% or 20%. But the prospectuses did not say that if the market went down 5% or 10% your shares would be wiped out. It seems to me that, for all those vulnerable people, the FCA has to warn of the downside risks of these vehicles.

My Lords, I support my noble friend Lord McFall in this amendment but I greatly regret the fact that the amendment is necessary. One of the reasons for my regret is the appalling reputation that the financial services industry is earning now as a consequence of the events of the past few years. It is a vital industry for the United Kingdom. It was based initially on the probity of the United Kingdom, which now has to be seriously questioned. It should not be necessary to put into a Bill a duty of care on vulnerable people. It should be a matter of course.

When my noble friend Lady Hayter began this afternoon’s debate, she referred to the issues that have caused such convulsions in the past few months and have led to a serious loss of trust in financial services in general. It would come as no surprise that some particularly vulnerable people, especially the elderly, would nowadays prefer to put their money in a sock under the bed because it is about the only place where it is likely to be safe.

If we are going to restore the integrity of the financial services industry, we as a Parliament must be prepared to show that we are prepared to speak up for the vulnerable. Those of us whose careers have taken us into the other place have had to deal with constituency cases. Quite frankly, a number of times I have felt like sending for the police when I have had constituents in with instruments that they have been sold, which, in many cases, have taken their entire savings away from them. You get not just the City spivs who you see on television programmes but people who live in a community selling wholly unsuitable products.

I suspect that the Minister will say that this legislation is not necessary. I urge him to reconsider that. If we do not put the consumer back again at the heart of the financial services industry, we will lose the competitive advantage that I hope we still retain despite the events of the past few years. We have to overstate to convince people that their interests are at the heart of what this country stands for in terms of financial services regulation.

I support my noble friends, particularly my noble friend Lady Liddell. This takes us back to our earlier remarks today on the need for a professional body for the financial intermediary. I was very disappointed at the way in which the Government did not seem to recognise that as a matter of great concern. As I understand it, doctors have a professional body in the first place and, secondly, they have a code of conduct. Therefore, this sort of thing is not necessary for them because they know that that is how they have to behave. This is true of a number of other professions.

However, one group of people who claim to be professional—the financial intermediaries—have nothing like this at all. I think I am right in saying that there is no professional body whatever. The Government seem perfectly happy with that. They do not seem to see that they should at least encourage them to set up a professional body with a code of conduct, et cetera.

My noble friend Lady Liddell puts her finger on it when she says that we really should not be discussing this issue and that it should be taken for granted that the sort of things referred to by my noble friend Lord McFall could not happen. In a decent society, that should be the case. However, it is not the case. One of the great things about this House, until we are all thrown out, is that your Lordships accept their responsibilities, although our successors may not. It is important to draw attention to what responsibilities should exist in society. I believe that the Government should respond positively to my noble friend’s amendment.

My Lords, I support the amendment in the name of my noble friend Lord McFall. I declare an interest as chair of the Consumer Credit Counselling Service, the country’s leading debt advice and debt management charity. I want to focus in particular on people who struggle with debt, often because they have got into arrears with their credit cards or personal loans and other consumer credit products, but also because of mortgage arrears, rent arrears and, increasingly, fuel and utility debts and council tax.

CCCS has helped more than 1.5 million people in the past three years and about half of them told us that unemployment or reduced income were the main reasons for their debt problems. People also say that life events such as illness or separation can quickly overwhelm family finances and cause or contribute to mounting debt. What they find is that debt is rarely a problem in isolation. There are nearly always other factors that need to be addressed, including the link between problem debt and depression. Nearly half of CCCS clients said they had been worrying about their debts for a year or more before seeking help from a debt advice provider. Around a third of people said that their debt problems had weakened their relationships or led to a break-up. Nearly half said that debt had shattered their self-confidence to support themselves and their families.

The pre-crash boom in consumer credit, which peaked in about 2007, also remains a key part of the UK debt narrative. Even after several years of near zero lending, the total outstanding secured and unsecured debt is still some 91% higher than it was 10 years ago—so it is a pretty bad picture. Research for CCCS by the Financial Inclusion Centre concluded that some 6.2 million households are currently either already in financial difficulty or at risk of getting there, and it is going to get worse.

The IFS estimates that real median household incomes will fall by 7.1% between 2009-10 and 2013-14 as a result of low growth and fiscal tightening, the largest decline since the 1974-77 fall of 7.5%. Unemployment remains at a stubbornly high 8.3%, or 2.65 million people, although it has just reduced. Youth unemployment sits at 22%—more than one in five young workers is without a job. This is particularly worrying as we know that time spent not in employment, education or training as a young adult can have a scarring effect as well as reducing earnings.

At the same time, we are experiencing an extended period where households are facing rising costs for essential goods and services. Food, fuel and transport costs are rising sharply and we will sooner or later face a rise in interest rates, which are unnaturally low at present. Figures from the Financial Inclusion Centre show that if living costs rise by more than £50 per week, it would double the percentage of households—which is currently 30%—who have no spare cash at the end of the month.

There is surely sufficient evidence in what I have said that the idea that consumers should be required to take full responsibility for their decisions does not accord with what happens in the real world. My noble friend Lord McFall made this point very eloquently, and we strongly support his idea that in considering what degree of consumer protection may be appropriate, the FCA must have regard to the differing ability, disability and vulnerability of different consumers.

However, it goes further than that. The FCA has also got to take into account what the CCCS and FIC research tells us about the way people’s history and the impact of family issues, illness and relationships interact with their credit arrangements. Families are being squeezed hard at both ends, with incomes and expenditure under pressure. The Bill ought to be amended to reflect less of the theory of caveat emptor and be more reflective of what is happening on the ground.

My Lords, the debate on this group of amendments has been very interesting. However, it has some characteristics of straying into Second Reading territory because it has gone much wider, albeit over very important areas, into questions of broad mis-selling standards in the industry, which we have discussed already this afternoon. Therefore, I will not go over all the points that have been made but stick to the issues that are the focus of the specific amendment, subject only to one general point about the important questions raised by the noble Lord, Lord McFall of Alcluith, on proposed new Section 1C—on the consumer protection objective, which clearly goes to the heart of this—and his observations and questions on proposed new Section 1C(2)(e), which concerns the general principle of care.

One issue around the drafting that we should bear in mind is that the FCA will be responsible for the protection of retail consumers, but will also have a responsibility for wholesale markets, professional markets and counterparties. The reason behind the drafting of proposed new Section 1C(2)(e) is to make sure that it encompasses both the very strong duty of care that is due to individual consumers, on the one hand, and the fact that between professional counterparties the nature of the duty of care is very different. Indeed, in the terms of this particular principle, there may be no duty of care under this provision if the market is purely professional—it is very different from a consumer product market. It is important to understand that background to the discussion. However, these amendments are very much concerned with protection of the consumer.

There is some confusion in my mind about what the noble Lord is saying. He is talking about the responsibility and the environment of risk in wholesale markets as against retail markets. Even in wholesale markets, there is now a need for a duty of care. The noble Lord was managing director of financial regulation at the Treasury, so he will be aware that from the time of Barings onwards there has been an issue about the duty of care in the wholesale market, too. I am not saying that it should be equated across the board with the duty of care to consumers, but no one who has watched developments over the past few years can take a laissez-faire attitude to what is happening in wholesale markets.

I am not suggesting for one moment that there should be a laissez-faire attitude. I am merely pointing out that a very different set of parameters has to be used by the FSA, and will have to be used by the FCA, when dealing with different parts of the financial services market. To those who argued earlier that we should not lose caveat emptor, I point out that in professional-to-professional markets, of course there has to be a high degree of integrity. Recently we saw exactly what appears to have been going on in what are fundamentally professional markets. However, that is very different from the duty of care owed in the case that we are talking about, which is of selling products to vulnerable, disabled consumers. Wholly different considerations apply from those that apply in professional markets. I point that out because the noble Lord, Lord McFall of Alcluith, got into this broader question, and as background to the question that we need to come on to, which is whether it is appropriate to include amendments to highlight important issues about disability, ability and vulnerability that address consumer product markets.

I hope that the Minister will think again about this before Report, because he has got it profoundly wrong. There is a duty of care for all clients. Of course, it has different consequences according to the nature of the client and according to their sophistication, capital resources and ability to absorb risk. When Goldman Sachs placed collateralised debt obligations—securitised packages of mortgage loans—with professional clients, they knew that the products were junk, and internal e-mails referred to them as such. They were breaching a duty of care; there is no doubt at all about that. The courts will be looking at this in connection with LIBOR and are very likely to decide that if it were the case that even professional clients were working on the basis of a falsified LIBOR rate, there was a breach of fiduciary responsibility and duty of care. Duty of care is an enormously important term of art. The Minister, this afternoon, is trying to weaken and dilute it. That is an extremely dangerous line to go down.

No, my Lords, I am trying to use duty of care in the precise way in which it is used in FiSMA and the regulations that go with it. There are, of course, all sorts of other considerations that apply, whether it is in the LIBOR market or other markets. However, I am trying to use the term precisely as it relates to this legislation and the regulations under it. If we want to redefine duty of care or anything else as something that it is not, now is not the time to do it. This has been a wide-ranging debate. However, I would like to focus on the amendments themselves, which highlight important issues with much more focus than some elements of the discussion we have just had. The issues concern disability, ability and vulnerability. I fully share the views of the noble Lord, Lord McFall of Alcluith, that the ability of consumers to engage in financial services can be affected by their age, disability or other personal circumstances. These are points that have been made by a number of noble Lords in this debate, albeit that some other points went rather wider.

The first thing to be clear about is that I disagree with the noble Baroness, Lady Liddell of Coatdyke. It would be nice to be in a world in which these issues did not have to be referred to in legislation at all, but that is not the position I take. I believe that they should be reflected in legislation, and indeed they already are in a number of ways. For example, both the FSA and the Money Advice Service, which we have been talking about, have duties under the Equality Act 2010. The FCA and the PRA will be subject to the same requirements, so the Equality Act also bites on them. Also, under the public sector equality duty set out in the Equality Act, both the FCA and the PRA will be required to assess their rules and processes for their impact on protected groups, and take mitigating action where appropriate. In addition, equality law applies to financial services providers so that firms are required to make “reasonable adjustments” to their services for consumers with a disability under the Equality Act, depending on the nature of the product, the barrier and the size of the business. So there is indeed a body of law that goes very much to the points which the noble Lord, Lord McFall, makes.

Then there is the question of monitoring compliance by the industry with equality law. This is not a job for the FCA or the PRA. It is for the Equality and Human Rights Commission, as the regulator responsible, to enforce the law, and it indeed has the powers to do that. These powers include helping individuals with their legal cases and taking legal action against organisations that appear to have broken the law.

Amendment 136 specifically concerns the regulatory principle concerning consumer responsibility to which the PRA and FCA must have regard in discharging their general functions; and through Amendment 105 the noble Lord wishes to ensure that the FCA, in determining what an appropriate degree of consumer protection is, has regard to the way in which certain consumers may need extra help and protection. These issues are reflected in the FCA’s proposed principles-based approach to regulation, which is designed to ensure that firms adapt their approach depending on the needs of the customer. Instead of having myriad detailed rules and requirements that focus on different degrees of vulnerability, disability or other personal circumstances, requirements on firms will focus clearly and unequivocally on the overarching principle that firms need to take account of their customers’ needs and treat them fairly.

This builds on the FSA’s current approach. For example, principle 7 of the FSA’s Principles for Business states:

“A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading”.

In setting penalties for the failings of firms, one key aspect the FSA considers is,

“whether the breach had an effect on particularly vulnerable people, whether intentionally or otherwise”.

There are examples of where the FSA has taken very significant action. I will cite only one, but I am sure the noble Lord is familiar with it. Late in 2011, the FSA fined NHFA—a subsidiary of HSBC—£10.5 million for mis-selling products to elderly customers. The firm sold asset-backed investment products to elderly people wishing to fund their care home costs, but in fact many of them were not expected to live beyond the period for which it was recommended the products were held. I could also cite cases in relation to the Bank of Scotland and Swift 1st Ltd, so the FSA has been on the case.

The principle that a customer with greater needs should be better protected or offered more support and assistance is clearly enshrined in the regime, but it would not be appropriate to take a more detailed approach, for two reasons. First, we would not want the FCA to cut across or duplicate the efforts of the Equality and Human Rights Commission in considering what circumstances might need special care, and how they should be accommodated. The current approach strikes the right balance of setting a high-level framework with requirements directly imposed on firms by the Equality Act and, on the other hand, with discretion for the FCA to impose more detailed requirements as necessary to ensure appropriate consumer protection.

Secondly, I do not think it is right to list all these matters here. Again, it is potentially duplicative, but more importantly it also risks being incomplete. For example, we might legitimately add age, gender or geographical location—issues which I believe have been raised in previous debates on this Bill—to the list already proposed in the amendment, but where would we stop? I believe there are sufficient powers there. We will come on in due course to the new product intervention powers, which are important in this context compared with what the FSA has at present. Although we will no doubt come to them in detail in due course, the product intervention powers in new Sections 137C and 138M, which mean that in extreme cases a product could be banned with immediate effect, are also additional important safeguards to back up the general principles and approach which I have outlined.

I hope that I have made it clear that the Government take these issues extremely seriously. Unfortunately we cannot and should not rely on people doing the right things, which is why we have the various provisions in the equality legislation as well as the provisions for the FCA—provisions that will be tougher on intervention powers than the powers that the FSA currently has. I therefore invite the noble Lord to withdraw his amendment.

My Lords, in withdrawing my amendment I express my disappointment with the Minister’s response. Just to illustrate that individuals in this House are up to date with electronic technology, I can say that I took advantage of looking up the meaning of “objective” in Dictionary.com, because that is in bold at the top of the paragraph we are talking about. “Objective” means,

“something that one’s efforts or actions are intended to attain or accomplish”.

In other words, it is the purpose, the goal or the target of what we are to achieve. I submit that there is nothing more comprehensive than that. Therefore, we do not stray away from the subject; this is very germane to the subject. There is still disappointment in the FCA being expected to attend something rather than having a duty to attend. Tonight, we expect to get to a particular clause before we adjourn at 10 o’clock, but the consequence of not getting that far is that we take it on the next day. In other words, the consequences are not very great. There is a difference between that and a duty.

I submit that the Minister, for whom I have great respect, has muddled thinking on this. I wish that he would look at this again so that we can come back on Report to get clarity. Besides me, quite a number of people cannot understand what the Minister is trying to achieve here. I beg leave to withdraw the amendment.

Amendment 105 withdrawn.

Amendments 105A and 106 not moved.

Amendment 106ZA

Moved by

106ZA: Clause 5, page 16, line 43, at end insert—

“( ) The general principle that consumers should have to give informed consent to the use of their personal data by a regulated financial institution, and in particular to the transfer of such data into or out of such an institution when that institution is part of a group of companies whether that group is a qualifying parent undertaking or not, and that it should be possible for such informed consent to be easily and effectively withdrawn.”

My Lords, the amendment concerns a subject raised by the noble Lord, Lord Whitty, at Second Reading. With his consent, I raise the matter now in his absence.

The issue of consent to the use of information on the internet is greatly confused at the moment. We have the principle of caveat emptor, as far as possible; we have a set of data protection regulations which are of variable application; and we have a daft system doing the rounds at the moment under which every website pops up with the message, “Can we use cookies?”, to which you answer, “Yes”, because the website will not function without that. That is a complete waste of time which has been foisted on us by Europe.

The question raised by the noble Lord, Lord Whitty, is interesting and I shall be interested to see where the Government find themselves. When you have a regulated institution with financial data on people, under what circumstances is it allowed to share those data with other bits of the same company which are not regulated? This may apply to Tesco with all the data which it has on Clubcard. Is the retail side of Tesco allowed to look at what people are doing in their bank accounts and to understand what they should be marketing to them? Vice versa, is the banking side of Tesco allowed to look at all the Clubcard data and say, “Hang on, this guy looks as though he is going bust because he is starting to buy cheap orange juice, so we really ought not to be offering him the degree of credit that we are”. If we are to allow such sharing, what degree of information should be offered to consumers about what is happening? There is a standard practice on the internet—I rather suspect that we have all done it—where we are presented with a little form saying, “Have you read the agreement? Tick ‘yes’”, and the agreement is 154 pages long. As it is not really clear where the changes are from the previous one you signed, you tick “Yes” because you want to use the thing. You sort of trust the people you are dealing with.

Are we in the territory where the consent to share information will be hidden away in that kind of automatically signed agreement on the web, or are we in the territory where things would have to be made clear in the preamble to the consent form that this sort of sharing was being permitted and that no disadvantage would be incurred by the customer if they refused to share? I find this a puzzling area and I shall be very interested to know what the Government intend that the FCA should do. I beg to move.

My Lords, the British banking market is changing, thanks, partly, to the ongoing regulatory reforms, as new competitors enter the market. Clearly, that new competition is very much to be welcomed. Consumers need greater choice both for themselves and to drive up standards. However, we should be aware, as the noble Lord, Lord Lucas, has spelt out, that potentially some of the new entrants to the financial sector happen to possess a large amount of data on their customers from the non-banking activities. Therefore, it will be important for safeguards to be put in place to prevent any abuse of that information.

Clearly, supermarket banks own some of the largest consumer databases in the world, with item-level purchase data on each of the millions of members of their loyalty card schemes. Should that information be used by the banking arms of those conglomerates, it would clearly raise concerns for consumers about their personal privacy and about the potential for misuse. The concerns are fairly obvious. What about invasion of privacy? A consumer’s lender will know everything about what they had purchased and when. For example, imagine that a bank learnt from the supermarket side when a consumer started to buy cheaper food, they would know exactly when payday loans might be welcome. Similarly there is a possibility of the use of that ordinary supermarket data as a credit rating mechanism.

Loyalty scheme operators know an enormous amount about all of us. I understand that Clive Humby of dunnhumby, the Tesco subsidiary which manages Clubcard, has boasted that, of the customers who tend to buy only convenience meals, Tesco knows exactly which ones are shift workers by the time of day when they purchase those convenience meals. I assume that means Members of your Lordships’ House who shop at 10 o’clock at night. The company also tends to know who the students are by the sort of things that they buy. Recently, in the States, there was an example—not in the banking area—of a supermarket having seen that a woman was buying vitamin supplements, lotion and hand sanitisers, and working out that she was pregnant and then sending her some information about that before she had got around to telling her parents. That is different from the banking side, but now that it will be easier for some of these non-financial firms to purchase banks there are worries about the spread of information and whether it could leak across.

Behind the amendment moved by the noble Lord, Lord Lucas, is the desire for some assurances that guarantees will be put in place to ensure that there is a firewall around any loyalty club databases to prevent a spreading across to the offer of financial services. My noble friend Lord Whitty raised the same subject during the Second Reading debate. We want to encourage new entrants into the banking world to give consumers a better deal, but we need to ensure that there are protections and safeguards to prevent the abuse of personal data and that there is perhaps some oversight mechanism.

I assume that the second amendment in this group is not being discussed but perhaps the Minister will nevertheless respond to it.

My Lords, I shall respond to the amendment that has been moved but I shall not respond to the amendment that has been not been addressed. Amendment 106ZA seeks to add to the list of matters to which the FCA must have regard in advancing its consumer protection objective. The new “have regard” proposed by my noble friend focuses on data protection, as he has explained, and specifically would require the FCA to consider the issue of consumers having to give informed consent in order for their data to be shared, in particular within a group of companies which includes a non-financial services institution.

Of course, I agree that consumers should have full knowledge about what is being done with their data at all times and have to consent to any sharing of them. I will do my best to reassure the Committee, as I think it is fairly clear, that there is already legislative provision in place to deliver what my noble friend wants to achieve and that this applies whether or not we are talking about different entities—because it is essentially a legal entity test—within a banking group or different entities within a supermarket group. The bank within a supermarket group is bound to be in a different legal entity from the supermarket operation itself. The same considerations apply whether within a banking group, within other financial services groups or within a supermarket group.

The ability of a subsidiary to share personal information about its customers, either with the parent company or with another member of the group, is already regulated by the Information Commissioner under the Data Protection Act 1998. It is legislation that applies to a financial services firm in exactly the same way as it applies to a supermarket or any other data controllers. If a financial services firm has breached a customer’s rights under the Data Protection Act—for example, if it has used the customer’s personal information unfairly, for a reason that is not the one for which it was collected, or without proper security—then the right course of action is for the customer to complain to the firm and then to the Information Commissioner. The Information Commissioner has the powers to force compliance with the law.

The FCA will not, therefore, be the first line of defence in the area of data protection. It is important that we do not blur the lines of responsibility between a financial services regulator and the Information Commissioner, who, as we have seen through numbers of cases, whether in financial services or in other areas, is a regulator with teeth. The case in 2007 of Nationwide is an example of the Information Commissioner taking aggressive action. In support of that, the FSA will take action where appropriate. The Information Commissioner is the first line of defence, but if a financial services firm were to do something reckless, such as losing a laptop with consumer data on it, then it will be fined, as Nationwide was fined £1 million in 2007.

We have the Information Commissioner as the first line of protection to make sure that information cannot leak from one entity to another within the group without the informed consent of the consumer and that the data within the entity are properly used in the way I have suggested. However, as a second line of defence, in areas such as the one that I have described, of the loss of a laptop, the FSA—and in future the FCA—will have important supporting powers. Therefore, I would suggest that this “have regard” is one that is not necessary or appropriate and might raise false expectations about the responsibility of the FCA in an area where there is a regulator with proven ability to come down hard on those institutions that abuse consumer data. I ask my noble friend to withdraw his amendment.

My Lords, I am very grateful for that explanation. At this stage, it is exactly what I was hoping for. I beg leave to withdraw the amendment.

Amendment 106ZA withdrawn.

Amendment 106A

Moved by

106A: Clause 5, page 17, line 2, at end insert “and having regard to the general duty to provide those services honestly, fairly and professionally in accordance with the best interests of the consumers in question”

My Lords, I shall also speak to Amendment 138A. Amendment 106A adds to what the FCA must “have regard to” when considering the degree of consumer protection. It adds the requirement to have regard to the general duty of providers of financial services,

“to provide those services honestly, fairly and professionally in accordance with the best interests of the consumers in question”.

Amendment 138A adds to the regulatory principles to be applied by both the PRA and the FCA. It adds the principles that,

“authorised persons should act honestly, fairly, and … in accordance with the best interests of consumers who are their clients”,

and that,

“authorised persons should manage conflicts of interest fairly, both between itself and its clients and between clients”.

These provisions, or something very like them, already exist as FSA principles 6 and 8 in section PRIN 2.1.1 of the FSA Handbook, but crucially those are principles and do not have the force of law directly. Perhaps 30 years or so ago, that would have been a satisfactory situation. If the culture and current practices of our financial institutions were robust, morally sound and possessed of a sense of the common good then the amendments I propose would probably not be necessary. However, the culture and current practices of many of our financial institutions are not robust, not morally sound, and certainly not possessed of a sense of the common good.

As the noble Baroness, Lady Liddell of Coatdyke, said an hour or so ago, there have been numerous scandals. There was the mortgage endowment scandal, for example. There was the selling of precipice bonds to pensioners. There was the payment protection insurance scandal. Most recently, there was the mis-selling of interest rate swaps to SMEs. Every day seems to bring news of yet another gigantic scandal. Yesterday HSBC apologised to the US Congress for, among other things, breaches of US anti-money-laundering regulations and poor record keeping. It turns out that 41% of the bank’s accounts in the Cayman Islands had no customer information attached to them at all. Senator Levin described the bank’s culture as “pervasively polluted”.

It is no wonder that confidence in financial institutions has fallen most dramatically here in the UK. The recent Ernst and Young survey on global consumer banking reports that 63% of UK consumers say that their confidence in the banking system has fallen. That is the highest fall in Europe, and higher than in the USA. It seems to be the case that statements of principle promoted by the FSA no longer command either the respect or the compliance of some of our largest financial institutions.

Over the past few weeks, there has been much public discussion of the moral and cultural failures in significant parts of our system. I do not believe that these failures can be addressed by exhortation. I believe it requires legislation to begin to change these moral and cultural failures, and to encourage the emergence of more responsible and ethical behaviour. I do not believe that we can rely on the banks to change in an appropriate and timely way without specifying what some of those changes should be. That is what these amendments are designed to do, by proposing to put into the Bill what is essentially a duty of care—not, perhaps, the most popular concept this afternoon—for the financial services industry in respect of its dealings with ordinary consumers. We may regret that it has come to this, but it has. It is plain that our trust in much of our financial system to behave ethically was grossly misplaced. These amendments try, in some small way, to correct some of that. I beg to move.

My Lords, Amendment 107 is in my name. Bob Diamond said in November 2011 at the “Today” programme lecture:

“Our culture must be one where the interests of customers and clients are at the very heart of every decision we make; where we all act with trust and integrity.”

This amendment puts that principle in the Bill, by adding to the FCA’s consumer objective that it must have regard to the general principle that,

“where consumers properly repose trust in a firm’s discretion and are vulnerable to the exercise of that discretion, the firm has a duty to act in the consumer’s best interests”.

That is simply what millions of people want, and they will not understand if it is denied to them. The basic principle is simple: if you have discretion when looking after someone else’s money, the starting point should be that you act in that person’s or that client’s best interests.

I anticipate that the Minister will argue against the amendment, citing the fact that current FSA rules already say that firms must,

“pay due regard to the interests of its customers and treat them fairly”,

but paying due regard is not enough to rebuild trust in the industry, and experience shows us that it falls short of any kind of duty of care. Firms may not get every decision right on every occasion and risk will not go away, certainly in investments, but firms should at least be able to demonstrate that when they exercised their discretion and took a decision, they believed that they were acting in the client’s best interests. The Government have expressed a preference for the FSA rules to lay out a specific, clear, focused and transparent set of duties on firms, but rules are geared to achieving compliance rather than changing behaviours. There must be a guiding principle to inform the content of those rules—the duty to act in the consumer’s best interests. People in positions of trust in financial companies have to change their behaviour. We simply cannot carry on the way we are.

The FSA is attributed with the comment in FTfm on Monday 16 July that,

“fiduciary duties are more of an aspect of common law rather than something established by its rules and regulations”.

That basically amounts to the FSA confirming that under the existing proposals it does not see it as part of its remit to uphold the standard of protection that the amendment proposes. Hence, that is a very compelling argument precisely for this amendment. Others will argue that the amendment imposes a new obligation on firms and that it is not a reasonable standard to ask of a commercial entity. I am not sure that it imposes a new obligation but it certainly makes it explicit. In oral evidence to the Joint Committee Martin Wheatley, CEO-designate of the FCA, said that,

“firms … have responsibilities in terms of appropriateness, in terms of their conduct and in many cases they also have a fiduciary responsibility to clients”.

The wording of the amendment reflects legal principles in that the Law Commission’s summary of the characteristics of a fiduciary relationship are discretion, power to act and vulnerability.

The principle in this amendment is not inconsistent with a commercial entity’s desire to make a profit: what it prevents is unauthorised profit or profiteering at the expense of clients. Firms can continue to have and pursue their own interests, just not at the consumer’s expense. Conflicts of interest need to be properly managed. Again, some may argue that a duty to act in the consumer’s best interest is not the right standard to impose across the board between providers and consumers, but the amendment would not apply across the board. It would apply where consumers have a particular relationship with providers that relies on a firm’s exercise of discretion and they are vulnerable to it.

In their response to the Joint Committee report, the Government inserted the new principle in the Bill, to which the FCA must have regard, that,

“those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate”.

The amendment gives clarity to what is an appropriate level of care where trust and discretion are involved to set a higher standard of protection. A duty to act in the consumer's best interest is clearer in its requirements to avoid and manage conflicts of interest. Where a client reposes trust in the firm's discretion and is vulnerable to the exercise of that discretion it is not enough to balance competing interests. Rather, the firm must ensure that conflicts cannot damage clients.

Separating retail and wholesale banking is part of the solution to addressing financial stability and integrity, but it is not the whole answer. Millions of ordinary people are saving, directly or indirectly, through the capital markets and are vulnerable to the exercise of discretion by a long chain of intermediaries. Legislation must protect not only the integrity of retail banking but the interests of the savers in so-called casino banking. “Casino” may be appropriate for the behaviour of some intermediaries—the fund managers, traders and others—but it is not the underlying purpose of the investment market. As auto-enrolment into workplace pensions gets under way in October, millions more people will be added to those saving through these markets, many of them low and modestly paid workers. Even before auto-enrolment, which will bring billions more into these markets, £380 billion is invested in DC pension schemes in the UK. That excludes the billions in DB schemes, investment ISAs and other products and with-profits investments.

The Centre for Policy Studies has just published Michael Johnson's report Put the Saver First, which I have just read. Although I may not agree with all of his recommendations, it makes an excellent contribution to the debate as to why the financial services industry is mistrusted. It states that the financial services,

“industry would appear to have forgotten that customers are providing the scarce resource upon which the whole of the … industry relies: their savings capital … Essentially, the industry should put the customer at the centre of everything it does … It is clear that many people are investing in products they do not fully understand, which are governed by a jungle of complex rules and tax regimes that, collectively, almost nobody understands. Savers are therefore putting their trust in the industry, and they need to be protected in situations in which the industry has a knowledge advantage. For almost all investors, this excludes very little. A less subtle description is that regulation should protect investors from the industry’s self-interest, its inefficiencies and, in some cases, its predatory instincts”.

In an investment industry with a long chain of intermediaries, the saver exercises virtually no influence over many key decisions. Indeed, at the behest of the Government, Professor John Kay is examining the lengthy investment chain and the implications for efficient capital markets. There is no shortage of evidence of misalignment and conflicts of interest between the consumer and the providers. The interests of the end users of capital markets—the savers and investors and those seeking capital—need to be reasserted. That in turn will support UK economic interests.

The Bill should address the cultural issues by reasserting the appropriate nature of the relationship between provider and consumer, where the latter is vulnerable to the exercise of discretion by the former and where financial services have too often been seen as controlling the real economy rather than supporting it. The LIBOR and EURIBOR rate-fixing scandal made many organisations furious because it subverted the integrity of a pricing mechanism at the heart of the capital markets. Promoting consumer engagement and empowerment is of course welcome, but it cannot be a substitute for greater clarity about the roles and responsibilities of each player in the investment chain.

My Lords, I am pleased to speak in support of Amendment 107, which was spoken to so well by the noble Baroness, Lady Drake, and I also have sympathy with the other amendments in this group tabled by my noble friend Lord Sharkey.

My personal interest in the success of the coming revolution in pension policy through auto-enrolment makes me especially keen to support this group of amendments. We have to rebuild trust in the financial services sector, where culture is currently suspect, to encourage greater pension savings. An explicit “consumer’s best interest” principle in the Bill would be a powerful tool for the FCA to ensure consumer interests are protected. Fiduciary duty requires those entrusted with other people’s money to put those customers first and provide appropriate stewardship, not to exploit their position to make an unfair profit or to get involved in undue risk where it is inappropriate. If duties were properly observed and enforced, it would provide a sea change in the prevailing culture of the financial services industry and lead to a much better outcome for consumers.

The problem is to get the balance right between consumers and firms. Concern was expressed in pre-legislative scrutiny that the draft Bill was unbalanced, enshrining the principle that consumers are responsible for their decisions but not placing an equivalent responsibility on firms. The new principle, inserted by the Government, to which the FCA must have regard, is that,

“those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate having regard to the … risk involved”,

and the consumers’ capabilities.

The question is whether we are prepared to leave this so vague and open to interpretation that it would provide very weak guidance. With respect, it leaves open the question that it was intended to resolve. For those managing long-term savings, the problem is precisely that there is confusion and misinformation about 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 get the balance right in the equivalent responsibility for consumers and firms.

When the Bill was considered in the other place, the Minister argued on this clause, as amendments were submitted for an explicit reference to fiduciary duty in the Bill, that:

“Customers should not have to dust down the old statute books and dig out their dictionaries … to identify what standards they can expect from providers”.

He said that it was better for the FCA to set out clear and specific standards via its rules. He also said that he was not convinced that fiduciary duty,

“is the right standard to impose across the board between providers and consumers”.—[Official Report, Commons, 1/3/12; cols. 271-72.]

Our Amendment 107 tries to address these objections. First, it does not rely on the term, “fiduciary duty”; it simply enshrines the common-sense principle that underpins these duties. Where consumers rely on a firm’s discretion, that discretion must be exercised in those consumers’ best interests. Secondly, it would not supersede or restrict the specific standards to be laid down in FCA rules, but rather provide an overreaching principle that the FCA should bear in mind when setting those rules. Thirdly, it would not apply across the board but only where appropriate, particularly where consumers have a relationship with providers that justifies a best-interests standard. I hope that the Minister will closely consider this matter and strengthen Clause 5 by accepting these amendments.

My Lords, this is perhaps the most important debate today—perhaps the most important of the whole clause—because these amendments are about requiring savings to be managed in the interest of savers, not financial intermediaries. As we have already heard, the Joint Committee recommended that the Bill,

“place a clear responsibility on firms to act honestly, fairly and professionally in the best interests of their customers”.

That should not be too much to ask. As my noble friend Lady Drake said, the Law Commission confirmed that where firms are managing other people’s money, or giving financial advice, they have fiduciary duties to act in those people’s interests, both individuals and institutions such as pensions that represent, after all, large numbers of individual savers. That fact is, sadly, not generally reflected within the industry. Because these are common-law duties, as we have heard, they do not form part of the FSA’s regulatory approach, hence they need to be repeated in the Bill, partly to comfort consumers that the Bill does not trump these common-law protections, partly to give the FSA a powerful tool to ensure that consumers’ interests are protected and partly to ensure that this duty of care is absolutely entwined in the industry’s DNA, where it has, until now, been lacking.

It is not just me. Michael Johnson of the Centre for Policy Studies, who I have to explain does not share my political leanings, has written:

“The ethos of fiduciary duty should be resuscitated across the industry”.

Like the noble Lord, Lord Stoneham, I have the example of pensions in mind.

Amendment 107 seeks to enshrine the principle that where consumers rely on a firm’s discretion—we must remember, that they are often part of a long chain, as my noble friend Lady Drake said; they often see or know nothing, as with the LIBOR adjustments—then the firm’s discretion must be exercised in the consumer’s best interests. Inter alia, that means not exercised so as to pump up bonuses or shareholder value.

As we have heard, the Joint Committee called for the FCA to be empowered to hold firms to account by upholding this duty to act in clients’ best interests. The response from the Government was, unfortunately, insufficient, as my noble friend Lady Drake said, in that they only asked the FCA to have regard to the principle that there should be a level of care appropriate to the consumer involved and that the need for advice should be accurate, timely and fit for purpose. That is vague, in the words of the noble Lord, Lord Stoneham, but it also does not go far enough. Nor does the FCA’s mandate to promote effective competition in the interests of consumers, welcome though it is.

Competition is fine in a perfect market where consumers have perfect information, but not for these credence goods whose outcomes might not be known for 20 years; not when terms are used which are meaningless to the client but not the seller; not where products are bought to cover risks about which any normal consumer can have little depth of understanding; not where prices are opaque, so that shopping around is impossible; and not for non-repeat purchases, where none of the consumers can ever become savvy.

Yes, the Bill provides for improved consumer protection via the product intervention, the transparency and disclosure advances, but product intervention is following a failed product, by which time purchases will have been made and disclosure rules still do not compensate for how much more the provider knows about risk than does the individual consumer. We welcome the requirement for the FCA to have regard to consumers’ different experience and expertise, and their need for information that is timely, accurate and fit for purpose, but we want firms themselves to have to sign up to and enforce a duty to act in the client’s best interests, along the lines of Amendment 138 in the names of the noble Lord, Lord Phillips, and the noble Baroness, Lady Kramer, that regulated persons and bodies should assist consumers in taking responsibility.

The duty to work in the client’s best interests needs to be in the DNA of every firm, not simply a regulatory intervention power by the FCA. Just as a solicitor’s client charter says that he will put the client’s interests first—and, incidentally, explain what the costs are likely to be—so there should be an expectation on anyone handling clients’ money. To quote Michael Johnson again,

“all pension schemes should be subject to fiduciary-like obligations”.

I believe that these amendments are central to whether the Bill works for consumers, the individuals on whose savings much of this industry is built. Consumers should be able to trust those who advise them, who care for their money and provide financial services; they should be able to trust that the client’s interests will always come first.

My Lords, there is a lot to deal with because of the number of amendments in this group, although they all broadly cover the same ground. I feel that if I err on the side of treating them in short order I will not do justice to each individual amendment, but if I deal with each in turn I risk going on too long. I think that in this case I should probably err on the side of doing justice to these amendments, because each is somewhat different.

The amendments all focus on the need for firms and advisers to act honestly, fairly and professionally in the interests of consumers. This follows a recommendation from the Joint Committee in its pre-legislative scrutiny of the Bill. I doubt that anyone in this Committee would question the need for such integrity in firms’ dealings with their customers—certainly, they have not done so in this debate—but I do not believe that the approach suggested by the amendments would help secure the outcome intended.

I can assure noble Lords that we carefully considered the wording suggested by the committee, but concluded that the best way to address the concerns underlying its recommendation was to modify the matters to which the FCA is required to have regard, thus reflecting what firms should already be doing, rather than to seek to impose directly some kind of high-level duty on firms.

The consumer protection objective ensures that, as the FCA acts to protect consumers, it will be required to have regard to the level of care that firms should provide to their customers, based on the level of risk involved and the capability of the customers. This is set out in new Section 1C(2)(e). The phrase “level of care” is wide enough to ensure that fairness, honesty and professionalism, and certainly acting in consumers’ best interests, are all taken into account. I am not sure how the amendments being proposed would add to the existing provisions; in fact, they may narrow the definition of “level of care that is appropriate”, which I am sure the Committee would not wish to do.

I thought that I heard my noble friend Lord Sharkey refer to the enforceability in law of principles of regulation. I make it absolutely clear that principles of regulation are indeed enforceable in law. It was those general principles which the FSA used to pursue, for example, the Barclays LIBOR case, and it will be exactly the same for the FCA and the PRA.

Amendment 106A would create a “general duty” for firms to act in the way that the amendment suggests. Such a duty would be so high level and vague as for it to be very difficult for firms to know what was expected of them, and it is far from clear what, if anything, such a duty would add to the contractual requirements and terms that already protect clients and consumers. Such a vague duty would also be difficult for consumers or the regulators to enforce. It is the Government’s position that it is clearer, better and safer for consumers for the FCA to make a body of clear, specific and targeted rules that give both firms and consumers an understanding of what level of care is expected, and that is the approach that we have taken.

Amendment 136A would add to the “senior management” regulatory principle an acknowledgement of the requirements for senior management,

“to act honestly, fairly and professionally”.

As with Amendment 106A, I do not believe that this addition would benefit consumers. Both the PRA and the FCA will have powers, under Sections 56, 63 and 64 of FiSMA through amendments made by Clauses 11 and 12 of this Bill, to take action in relation to a failure on the part of an approved person to act in a fit and proper manner in performing functions in relation to regulated activities. Therefore, there is already a perfectly clear and sufficient mandate to ensure that, if either regulator judged an individual to be acting in a way that was not honest, fair or professional, they would be prompted to take robust action against them, up to the removal of their status as an approved person. We do not need extra provision to make this happen. I hope that I can assure the Committee that the amendment is not required.

Amendment 108C would require the FCA to have regard to,

“the general principle that firms or advisers must act honestly, fairly and professionally in the best interests of their customers”.

We agree that they should, but the amendment would not guarantee that they would. It would not establish any duties on firms additional to the detailed rules made by the regulators. It would instead add something to which the FCA would have to “have regard” when considering what was an appropriate level of consumer protection. As I have already said, new Section 1C(2)(e) already deals with the point.

Amendment 138A would include the same phrases, “honestly, fairly and professionally” and “best interests of consumers” in the list of principles to which both regulators will have regard when carrying out their general functions. In addition, it would add the principle that,

“authorised persons should manage conflicts of interest fairly, both between itself and its clients and between clients”.

While I agree with the sentiment of both of these suggested additions, I have to say that they are again unnecessary. I have already explained why I believe that the wording referring to the expected level of care in the FCA’s consumer protection objective is the best way of ensuring this.

On the specific issue of conflicts of interest, if firms were not appropriately managing conflicts of interest, it is unlikely that they would be providing an appropriate degree of protection to consumers. In those circumstances, the FCA would have very clear powers to act. I am not convinced that the amendment would give the FCA power or authority that it does not have already. I thank noble Lords for tabling these amendments and assure them that I understand their concerns. However, in advancing its consumer protection objective, the FCA will already be focused on ensuring that firms treat their customers fairly, honestly and professionally and act in their interests.

Amendment 107 would include in the list of things to which the FCA must have regard when considering what degree of consumer protection is appropriate a firm’s responsibility to act in consumers’ best interests where the consumer has reposed trust in the firm. I should recognise that the noble Baroness, Lady Drake, made a valuable contribution to the Joint Committee that considered the draft Bill. I am pleased to see that Amendment 107 in her name continues that input into these Committee proceedings.

I am sure that we are all again in agreement that financial services firms should always act in the best interests of their consumers. It is an issue which it is important to discuss, as I shall go on to do, but, as the noble Baroness would expect, I argue that Amendment 107 would not ensure the outcome that we all desire. Instead, it would add something that the FCA would have to consider when deciding what was an appropriate degree of protection for consumers. It would require the FCA to proceed on the basis that there is a “duty” for firms to act in their consumers’ best interests where consumers place trust in those firms. Acting,

“in the consumer’s best interests”,

is a noble aspiration, but defining what this means is difficult, particularly in the context of the FCA determining what level of consumer protection is appropriate under such a duty.

The best way to ensure that firms act in their customers’ best interests is not through a general duty on firms. The noble Baroness acknowledged that there would be a difference of view about whether the amendment would impose a new duty on firms. Again, she will not be surprised that I argue that the analysis we have done suggests that there is a new general duty here, but we think that the better way to do it is through FCA rules and principles in support of the consumer protection objective—rules that must be clear, specific and enforceable, and that act to protect consumers against firms that do not or may not act in their interests. Therefore, while I disagree with the substance of the amendment, I support its driving principles. This is why we are creating the much more focused conduct-of-business regulator, the FCA, which will have a very clear consumer protection objective and the suite of new powers to protect consumers that we have discussed.

Amendment 108D would add a further factor to which the FCA would be required to have regard when considering what level of consumer protection was appropriate. It states that,

“discretionary asset managers will ordinarily owe fiduciary duty to their clients”.

I think we have already had one dictionary definition of “fiduciary duty” in this Committee sitting, but let me quote the Oxford Dictionary of Finance and Banking, which says:

“Persons acting in a fiduciary capacity do so not for their own profit but to safeguard the interests of some other persons or persons”.

The concept is plainly sound and I understand the concerns that are raised here. Firms engaging in discretionary asset management take on the responsibility to manage the assets of their clients on behalf of their clients, so do asset managers owe a fiduciary duty to their consumers? I will answer with my best understanding, as a non-lawyer, of the common law position: sometimes the answer is yes and sometimes the answer is no. It will depend on the facts of the case. Such is the beauty of our common law.

Adding this amendment to the list of factors to which the FCA must have regard when considering what is an appropriate level of consumer protection would, I am advised, serve only to muddy the waters. It would require the FCA to engage with some rather arcane provisions of common law to ascertain whether or not a fiduciary duty exists. If a fiduciary duty were found to apply, the FCA would then have to ascertain how that duty applied to the facts of the case. What if the fiduciary duty were insufficient to protect consumers? This amendment would cast doubt on the ability of the FCA to impose obligations on asset managers that go beyond the standards required by such a fiduciary duty.

Comparing this amendment with the effect of the Bill as currently drafted, one finds that the wording “level of care” is broad enough for the FCA to consider what standard of care authorised persons should provide to their consumers. I prefer this plain English and straightforward approach to one that resorts to concepts from common law, which are both imprecise in terms of scope and inflexible in terms of their application.

Again, I fully understand what is being got at here, but I believe that this amendment would, no doubt inadvertently, take us into difficult areas of common law as opposed to common English, which the Bill currently has in its favour.

Similarly, Amendment 138B seeks to require both regulators to have regard to the regulatory principle that,

“where appropriate, authorised persons should have a fiduciary duty towards the consumers who are their clients”.

I have set out why I believe that assuming or requiring a fiduciary duty for asset managers in particular towards their clients is problematic and may not give the levels of protection that consumers should expect. We have seen that the benefits of such a duty would not be clear-cut, and adding this principle to the regulatory principles of the PRA as well as the FCA would again just muddy the waters.

The FCA has a clear mandate to ensure that the consumers of all authorised persons receive an appropriate level of protection, as determined by their particular requirements and circumstances, without the need to assess whether that level of care in fact constitutes, or should constitute, a fiduciary duty. This amendment could introduce a burdensome process for the regulators in determining whether a fiduciary duty was appropriate, without in any way increasing what is really important—the care that a consumer would receive, which is the outcome that we want.

Amendment 138 would insert the principle that regulated firms should,

“reasonably assist consumers in taking responsibility”,

for their decisions in the form of a factor to which both the PRA and the FCA would have to have regard when carrying out their general functions. I agree that firms should assist customers in taking responsibility for their decisions. Many participants in financial markets are subject to information asymmetries so cannot transact with firms on a level playing field, and of course there is a role for firms to ensure that their customers understand the decisions that they are making. This is clearly a market conduct issue and is already embedded in the FCA’s consumer protection objective.

When pursuing this objective the FCA must have regard to a number of factors when considering what is an appropriate degree of consumer protection. These are already set out in the Bill and include,

“the differing degrees of experience and expertise that different consumers may have … the needs that consumers may have for the timely provision of information and advice that is accurate and fit for purpose”;

and,

“that those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate”.

These provisions will allow the FCA to ensure that firms offer their consumers a level of care that may go further than offering “reasonable assistance”, so again I suggest that this amendment is unnecessary and may be constricting.

I have given, I trust, a full analysis of these amendments. I hope that my noble friend will understand that while he raises some very important points, the construct we have within the Bill means that these issues, which were raised by the Joint Committee, are taken into account fully within the consumer protection principles and the other powers and sections of the Bill to which I have referred. Based on those assurances, which refer of course to both the regulators, I ask the noble Lord to withdraw his amendment.

I am not quite clear, despite all the noble Lord has said, how conflicts of interest will be dealt with. This is not about timely advice or all those other things he mentions, but it is absolutely central to the issue of duty of care.

To be absolutely clear, the regulators—and the FCA in particular—will have very clear powers to make any further rules on top of those that already exist in the FCA’s rulebook in order to deal with conflicts of interest. I can be completely clear and unequivocal on that point. The powers are there and further rules can be made in this area if the FCA at any point regards them as necessary.

I thank the Minister for his detailed response. I listened very carefully to everything he said, but I was not convinced by the notion that this group of amendments might narrow the FCA’s scope to act in this area. I was equally unconvinced that the general duty to provide services honestly, fairly and professionally was too vague, wide or ill defined, if that is what the Minister was actually saying.

I continue to believe that there is merit in an explicit inclusion of the two principles that we suggest in the list of the regulatory principles common to both the PRA and the FCA. The debate has also shown the high level of concern about this whole area. The detail of the Minister’s response shows that he is alive to that level of concern. I expect that we will return to this matter on Report. In the mean time, I beg leave to withdraw the amendment.

Amendment 106A withdrawn.

Amendment 106B

Moved by

106B: Clause 5, page 17, line 2, at end insert “and the requirement that all asset managers shall disclose the nature of their commitment to the stewardship code or explain their alternative investment strategy”

Amendment 106B stands in my name and that of my noble friend Lord Eatwell. Oddly, there is no mention of the Financial Reporting Council in the Bill, despite its central role in the regulation of financial services. Equally absent is the FRC’s stewardship code, although it is clearly relevant to the objectives of both the PRA and the FCA. In the case of the stewardship code or the UK corporate governance code—also strangely lacking; perhaps it is my fault that it is not mentioned in the amendment—the Bill’s drafters may say that that absence is due to the fact that the precise name of the codes may change over time. I think that it was the Cadbury code, then the combined code, then something else, and now it is the governance code. I understand that the drafters may say that they do not want the precise wording of the stewardship code or the corporate governance code included, but I am sure that it is not beyond the wit of drafters to include something such as, “such codes agreed by the FRC as are currently in force”.

The issue of codes and their enforcement is central to the behaviour, standards and culture that we expect of the industry. The Minister has already rejected a code of conduct, but these are separate to that. Since 2010, there has been reasonable progress with the introduction of the stewardship code. About 230 asset managers, asset owners and service providers signed up in the first 18 months of its existence. The stewardship code is addressed to firms which manage assets on behalf of institutional shareholders, although perhaps it was not top of the thoughts of those fixing the LIBOR rate: people who were dicing with money which belonged to others.

Amendment 106B would ensure that the Bill gives regulators a proper, clear mandate to strengthen the stewardship code if needed and, importantly, sufficient teeth to ensure that it is adhered to so that culture changes can happen. In another place, Mark Hoban noted that the FSA supports the FRC’s stewardship code through mandatory requirements on asset managers either to comply with the stewardship code or explain their alternative investment strategy. He said that such powers would transfer to the FCA, but that power is not laid down in the Bill. Surely we need to ensure, via the stewardship code and its monitoring by the FCA, that asset managers must demonstrate their commitment to the code. It needs the force of law to make it happen, because that has clearly not been the case so far.

I turn to the other two amendments in the group, which deal with co-ordination between the FCA and the Financial Reporting Council. Amendment 121B is intended to ensure such co-ordination and Amendment 121C would require a memorandum of understanding. I hope that we do not go back to the briefing from the Box that says, “Say no to memorandums of understanding”. It makes no sense for the Bill to ignore the Financial Reporting Council. It is the UK’s independent regulator to promote high-quality corporate governance. Again, in the other place, Mark Hoban emphasised that the matters of stewardship and corporate behaviour are predominantly the responsibility of the FRC via its codes and the Bill should be about corporate behaviour. Thus, we require to see co-operation—indeed, an MoU— between those two parts of the new regulatory architecture. The two codes need the impetus of an FRC requirement to comply or explain if they are not just to be left on someone’s shelf.

Even more, as I mentioned earlier, we need to develop a new code of conduct for bankers. As Ed Miliband has said, if we are serious about banking regaining the status of the professions, we need a code that goes across the industry. The FRC deals with codes. It is the regulator for accountancy and actuarial professions, including itself operating independent disciplinary arrangements for public interest cases. It oversees the regulatory activities of the professional accountancy bodies and the actuarial profession, including bodies such as the ICAEW, which authorise regulated members to carry out company audits. The FRC thus oversees the disciplinary systems of the regulated persons working within the financial sector. Close co-operation between the FCA and the FRC is essential to strengthen the standards expected of professionals and their organisations and in the monitoring and disciplining of those professionals or their companies.

The FCA will rightly be able to disqualify but also to discipline. However, the first-line discipline lies mostly with the recognised professional bodies and, after that, with the FRC, which can deal with accountants and their firms, auditors and their firms and actuaries—although not their firms. I know that the FRC is already thinking about an MoU with the FCA, in part to ensure that any disciplinary action is co-ordinated and that auditors and actuaries are not subject to double jeopardy or—my fear—semi-jeopardy. Discipline is one area where FRC-FCA working is needed, but there are other aspects. As the noble Baroness, Lady Noakes, who is not in her place at the moment, noted on 3 July, new Section 9Q allows the FRC to make recommendations to the whole world. Although not specified in the Bill, the Explanatory Notes to new Section 9Q cite the FRC as an example, as the Minister said previously in Committee specifically in relation to corporate governance standards.

The FRC also sets standards for monitors and oversees the work of auditors. It is notable that none of the recent failures was found by auditors, which begs some pretty big questions. The present Governor of the Bank of England has identified changes needed to the auditing profession and role, with less window-dressing of accounts, especially in disguising leverage. The Joint Committee suggested that the Treasury should consider whether a duty should be placed on auditors to draw certain risks to the attention of regulators. HMT has responded that the FCA would have powers to make rules imposing duties on auditors, but such rules and their monitoring and enforcement largely reside with the FRC—another reason for the need for the clarity of an MoU as to who does what.

As a standard-setter, the FRC’s links with European bodies are key, but many of them will be led by the FCA or the PRA, which again means that the working relationship between the FRC and its voice in Brussels needs to be clear, as well as transparent via an MoU. I will take one moment to tell you a story about the need for that to be joined up. When I was working with the FRC, I was also working with the Insolvency Service’s Insolvency Practices Council. I was very aware that certain banks were putting people into debt management systems rather than into an independent voluntary agreement. The reason was that if it was an IVA, it could not be carried forward as a debt, it had to be written out of the bank’s accounts. Putting them into a debt management scheme made what were quite toxic loans appear normal. Having heard about this through the Insolvency Practices Council, I went to the FRC and said, “Your rules do not seem to allow for that”. The FRC said, “Our rules are absolutely fine on that, but they are enforced by the FSA”. So I wandered across to my old friends at the FSA and explained all this. I said that the rules said they should not be shown as good debts when they were actually bad debts. The FSA looked it over and said, “Ah, that’s very interesting, but it’s a credit issue. Her Majesty’s Treasury deals with that”. So I went back to the lovely lady who I worked with in the Treasury and told her the story. She said, “That’s very interesting, but the rules for auditing are made by the FRC. Why don’t you go there?”. That is simply an example of no one taking responsibility. We need an MoU to be absolutely clear who will deal with it when something needs doing.

The financial services sector is made up of people—that is basically all it is, along with some clever computing powers. They are professionals, trained to standards set by professional bodies, working to technical standards agreed by the FRC, abiding by ethical codes adopted by their professional bodies which are overseen by the FRC. If we are to make any progress in improving behaviour and standards, the FRC will be an integral part of that. It is a body that must be recognised in the Bill, and it must be under a mutual obligation to work closely with the FCA. I beg to move.

My Lords, I am sorry to say that this is one of those groups of amendments where I do not think that the Committee’s time will be well served. I have repeatedly made public and private offers to the opposition Front Bench to talk to us in the Bill team at any time about any of their amendments. Not once in the process of this—now long—Committee stage, or before it, have the Opposition taken up the offer of talks to discuss amendments.

If the noble Baroness will let me, I will complete my sentence before letting her in. She herself began by saying that these amendments are defective, and that is indeed the case. As I shall explain, however, they also do not reflect one or two of the simple facts of the situation. Although there is, of course, a proper concern in this area, if the party opposite were prepared to discuss those facts, we might not be talking about some of these amendments in the way that we are.

My Lords, that offer has not come to me. I was at one meeting with the Bill group and asked whether I had access to the Bill team, but I have yet to be given its e-mail address. I had an e-mail from the team about one of our amendments earlier this week, and I have written to it on another issue. I have not had repeated offers. I have talked to the FRC about this amendment, and it knows all about it. I am therefore slightly surprised by the Minister’s comment.

My Lords, I believe that I made the offer in the last Committee session, on the Floor of the House. Hansard will record when I last made the offer in this Committee. I cannot speak to every member of the opposition Front-Bench team but I have made the offer repeatedly to the noble Lord, Lord Eatwell. Indeed, I know that the Bill team has made quite clear to the opposition research team how it can be reached. I make the offer again because I think that there are many things around which we could clear the ground, and that would be helpful for everybody. I can quite understand that there may be issues here, but there are many interested parties who put forward all sorts of good ideas for amendments which, on scrutiny, might not be reflective of the situation as it exists.

Let me help the noble Baroness with a couple of the facts of the situation. First, the FCA has already brought in a rule with which she may be familiar but to which she did not allude: rule 2.2.3 of the current Conduct of Business Sourcebook. This requires UK-authorised asset managers to put statements of commitment to the stewardship code on their websites, or—if an asset manager does not commit to the code—to provide its alternative investment strategy there. I would of course expect the FCA to carry forward this important rule in its own rule book. So I would suggest to the Committee that the suggestions underpinning the discussion we have just had—the contentions around the lack of joined-upness—are not reflected in the way in which the FCA Conduct of Business Sourcebook already explicitly refers to the stewardship code.

I agree with the noble Baroness completely about the need for an MoU. However, what she does not do in her speech this evening is to recognise that the FSA already has an MoU with the FRC. I believe that it covers all the relevant matters. We have discussed the subject of MoUs before. The Bill provides explicitly only for MoUs between the key players in the regulatory system: the Bank of England, the FCA, the PRA and the Treasury. We have discussed why that should be. That does not mean that there will not be—and are not already—MoUs between the new regulators and other bodies; we have talked about the OFT, and there is already an existing MoU with the FRC.

So I understand where the noble Baroness is coming from in this group of amendments. I believe that the matters are already properly accommodated within the Bill. I wish that we could have had a discussion about this outside the Committee, but I am glad to have now got that on the record. I would ask the noble Baroness to withdraw her amendment.

My Lords, it would not be very satisfactory not to consider such an important issue in Committee. Concern about it is shared not just by the FRC but by the ICAEW, which last night again expressed its support and its belief that the issue is important. As the Minister will know, there are vital and urgent requirements to improve client asset audits. Those can be undertaken only by regulated professionals overseen by their recognised professional bodies, such as the ICAEW, and these are overseen by the FRC rather than the FSA. So this is key stuff. This is not—this will sound awful but I will say it—“a little discussion with the Baroness, who does not really understand it but can be well briefed outside this House”. I think that that was the tone of the Minister’s comments. I am speaking on behalf of organisations such as the ICAEW, which feels very much that it has a key role to play, which it wants to play, in the regulation of this industry. We know that we need improved rules and guidance about how auditors should work. We know that this is in the hands of professional bodies, not the FCA. If there is already an MoU with the FSA, it seems to me that there will be one with the FCA. So I do not think that writing it in legislation will cause a revolution, nice though that would be. There are important issues of discipline in the hands of ICAEW and other professional bodies overseen by the FRC. It would be inadequate for those to be free-floating and not in the Bill. For the moment, however, I beg leave to withdraw the amendment.

Amendment 106B withdrawn.

House resumed.

My Lords, the noble Lord, Lord Patel, has withdrawn his name from the following debate. I therefore suggest that there is now time for speakers other than my noble friends Lady Jolly and the Minister to speak for up to five minutes each.