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Financial Services Bill

Volume 739: debated on Wednesday 25 July 2012

Committee (5th Day)

Relevant document: 4th Report from the Delegated Powers Committee.

Clause 5 : The new Regulators

Amendment 117

Moved by

117: Clause 5, page 17, line 35, at end insert “, and

(e) the ease with which consumers can identify and obtain services which are appropriate to their needs and represent good value for money”

My Lords, the FCA’s objective to promote “effective competition” will deliver fully on the Government’s commitment to putting the consumer at the heart of the financial system only if there is no ambiguity about the FCA’s authority to tackle hidden and rip-off charges. The FCA can judge the effectiveness of competition only if it is explicitly required to take into account the ease with which consumers can identify and obtain services that are appropriate to their needs and represent good value for money. The amendment provides for that.

During the Commons Committee stage, the Financial Secretary argued that the FCA had,

“the powers and the mandate to intervene on matters of price and value for money, if the case to do so is made. It does not need bespoke powers”.—[Official Report, Commons, Financial Services Bill Committee, 1/3/12; col. 261.]

Unfortunately, experience does not reinforce such confidence. We are all too familiar with the industry’s willingness to mobilise its resources to mount a legal challenge to the regulator if ambiguity exists. When the OFT decided to investigate unauthorised overdraft charges, the banks challenged its ability to do so. Two years of uncertainty, nearly £1 million in legal fees and many other resources later for the OFT, the legal case eventually concluded with a ruling that the OFT could not assess the fairness of those charges. In respect of payment protection insurance, the banks put up a sustained legal fight before accepting that they had mis-sold a product to millions of people. The FCA ran up around £900,000 in legal fees when the industry asked for a judicial review into its judgment on PPI complaints. In the face of a powerful industry, the absence of bespoke powers may make the FCA reluctant to take action and could lead to successful challenges against the authority in the courts.

The FCA is not a price regulator but that must not be interpreted as a reluctance to act on charging structures. The FCA’s competition objective as drafted requires it to have regard to innovation, ease of entry to market, ease with which consumers can change providers and the consumers’ need for information to make an informed choice. As is so well documented, so many consumers struggle to process the information provided and there is a danger of too much reliance on disclosure and informed choice to protect the consumer, given the systemic imbalance in knowledge and understanding between consumer and provider—a view shared in Professor Kay’s recent report. Similarly, the financial needs of most people are probably pretty simple but the industry often sells the more complex products because they attract higher charges. This is not an argument against innovation but a recognition that more complex products give rise to the need to ensure that they represent good value for money.

The FCA’s authority will be strengthened by such an explicit reference in its competition objective. The public’s loss of trust following the litany of product mis-selling has to be addressed. Just look at some of those products. “Behind-the-scenes” prices reduce direct price competition as apparently low “headline” prices mask the true costs once ancillary charges, such as for unauthorised overdrafts or rejected transitions and default charges, are accounted for. Consumers need to be confident that once they have entered into a contract they will not be subject to any unexpected or nasty surprises. Which? recently published research which showed that banks’ fee structures are so complicated that even a maths PhD student found it virtually impossible to compare charges between banks and to calculate how much a bank charges for using an unauthorised overdraft. Some particularly toxic forms of payment protection insurance paid commission rates of 87% of the premium to the bank that sold the policy. That means that if a consumer pays out £10,000 on a PPI policy, £8,700 goes back to the bank in commission.

Some consumers who took out an equity release plan at the turn of the century now face substantial early repayment charges amounting to 25% of the outstanding loan. On an equity release loan of £200,000, the consumer could now face early repayment charges of over £50,000. More recently, in the sale of products to protect small firms taking out loans against rising interest rates, the FSA found a lack of clarity about the cost of stopping a product, failure to check whether a consumer understood the risk, and selling based on personal rewards rather than on the needs of those businesses. Time and time again we see products sold to consumers that are not value for money, do not meet their needs and take advantage of their lack of understanding.

Furthermore, consumer credit regulation is to transfer to the FCA, affecting a market for consumer and small business credit of about £270 billion, where vulnerability to high charges is a significant issue. The FCA’s competition objective will, I understand, apply to consumer credit products, which is another compelling reason for placing a requirement on the FCA to have regard to value for money.

Opacity and complexity in the pensions and savings market results in excessive charges, fuelled by the increasing subcontracting of investment activity to a lengthy chain of agents. Each has access to more information than the consumer, which helps them to maintain charges which deliver generous revenues for them and less real value to the customer. The recent plethora of reports on charges reiterates the evidence of a problem which we know has persisted for a long time and which the regulator has got to tackle.

The mathematics of an annual management charge is too complex for most savers. That charge is not a true statement of the total expenses ratio, and even that ratio excludes other hidden costs. As the noble Lord, Lord Turner, said in his City speech yesterday, there is far greater potential in retail services than in other sectors for producers to rip off customers. I beg to move.

My Lords, this is a very important amendment. It is important in its own right, but it also exposes what is fundamentally wrong with this Bill, which is that it is based on an economics model of the rationally informed consumer.

No one doubts that there are large numbers of rationally informed consumers out there, able to take optimal decisions, but a vast amount of research has been undertaken in recent years that shows that there are considerable numbers of consumers who are not best described as part of the rationally well informed model. Indeed, one can go further. I have seen research papers that show that even for what one might call brilliant consumers, the complexity of the instruments they are dealing with is so great that it would take them several years to do all the calculations required to make an informed decision. Therefore, what is wrong with this part of the Bill is its fundamental philosophy of the rationally informed consumer.

The other point to bear in mind is that the objective of the financial intermediaries that this applies to is not, in any sense, to be helpful to anybody. Their objective is to make money. What they are looking for are instruments, some of which are so complex—like CDOs, and so on—that you have to be a genius to understand what they amount to in the first place. There are several other examples of that that have got my head spinning.

What this leads us to is a matter that arose the last time that the Committee met and the subject of duty of care was raised. You will not find anything like that in this Bill or any of the philosophy behind it. What is required in the Bill is that everybody acting as a financial intermediary should be instructed that they have a duty of care. That duty of care should involve presenting information in a way that quite ordinary people can understand and pointing out the perils of all the mistakes that can be made.

I myself am not that rational a consumer in this regard. As for the idea that I would look at every bank and work out the optimal one that I should deal with, I take the view that there is more to life. If I end up paying rather more for any financial intermediation that I am involved with, I have to bear that cost because there are other things I want to do with my time. Then again, I am not badly off and I can afford to do that. But very poor consumers need something much more. I repeat that what needs to be in the Bill is the equivalent of a duty of care on the part of all financial intermediaries dealing with ordinary consumers and an acceptance of responsibility for what they are offering them.

My Lords, I support the purport of the amendment moved very effectively by the noble Baroness, Lady Drake, and supported entirely fairly by the noble Lord, Lord Peston. I confess that for 26 years I tried to deal with the British public’s legal problems as the legal eagle on the “Jimmy Young Show”. I suppose that I take a particular interest in the effect of legislation such as this on the ordinary consumer. There are a number of practices at large these days in what I call big business that leave the individual consumer way behind in terms of any fairness of dealing. The big battalions will call in aid lawyers, often paid on a conditional fee basis, and it is frankly terrifying if you are a small bloke and have a dispute with a large company. You will quickly be given the clear indication by the large company that if you do not buckle and pay up you will be crushed. I put that a little dramatically, but not much.

As it happens, I have been dealing with one of the large energy companies lately over a disputed electricity Bill. I have been astonished at the general tenor of the dealings and the way in which it so organises its affairs that if I were not an old fart of a lawyer I would easily have been overborne by its tactics and approach.

I am glad to see that my noble friend doubts that I am an old fart of a lawyer, but I am—55 years in the saddle and still riding.

I appreciate that the Minister has, at all stages along the way, tried to protect the Treasury, the FCA and so forth against all these vague and difficult notions of fairness. Indeed, he might like to clarify in summing up whether he thinks that the ill to which the amendment addresses itself could be healed by the integrity objective. The amendment is to the competition objective, but the integrity objective could enable the FCA to take account of the matters raised by the noble Baroness, Lady Drake, in order to improve things. But I seem to recollect from one of the amendments in my name and that of my colleagues that the Government think that the integrity objective is not about fairness: it is about the mechanics of the system, if I can put it that way. I have the same general misgiving as the noble Lord, Lord Peston, and many others in the House, that the Bill does not address issues of fundamental fairness that affect ordinary citizens. I shall be very interested if there is any consolation that my noble friend can give.

I support the amendment in the name of my noble friend Lady Drake. JK Galbraith said a number of years ago in one of his books that there is nothing about money that the ordinary person of reasonable intelligence and diligence cannot understand. That proposition has been turned on its head by the financial services industry over the past 20 years or so, and now not many of us can understand it. Somebody mentioned CDOs. The noble Lord, Lord Smith of Kelvin, as an accountant, asked me, “Do you know how many pages are in an ordinary CDO, John? There are 350 pages”. Who can understand it? The ordinary person cannot understand it. Worse still, the people making it up cannot understand it. That is why we are in a financial crisis today. The core of this amendment is to rebalance the asymmetric relationship between the industry and the consumer. The Government have paid insufficient attention to that issue and it will come back and haunt the Government and haunt the political classes in the future if we do not pay attention to it and get it right.

I will give an example of my own. In 2005—the year of the general election, which I won in my constituency—I crashed my car, so I decided that I needed another one. I went into my then bank, Barclays, and asked for a loan. Although the counter staff were very courteous and offered me the loan, they also said, “Sir, we advise you to take out PPI—payment protection insurance”. I asked what the payment protection insurance was for. “Well”, they said, “if you become unemployed this could be paid out”. It was the Victoria branch. I pointed over to the Houses of Parliament and said, “Look, I’m in there for the next five years, whether I turn up or not, so my money is secure until the next general election. I do not need PPI. Thank you, sir”. I then received eight letters pointing out the folly of my mistake in not taking PPI. The lesson I learnt from that is that the industry knew that there was a problem. It knew that this was unsuitable for certain consumers, but there were good returns, so it kept on going.

Subsequently, the chairman of one of the major banks spoke to me confidentially, shook his head in amazement and anger and said, “With any product line which is getting a profit of more than 80%, surely someone should have asked the question: ‘Is this a product which is operating in a fair market? Is it doing justice to the people who are buying the product?’”. The answer, he said, was no, but the industry kept going. I was chairman of the Treasury Committee at the time. We referred it to the Competition Commission and then the OFT in 2005 and yet, three years later, the industry was still trying to sell it. I know from talking to some non-executives that executives were even bullying or trying to bully non-executives to maintain the product line—the combined rage of the consumers, the politicians and the regulators meant nothing to them.

This is all about imbalance, asymmetry of knowledge and value for money. The Government need to see this amendment as iconic in terms of that relationship and ensure that, before we get this on to the statute book, the consumer can at least start to get a fair deal.

My Lords, I very much support the spirit of this amendment; I will let my noble friend on the Front Bench answer for the technicalities. We have got ourselves into a position in which people do not trust the financial system and it is immensely damaging for us. It means that people cannot save in a sensible way; they do not want to expose their savings to what they believe to be a bad and unsafe part of the financial system, and with good reason. When one looks at what the banks have been up to, one just thinks that they have lost their sense of judgment as to what is right and proper and how things work in the long term. The things that have been going on at HSBC and Barclays pensions mis-selling, the problems with PPI and these extraordinary financial products which were sold to small businesses, all speak of a complete lack of interest in being trusted.

We must get back to a state where the financial system enjoys a proper level of trust. Otherwise, when people come to choose where to save their money, they will divert it into the likes of houses and push house prices ever further up. They will be tempted into deeply unsuitable investments because they cannot trust what is going on in the mainstream. That is all deeply undesirable. Getting back to us trusting them by the banks’ own actions will be difficult; they have blotted their copybook to such an extent. We are relying on the FCA to be an effective regulator and ensure that, if there are problems in the works of the likes of PPI, they do not go on for years, so that when they burst they are enormous headline issues affecting millions of people, but are picked up early and the banks are politely requested to mend their ways, perhaps without most of us knowing what is going on.

We need a regulator that is quicker and more effective at picking such things up early if we are to restore confidence in the system. We know that there are problems out there which have not been dealt with. There are pension funds charging 4% a year to people investing in them for managing the funds. That is a continuing iniquity which needs to be dealt with. The amendment is aimed squarely at such practice: at ensuring that what is offered to consumers, when one takes all the hidden charges into account, is fair and good value for money and that people are being invited to take proper decisions.

This is a valuable amendment in its spirit. If my noble friend can convince me that such provision is already in the Bill, I shall be delighted.

I strongly support the amendment moved by my noble friend Lady Drake. As usual, my noble friend Lord Peston spoke about the average consumer and the complexity of the Bill. I doubt that an average consumer will ever read the Bill. This is not an ordinary Bill. I do not pretend that the FSA was perfect, but we are now to have an FCA. I think it is in Clause 5—although that itself is not easy to find—but then it is in proposed new Section 1E. You and I may find that easy—I do not, because this is the most complex Bill I have read. I apologise, because over five years I introduced many complex Finance Bills—two a year on average—so I know about complex Bills and have dealt with them both in government and in opposition, but I find this one incredible.

The Bill is about the competition objective and helping the consumer. The amendment is modest. If the noble Lord, Lord Sassoon, is in a good mood—I see that he is not; he is shaking his head—he should look at the amendment to see whether it would do any harm to the consumer. I should have thought that it might help them. The consumer will not read it, but the new FCA would have to read it and be responsible for it. First, the noble Lord must be in favour of good value for money—he is nodding. The last phrase of the amendment is that it should be “good value for money”. It deals with,

“the ease with which consumers can identify”.

That cannot do any harm to the Bill and the idea of helping consumers. Even if the noble Lord is in a bad mood today, as he indicated, I hope that he will see the amendment not in principle but in fact. It is a very modest amendment asking for very little.

The noble Lord, Lord Sassoon, does not always answer my questions positively, but this one is simple. This is not my question but that of my noble friend Lady Drake in her excellent introduction to the amendment. Is the amendment going to do any harm to the Bill? Is it going to help the FCA to help the consumer? If the answer is yes, can the Minister say that he will at least examine the Bill, take the amendment away and look at it with a view to including it at Report? That is all I ask, and I am sure that that is what my noble friend Lady Drake asks. I hope that he feels in a better mood when he comes to reply.

My Lords, I also recognise the good intention of the noble Baroness, Lady Drake, in moving this amendment. However, I think that the FCA is best helped to help the consumer by having clear objectives and principles, or matters to which they must have regard in pursuing the objectives. I worry that this is becoming overcomplicated.

I also suggest that new Section 1E(2)(a), which states that the FCA must have regard to,

“the needs of different consumers who use or may use those services, including their need for information that enables them to make informed choices”,

overlaps substantially with the effect of the amendment. Furthermore, I am not sure whether it is a good idea to put in the Bill,

“services which are appropriate to their needs”,


“represent good value for money”.

Those two concepts are not defined and may be interpreted in very different ways by different consumers. Who is to say what represents good value for money? The important thing, which has been much too lacking in recent years, is that we should have complete transparency. However, I would like to hear the Minister’s view on this.

I would also like to ask him whether the words,

“The matters to which the FCA may have regard in considering the effectiveness of competition”,

mean that the FCA is prohibited from having regard to other matters, or is this intended to restrict—or to broaden—the matters to which the FCA can have regard? If the provision is intended to broaden the matters, surely the best way is to leave it as simple as possible so that the FCA can use its own judgment in deciding to which matters it should have regard.

My Lords, the noble Baroness, Lady Drake, has made a powerful case for her amendment. I think that it is widely acknowledged that the needs of consumers require greater emphasis in the financial services industry as it moves forward, and I believe that that is why the consumer is being placed at the heart of the FCA. However, I am puzzled that the noble Baroness, Lady Drake, has chosen to put her amendment within the competition objective for the FCA. It seems to me that what she was talking about is quintessentially part of the consumer protection objective, which is in new Section 1C. A number of things are already listed within that consumer protection objective, including,

“the general principle that those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate having regard to the degree of risk involved … and the capabilities of the consumers in question”.

It seems to me that if proper regard was paid to that in the development of the FCA’s policies, that would meet almost all of what the noble Baroness, Lady Drake, seeks to address in her amendment.

My Lords, I support my noble friend’s amendment and much of what has been said about it. I would also like to counter what the noble Lord, Lord Flight, said because the amendment goes much further than providing information to consumers.

Rather than the noble Lord remain in rather dangerous flight, I believe he means the noble Viscount, Lord Trenchard, does he not?

My Lords, I do. I was looking at the Marshalled List and saw the name of the noble Lord, Lord Flight, to the next amendment. I beg the pardon of the noble Viscount, Lord Trenchard.

When faced with issues of consumer care and consumer protection, the FSA, in its early days and for much of its time, tended to resort to stipulating the information that the consumer needed to be given. By the time that had gone through the corporate lawyers of the various banks and insurance companies, it amounted to five, six or sometimes 25 pages of close 10-point type, which was even more difficult for the average consumer to understand than it is for the average Member of the House of Lords to understand this Bill.

That is a very passive form of consumer protection and it is a very passive definition of customer care. The amendment attempts to put an obligation on the FCA to ensure that companies operating in this sector operate positive customer care, not simply passive provision of information which a large number of consumers cannot understand. To answer the noble Baroness, Lady Noakes, one reason why I believe that it is appropriate for it to be in the competition area is that when the FCA looks at where competition is succeeding, one of the measures of the proper outcome of competition that it considers is the way in which companies compete, as regards customer care, for their consumers.

Competition is not an end in itself. Competition policy and the enforcement of competition should protect and enhance benefits to consumers. One of those benefits is that the truly competitive company looks after its customers in a positive way and competes with its competitors in that regard. The passive provision of information is not customer care. This clause goes a significant way towards ensuring that customer care is seen as an objective both of consumer protection and of competition policy.

My Lords, along with most other speakers, I support the amendment moved by my noble friend Lady Drake. As I have argued in Committee before, it is no good having a competitive market for banking and insurance—not that we have one—if consumers effectively cannot enter the market, if they cannot identify what they need and if they cannot get value for money. As we have heard, all sorts of people find it challenging to know what services are suitable for them. How else could HSBC have sold bonds designed to be held for five and more years to 2,500 with an average age of 83? It is a little like people trying to sell PPI to my noble friend Lord McFall, or Barclay, HSBC, Lloyds and RBS mis-selling interest rate swaps to 28,000 businesses.

My hope is that Amendment 117 will give the FCA an explicit mandate to put a stop to unfair overdraft charges, excessive fees and complicated price structures, all of which hinder competition, which is probably why I think the amendment belongs within this area. The FCA has to be able to tackle hidden charges if it is to promote effective competition, given that, as we have heard, individual consumers simply cannot do this for themselves. If we, as consumers, buy a theatre or an airline ticket, there is a pernicious little booking fee—at least we can see it. I have just had to pay £2 on a £10 ticket to go to the Noel Coward Theatre, which seems a bit high. At least we can see such a charge and we can choose whether to pay it or not to go to the theatre, but that is not the case with bank charges.

A recent Which? survey found that 60% of those polled said that they paid what they felt to be an unfair bank charge and half paid a charge which they thought was disproportionate to whatever benefit they received. It is not clear, from the current language in the Bill, that the FCA will have the necessary mandate to tackle hidden charges. I know—and my noble friend Lady Drake quoted it earlier—that the Financial Secretary in the other place said that the FCA had,

“the powers and the mandate to intervene on matters of price and value for money”.—[Official Report, Commons Financial Services Bill Committee, 1/3/12; col. 261.]

The Financial Secretary argued that the FCA does not need these bespoke powers, given that it can take action under the competition and consumer protection objective. However, a Queen’s Counsel advised Which? that the current wording of the objective could allow the industry to challenge the FCA’s mandate to tackle hidden charges, which could lead to a repeat of those failed and expensive test cases to which my noble friend referred. Any such uncertainty would make the FCA very risk-averse; it would be reluctant to take action for fear of being challenged. Unless the FCA has a really clear, unambiguous mandate to tackle hidden charges, I can share its reluctance to be at risk of legal challenge from the industry. Therefore the Bill must give this power to the FCA; it is absolutely key to promoting competition. At present there is insufficient responsibility on firms to ensure that products are appropriate for the consumer in terms of meeting their needs, accessibility and reasonable value for money, as Consumer Focus argued to the Joint Committee. The Council of Mortgage Lenders said that the regulator,

“should have an appropriate degree of protection for consumers and should reflect a differential approach not only between market and retail consumers, but within the retail market itself”.

The amendment is simple; and can only promote confidence in the industry. Who, after all, could argue with appropriate services and value for money? Not even, I think, the Minister. We need to get back to trusting the banks and the pension providers, as the noble Lord, Lord Lucas, said. Therefore we trust that the Minister will accept Amendment 117. In the words of my noble friend Lord Barnett, it can do no harm; it can do good.

My Lords, this has been an interesting and wide-ranging debate to kick off today’s Committee session. I will deal first with the amendment on its own terms and then pick up some of the wider important points, although perhaps they may not be directly relevant to the key reason why I cannot accept it.

As we have heard, this amendment seeks to add a new have-regard to the FCA’s competition objective. I know that it has been promoted by the consumer group Which?. As we have heard, it drives at the same issues as a number of amendments discussed in another place—namely, that the FCA should have, in the words of Which?—which were quoted by the noble Baroness, Lady Hayter of Kentish Town—an explicit mandate to,

“put a stop to unfair overdraft charges, excessive fees and complicated pricing structures where they hinder competition”.

I agree, of course, with what lies behind this amendment. Consumers should have access to the right financial services and products; they should be able to buy in the confidence that they know what they are getting and what they are paying for. That must be clear and transparent; there ought to be no place in financial services for a culture where consumers are kept in the dark.

However, let me put on the record what the Government have said a number of times before—both in publications and during discussions in another place—which is that if the FCA finds problems in pricing, charging or in the ability of the consumer to obtain value for money that cause it concern, it will have the mandate and the powers to act. It has the mandate both under the effective competition and the consumer protection objectives, a point that has been made by a number of my noble friends and other noble Lords in this debate. It can apply its extensive regulatory toolkit in pursuit of price intervention, should it think it appropriate to do so. The FCA does not need new powers nor do its objectives need expanding. We simply do not agree with Which?’s legal analysis. Fundamentally, it is a narrow legal point.

Having said that, a range of important issues have been raised which I will spend a minute or two addressing. The noble Baroness, Lady Drake, in introducing this amendment, talked among other things about the OFT bank charges case. It is important that the Committee understands that the powers available to the FCA are far broader than those available to the OFT at the time of the bank charges case. The OFT was in fact relying on the Unfair Terms in Consumer Contract Regulations. I suggest it is incorrect to draw a line somehow between what the OFT was or was not able to do and what the FCA will be able to do, because the FCA has much wider powers.

In terms of what the FSA can do now and what the FCA might do in future, first, as we discussed in Committee on previous occasions, the FCA will have additional product intervention powers. The noble Baroness I think gave an example of a low headline price to attract new customers that is then offset by high ancillary charges. That is a very good example—and one that I might have given if challenged—of precisely the sort of situation where the FCA might well intervene and where the FSA has already begun to take a similar approach, as set out for example in its consultation paper on the mortgage market review. I do not think there should be anything between us there.

Looking more widely, I think the noble Baroness said at one point that the FCA “must” be required to have regard to ease of access to value for money. However, the amendment does not achieve this—it simply adds to the list of matters to which the FCA may have regard. Linked to that, I can assure my noble friend Lord Trenchard that the have-regards listed in this new Section 1E are of course not exhaustive. The FCA is not precluded from taking other matters into account in assessing the effectiveness of competition. That takes me to the point made by the noble Lord, Lord Barnett, where we would get into difficulties. The easiest thing would be to say, “I agree with the sentiment behind this, let’s put it in”. One of the arguments in favour of putting it in is that the FCA would be vulnerable to legal challenge if it is left out. However, as I have clearly stated, our legal analysis is simply different—I have not seen what lies behind Which?’s legal analysis but we disagree on that. If we were to go down the line of putting in a longer list of have-regards, we get more and more into the difficulty of suggesting somehow that the list is exhaustive and that the FCA cannot do things that are left off the list. Potentially, the more we add to the list, we risk getting into legal difficulties that we are not in at the moment, because the FCA will have all the legal powers it needs. The noble Lord, Lord Barnett, put it as a reasonable challenge, as he always does to me, but I think there is a danger in going down the route of this amendment.

I seek to help my noble friend. Regarding the language of new Section 1E(2), where it states:

“The matters to which the FCA may have regard”—

there is no danger of the kind he suggested in the amendment of the noble Lord, Lord Barnett. This is because there is the crucial word “include” at the end of the preamble to the new section, which states:

“The matters to which the FCA may have regard … include”,

paragraphs (a), (b), (c) and (d). That is a clear indication that this is non-exhaustive. One could therefore add a number of further provisions without endangering the ability to think more widely.

My Lords, my clear legal advice is that the FCA does not require this additional “have regard” and that there is, notwithstanding the wording to which my noble friend draws attention, a danger that if the list becomes longer and suggestive that it is intended to be exhaustive, that may give rise to legal challenge. That is the advice that I have received from the best legal advisers that the Government have to hand and it is all that I can say on the matter.

I want to wrap up this discussion by going back to some of the things that noble Lords have drawn attention to in new Section 1C on the consumer protection objective. The noble Lord, Lord Peston, for example, is of course quite right to say that some or the majority of consumers of financial services are not “rationally well informed,” to use his term. This is precisely why, among other things, new Section 1C(2)(b) refers to,

“the differing degrees of experience and expertise that different consumers may have”.

This is also why, among other things, we have discussed the important work of the Money Advice Service in improving the ability of consumers to make informed choices, which we will come back to. I therefore agree with the noble Lord’s starting position, but I suggest that the way to deal with it is not through this amendment. I could point to a number of the other provisions in the consumer protection objective which go to the heart of many of the concerns raised in this debate. Coming back to my fundamental analysis that the legal analysis on which this is based is, in the view of the Government, flawed, I ask the noble Baroness to withdraw her amendment.

I am full of despair because the noble Lord seems to have missed the whole point of what we are discussing. He keeps going back to technicalities, which is exactly the wrong way to view this matter. I think it was the noble Lord, Lord Lucas, who focused on why this Bill is a wasted opportunity, particularly in the way that it is being handled by Ministers. The real disaster that has hit this country is the destruction of the reputation of the financial intermediary sector. We in your Lordships’ House have a chance to do something about that. The way to do this is not to talk about technicalities and to say, “My lawyers say this, and your lawyers say that”. The way to do it is to place in the Bill a particular amendment—I do not really care where it is put. I will not object if the Minister does not like the wording as long as he makes the wording better. We have a chance to save the reputation of an industry which matters enormously to this country.

I find it very upsetting that in the last opinion poll I saw, the financial intermediaries had fallen nearly as low as politicians in terms of their public reputation—we can live with that because in some sense we do not matter. This is enormously important and I implore the Minister to listen to what his noble friend Lord Lucas said. We have a chance here to make a contribution to improve and, indeed, eventually save the reputation of a vitally important industry. This Bill simply does not do that, but it could. That is why I call it a wasted opportunity.

My Lords, we are in Committee and discussing a very specific amendment. I therefore make absolutely no apology to the noble Lord, Lord Peston, who raises extremely important Second Reading-type debating points.

I will not give away again to the noble Lord for a minute, if he will forgive me. We are discussing a very specific amendment. I have explained why I believe it is defective. The sentiment underlying that is completely shared by the Government: we do not believe it is necessary. The noble Lord raised matters which, although somewhat different, are also related to the capabilities of consumers. I have attempted to address a very serious point by pointing out that his concern will be at the heart, right at the centre, of the new regulatory body’s objective and thinking.

When it comes to his new point, which is not the one I was addressing before, about the standing of the industry, again, I completely agree with him. However, we are now talking about a regulatory structure. The Joint Committee of both Houses has been set up and will look very quickly at some of the wider questions of integrity and standards in the industry. This morning, I am trying to focus on the specific matter of this amendment.

My Lords, I find it almost impossible to cope with the way in which the Committee stage of this Bill has been handled. It is completely different to any other Bill which I have taken part in. My point was not a Second Reading point. It was germane to this specific amendment, to what lies behind it, and to the philosophy of it. The Minister’s absolute refusal to even say, “Some good points have been made and I would like to go away and think about them some more”, is what annoys me about this Committee. My experience with the Ministers that I have usually dealt is that when a good point has been made, they always say, “I will go away and think about it some more”, without making any promises. However, the noble Lord, Lord Sassoon, never says anything like that. I have not heard him once in five days suggest that there is anything wrong with this Bill, or that he would like to think again. There comes a point when one has to say that, in order that people know that their Lordships have rather high standards.

Does the noble Lord, Lord Peston, agree that the Government came forward with a package of very substantial amendments that have already been discussed in Committee? I refer the noble Lord to the number of government amendments that have already been laid and debated, and to the number of times in Committee when I have indeed said that I will look at things or have made concessions. I do not accept for one minute his statement about the attitude with which I have come to the Committee.

Can I suggest that the noble Lord does not get so het up? There are issues and principles here, and we want to tie them down. Looking at Amendment 117, if I am correct, it is for the FCA to include,

“the ease with which consumers can identify and obtain services which are appropriate to their needs and represent good value for money”.

This goes to the heart of consumer interest. Given the Minister’s position—and let us get rid of the legalese jargon—does he think that this Bill, in this area or elsewhere, ensures that the type of scandals which we have seen going on for years and years without being addressed will be nipped in the bud by the new powers? Will we see the FCA step in straightaway, without prolonged pain for both the industry and consumers? That is what is behind the amendment and the points put by Members.

My Lords, all I can usefully say is that while I believe that this amendment is well meant, it is based on a legal construction that the Government do not accept. The FCA has all the powers that it needs and there are some dangers in putting this amendment in. That is what we are discussing.

My Lords, perhaps I might respond to some of the issues that have arisen in the debate and in the reply from the noble Lord, Lord Sassoon. The Minister is arguing that the FCA has a sufficient mandate through the competition and consumer objectives, as drafted, to tackle these matters. My problem is that I do not share that confidence in the absence of the amendment to the competition objective that I seek. I accept his point that the FCA’s powers are much broader than those of the OFT, but with the bank charges case I was trying to illustrate the disposition of the industry to mobilise quite effectively if there is ambiguity in the statutory or regulated provisions. Rather than arguing whose legal advice is better, I was seeking simply to nail this issue by saying clearly that effective competition means that consumers have to be able to identify whether services are appropriate to their needs and represent good value for money. The lawyers could then argue as much as they like, but that provision of what effective competition embraces would be laid out in the Bill.

The Minister made too much of my use of “must” in my speech, rather than “may” as it is in the Bill. I am seeking not to challenge the word “may” but to establish with clarity that competition cannot be effective without it being value for money for the consumer. My amendment does not seek to establish a long list but it seeks to give clarity on a very important issue, which goes to the heart of what effective competition is. I think that 20 million people out there are with me, based on their personal experiences of the financial services sector in recent times.

In response to the noble Baroness, Lady Noakes, in my own defence I have tabled amendments to both the consumer and competition objectives. My noble friend Lord Whitty very ably answered the question in part. However, I am seeking an amendment to the competition objective because on this occasion, at the risk of repetition, I am trying to give clarity to the definition of effective competition in terms of the matters that the FCA has to have regard to which, I reiterate, is the ability of consumers to identify what is appropriate to their needs and represents good value. At the heart of my argument is that the FCA cannot judge effective competition unless it has regard to those matters. I feel they are so fundamental to a judgment of effective competition that they are worthy of being spelt out in the Bill as a matter to which the FCA may have regard.

On the market integrity point, there is consistency in my amendment in terms of what I am arguing in respect of both market integrity and the competition objective. My argument would be that a key characteristic of well functioning markets is that they can provide consumers with products and services having value for money. The wording of the market integrity clause does not address or mitigate my concern, hence the amendment I have tabled.

There is a series of recent reports—on charges, the FSA and Michael Johnson—and in the Kay review, a report that the Government commissioned, there is a wonderful quote. It says it so beautifully:

“Regulatory philosophy influenced by the efficient market hypothesis has placed undue reliance on information disclosure as a response to divergences in knowledge and incentives”.

The chair of the FSA made a powerful speech yesterday in the City and the Law Commission is today putting forward its own proposals on rip-off charges, so I am not alone in expressing these concerns. I agree wholeheartedly with the noble Lord, Lord Lucas, that the series of mis-selling scandals has now reached such a level that there is a danger of there being so much cynicism out there that people do not expect anything different from the financial sector anymore, and that the reputation of the sector and the City will become almost irretrievable. There is an element of enlightened self-interest for the sector in supporting this amendment, in that sense.

The Minister referred frequently to Which?. Openly and honestly, I come with form in terms of arguing for the consumer interest and I do not feel apologetic if I deployed some of the Which? arguments. I deploy arguments from many sources, so I do not feel defensive on that point. The consumer voice in this country is not particularly strong at the moment. However, I hear what the Minister says. We will probably return to this matter on Report and I hope that he will reflect on the points made in the arguments because millions of people will not understand why the opportunity is not taken in this Bill to address, in the Bill rather than by the implication of other powers or legal advice, a fundamental issue of what effective competition looks like for the consumer. On that basis, I beg leave—

Before the noble Baroness withdraws her amendment, I wonder if I might take the opportunity to make a couple of points to my noble friend on the Front Bench. He has been saying that his lawyers are better than theirs, which I of course accept, but it really is not a matter for either set of lawyers. It is for the lawyers that the FCA will have when it comes into existence to interpret this Bill. One problem with the FSA is that the limitations it imposed on itself as to the speed and determination with which it has pursued some of these other problems have resulted in them ending up much worse than they might have been.

It would help if my noble friend was prepared either to say now or to consider allowing me to give him an opportunity to say on Report that the sentiments expressed by this amendment—indeed, the particular courses of action envisaged by it—are ones that he would expect the FCA to undertake on the basis of the powers that it already has in the Bill and that he would expect it to act quickly, as the noble Lord, Lord Peston said, to nip things in the bud rather than waiting until it is absolutely sure that it has identified the exact nature of the problem. In other words, it should be able to take swift and pre-emptive action. If nothing else, under Pepper v Hart this would give the FCA’s lawyers some comfort when they come to interpret the Bill in future.

My Lords, I briefly draw my noble friend’s attention to a couple of things that I have already highlighted this morning. First, there are the additional product intervention powers that the FCA will have, as opposed to those which the FSA has had. Those go to the heart of his concerns, because we are certainly not giving those powers to the FCA, and it is not receiving them, without an intention to use them. Secondly, I drew attention to the consultation on the mortgage review, which indicates a developing line of thinking that goes precisely to his points. The evidence points in the direction that my noble friend is looking for.

My Lords, I had come to the point where I was reserving this for Report and begging leave to withdraw the amendment.

Amendment 117 withdrawn.

Amendments 117A and 117B not moved.

Amendment 118 has been retabled as Amendment 118AA.

Amendment 118A not moved.

Amendment 118AZA

Moved by

118AZA: Clause 5, page 17, line 35, at end insert—

“(3) Section 21 of the Financial Services and Markets Act 2000 (restrictions on financial promotion) is amended as follows.

(4) At the end of subsection (2) insert “or

(c) the content of the communication is for the purposes of a social investment.””

My Lords, this amendment takes us back to social impact investments. In moving Amendment 118AZA, I also very much support Amendment 121A in the name of my noble friend Lord Hodgson; it is also in mine. However, I know that he will speak eloquently to that amendment so I ask noble Lords to assume my support in the interests of the time pressures that we have today, and I will confine myself to speaking to the first amendment in this group.

Again in the interests of time, I will not go through the issues that define why social impact investment is so important and so beneficial, yet it currently feels very constrained. That has been done already, very eloquently, by my noble friends Lord Phillips and Lord Hodgson, both of whom are in their places here today, so I will talk within the narrower terms.

I want to make two points about social impact bonds, which are the primary form of social impact investment under general discussion. These bonds are, by definition, small. If the sector develops as it hopes, the range typically will be £1 million to £5 million. The bonds are small because they deal with very specific, local social problems, which might include building new social housing within a particular community or the resettlement of prisoners from a particular prison. That small size is key to understanding the regulatory environment in which these bonds need to live and thrive.

Secondly, qualified investors are not likely to provide a very large market for social investment bonds. Certainly the one that has been offered in Peterborough for prisoner resettlement is indeed funded by qualified investors, but that will be a less frequent occurrence. The real market for these bonds is people who live in the community and whose primary objective in purchasing the bonds is social good, with a financial return being secondary. That is the market that has to be reached if we are to develop this sector effectively.

That brings me to the problem that is addressed by this amendment, which is Clause 21 of FiSMA on the financial promotions order that sits underneath it. Under these rules a financial instrument cannot, in effect, be marketed except by an authorised person. Under the order there are a few exceptions but they do not apply at present to social impact investments. To become an authorised person requires going through a process that costs some £150,000. We have talked directly with the FSA and the FCA, with independent financial advisers and with others who do structuring, and there is a general consensus around that number. In a traditional investment, which might include a fund for £20 million, £30 million or £40 million, £150,000 is nothing. However, for a bond issue of £1 million, £2 million or £5 million, £150,000 is a very large amount of money and effectively makes it impossible to develop the instrument and market it to the general public. Therefore the rules as they stand make it impossible, in practical terms, for social impact bonds to actually be marketed to their primary would-be buyers, who are the general public.

That strikes all of us, I think, as a real flaw in this legislation and it has to be tackled. We have the irony that a charity could come to any Member of this House and say, “We have a very good cause. Please give us some money to fund this cause”—no problem with that at all. However, if that charity were to go to any of your Lordships and say, “We have a very good cause. Please give us some money and, no promises, but I will try to get you back your original investment and maybe even a small return on it”, that is handcuffs at dawn; it is actually breaking the law. That is an insane situation in which to be placed, but it is where we currently sit.

I say to the Government, to the Minister and even to the Bill team that, since the Government themselves are considering whether they should enter the field of promoting social impact bonds, I would hate to see members of the Civil Service finding themselves serving at Her Majesty’s pleasure as the consequence of having promoted these kinds of investments. It is an anomaly, and we seek to address it by this amendment. I will not pretend that the amendment is brilliantly crafted, but our goal is to get the Government to sort this problem out before the law of unintended consequences has a severe impact. This rule is already inhibiting the development of this market for no good purpose. It needs to be dealt with promptly, and I ask the Government to consider this issue seriously.

My Lords, I proposed Amendment 121A in this group. I am grateful to my noble friend Lady Kramer for her support. She has covered some of the ground that I wish to cover, and I will endeavour not to repeat the very powerful arguments that she has made. My amendment proposes inserting into the Bill a new clause with a further consumer protection objective, as stated in its subsection (a), in situations where consumers are,

“engaging in investment activity … to benefit society or the environment”,

so it comes at the problem in a slightly different way.

As some noble Lords will know, I have just completed a review of the Charities Act 2006. My terms of reference, given to me by the Government, were widely drawn. One of them stated:

“Measures to facilitate social investment or ‘mixed purpose’ investment by, and into, charities”.

My report, published a week ago, ran to 159 pages and contained 130 recommendations, a large number of which—15 or 20 or so—were concerned with social investment. I think that there is a great opportunity here, as my noble friend mentioned, and we are in danger of missing it.

So far my noble friend Lord Sassoon’s comments on this, no doubt written for him by the Treasury, are disappointing. As my noble friend Lady Kramer pointed out, we have this counterintuitive situation where you can give money but you cannot invest it. As long as you give it away and cannot possibly get it back, you are fine. However, you cannot say, “I will give you this money. I might lose it but I might get it back, and I might get it back with a small incremental return”, perhaps linked to gilts. You cannot do that, which must be counterintuitive. As the Government seek to develop social impact bonds—covering school exclusion, prisoner reoffending, getting people back into work—where charities and voluntary groups can do better than the state, which is therefore prepared to share some of the savings with these very effective voluntary groups, it must be sensible for us to try to find ways to facilitate the flow of money from the private sector into these sorts of schemes.

As we said in earlier debates, this idea is at an early stage, and there are many challenges. The first, not least, is to find some corporate form that can encompass all the different strands of funding: the charity itself, other funding charities, the Government and the private sector, which subdivides into corporate investors and individual investors. All these have different timescales, different legal requirements, different tax structures and different objectives. It is on the last of these—in particular, the objectives of private individuals—that I think we should focus and that my amendment seeks to focus.

Research suggests that if people could invest relatively modest sums—say, £500 or £1,000—in a social investment proposal with which they sympathised, with the possibility of getting their money back but no certainty, and perhaps with a modest incremental return, it would attract substantial support from across our society. One would hope that successful operators in this field might create a record of success that would enable them to raise larger sums of money and provide increasing services in the future.

So what are the problems? Well, there are many of them, including the approach of investment managers and advisers, and that of the actuarial and accounting professions; pricing of the initial risk; and providing interim valuations. At the heart and more important than any others is the prospectus directive. As the noble Baroness pointed out, that prohibits offering investments other than to a very limited number of people, unless that is accompanied by a full Companies Act prospectus, which she also pointed out is very expensive. By the time you have provided warranted indemnities and for financial advisers, lawyers and accountants, there is easily no change from half a million pounds, and very often it costs much more. That does not fit with small schemes of the sort that the market now needs and can now bear. The market is not mature enough to take on the very large schemes that a full Companies Act prospectus would justify.

There is a way in which we can get round this in the short term. As the noble Baroness pointed out, the Financial Service and Markets Act 2000 (Financial Promotion) Order has very wide and quite appropriate prohibitions on people being communicated with on schemes unless they are in a position to understand the risks that they are undertaking. The order has in it some exceptions already—for example, when an offer is made to an individual who has reasonable grounds to believe that he is a certified “high net worth individual”. That in turn means that the recipient understands that in the words of the order:

“The content of this promotion has not been approved by an authorised person within the meaning of the Financial Services and Markets Act 2000. Reliance on this promotion for the purpose of engaging in any investment activity may expose an individual to a significant risk of losing all of the property or other assets invested”.

In order to achieve that, the person becomes what is called a “sophisticated investor”. He self-certifies that he is knowingly taking on a higher degree of risk and undertaking therefore a greater degree of responsibility.

If we can conceive—and have already introduced into law—the idea of a self-certified sophisticated investor, why can we not have a self-certified social investor? It would be somebody who understands that what he is taking on is not financially oriented alone but is aimed at providing a social benefit. If we could do that, it would begin to break the logjam, which is statutory, regulatory and administrative and is holding up the development of this movement.

If the Government could see some way in which to accept an amendment such as Amendment 121A, it would enable the consumer protection objective to be met but would empower and require the FCA to have regard to the possibility of creating the social investor alongside the sophisticated investor that currently exists. It does not require the Treasury to do anything now but enables it to make changes in future and gets the issue of social investment on to the face of the Bill. My noble friend Lord Phillips of Sudbury and the noble Baroness, Lady Kramer, proposed some amendments late the other night which were what I would regard as a full-frontal assault on the castle. This is more a way of creeping round the back to provide the Treasury with opportunities in the future.

My noble friend should consider a further argument. Interest in social investment is rising around the world, and the UK has played a leading role in the developments in that sector so far, undertaking a lot of the intellectual heavy lifting required. We are now beginning to move to the implementation phase, and this amendment would be a modest first step towards making the UK and London a centre of excellence for this new activity and ensuring that the UK is best in class in its delivery.

My Lords, I support totally the tenor of the amendments in this group, which have been so well spoken to. I add some practical examples of where I believe that these amendments or amendments like them would be of immense social utility. It is generally accepted that community life in our dear land is breaking down everywhere. At the same time, there is a general perception and I think agreement that anything that can be done by a community or a group within a community to shore up its social assets is doubly valuable against the background. For example, a local scouts organisation might want to build a new hut; a local sports club may want to build a pavilion or buy some boats or a bus to take teams away; or a local amenities society may want to improve a local building or acquire one. A local church might want to do something. One can go on and on. Local organisations every day of every week in every part of the land want funds to do something that they all agree would be of great benefit to that community. At present, the regime that my noble friend Lady Kramer so vividly described is a complete road block against having a general appeal to the community to chip in perhaps £10, £20 or £100—it need not be £500 or £1,000.

What is needed is for my Government to be imaginative enough, although I realise that the Treasury is not the homeland of social imagination, to see that if we could amend the arrangements provided for by this Bill, realising that one size does not fit all, we could unleash an unpredictable but extraordinary outpouring of funds. Many will be reluctant to give but much readier to lend, even though they appreciate that the basis on which they lend is somewhat uncertain. As my noble friend Lady Kramer said, the upfront costs of having to comply with the present regime are simply prohibitive. She mentioned social impact bonds of £1 million to £5 million, but I am talking about appeals of £50,000.

The value of those small local appeals, which can be met by people lending in small amounts but large numbers, is double. They provide badly needed social facilities and, in the process, bring the community together and give them the sense of achievement. They shore up community and are of inestimable public benefit. My noble friend the Minister has had a horrendous job steering this Bill through its stages and has dealt with it in an exemplary fashion. I hope that the Government will think again over the two next months and come back in the autumn realising that they have to make major concessions on this part of the Bill for the good of us all.

My Lords, I hope to set a precedent whereby the commitment of our Benches is not necessarily proportionate to the length of the speech. I support the amendment in the names of the noble Lord, Lord Sharkey, and the noble Baroness, Lady Kramer. Social enterprises are businesses that trade to tackle social problems and improve communities, people’s life chances or the environment. They make their money from selling goods and services on the open market and reinvest their profits back into the business of the local community. When they profit, society profits. We believe that Amendment 118AZA would contribute to their formation and therefore we support it.

On our Amendment 128AA, in the names of the noble Lord, Lord Eatwell, and the noble Baroness, Lady Hayter, we believe that given the consensus in at least part of this Chamber that social investment is a good thing, it would be appropriate for the FCA to have a social investment panel that would sit alongside the small business and market practitioners and consumer panels. The FCA would have a duty to consult. The panel would represent the interests of organisations that specialise wholly or mainly in social finance or investment. Today’s debate has shown that if we can persuade government to go into this area it will be complex and will need an appropriate panel to help to develop the regulations around it.

My Lords, I support the common sense of these amendments. However, charities are regulated by the Charity Commission. Although one hopes that all these social endeavours are extremely honest and properly run, it is important to be clear about what charges are involved, and that the people organising them are fit and proper people. There is a very real issue to address here. It would be fine to say, “Here is a green light. Be an investor like a sophisticated investor”, but behind this territory lie quite big issues concerning good conduct.

My Lords, we have already, quite reasonably, spent considerable amounts of time discussing issues of social finance and social investment. I want to reiterate, at the start of my response, that I do share the aims of those who wish to nurture the social investment sector and see it grow. I am pleased that there are plans for some of the noble Lords who are interested in these matters to have a discussion with the Bill team over the recess. I am happy to encourage that to happen. There are a couple of other ways to address this issue, which I will refer to as I proceed. So I hope that the Committee will bear with me for a moment or two. I will explain why I think that Amendment 118AZA and Amendment 121A are not appropriate; but there is another channel as well as further discussions between me and the Bill team where it might be possible to make some progress during the summer on practical steps. So I ask noble Lords to bear with me for a couple of minutes.

I am, of course, aware that my noble friend Lady Kramer had a meeting with the FSA on this matter two weeks ago, which she was good enough to tell me about. Those discussions informed Amendment 118AZA. I completely agree that if we are to help social investment grow we must make it possible for social investment vehicles, and in particular smaller schemes, to market themselves. I take her point about costs. In parenthesis, when my noble friend Lord Hodgson of Astley Abbotts talks about the costs being high, they are high. I do not challenge the numbers of my noble friend Lady Kramer but when my noble friend Lord Hodgson of Astley Abbotts talks about the prospectus directive and half a million pounds, we are in the territory of listed investments, which are rather beyond the sorts of investment fund we want to target. I am sure he wants to target them initially, but I accept the costs are high.

The effect of this amendment and why I cannot support it is that it would have the effect of making all financial promotions that relate to social investment exempt from all the requirements placed on firms and investment schemes, about how they can market their products and investments. I agree with my noble friend Lord Flight that we need to be careful. An essential component of a successful financial services sector, as came up in the discussion of the previous group, is that of trust. We already know what a huge job there is for the sector to rebuild trust. We do not want to undermine trust in the social investment space, because an advertisement or a financial promotion might well be the first point at which matters go wrong if a consumer buys a product or service on false or misleading information. So we do have to make sure that the marketing of financial services is regulated; that financial promotions are clear, fair, and not misleading, whether they are related to social investment or to any other product. In particular, we want to make sure that unscrupulous providers do not see some wide exemption in this area as a loophole—my noble friend is nodding in agreement. We must ensure that there is not a loophole to exploit consumers by offering products around claims of social purpose and getting around the rules. We need to be careful about that, because that will undermine the sector.

To illustrate the point for the benefit of the Committee, Members may have seen a report in the Guardian just last week of the case of a firm advertising a very high guaranteed return bond, generated through investment in social enterprises. The provider in question is registered with the FSA as an industrial and provident society, but not authorised. It does not appear to have permission to offer bonds with the exact characteristics of those it promotes; operating without such permission is a criminal offence under Section 23 of FiSMA. Any investors in such an operation as is being promoted would be left entirely without protection should it collapse. That particular case is being looked into by the FSA. However, it represents a timely reminder that we have to proceed with great care in this space. So I oppose this amendment and also, for similar reasons, Amendment 121A. However, I think we have an opportunity here. As my noble friends may well be aware, the Red Tape Challenge, which seeks to reduce the burden of regulation right across the entire regulated space, is currently looking at civil society. We do want, under the Red Tape Challenge—which is open to submissions at the moment—to see what specific ideas there may be, to changes to the financial promotions order or other regulations—

I am extremely grateful to the Minister for suggesting that we might be able to make some progress over the summer. His example of an industrial and provident society underlines exactly the point we are making. That is one of the areas that falls between the stools. At the moment it is neither a charity nor a proper regulated body, and this is exactly what we are trying to get at. We are trying to get our arms around this space in a way for which the present regulations do not provide coverage as regards the IPSs.

I entirely accept that. However, the effect of these particular amendments would be to take away all regulation and protection. We certainly do not want to go from the current situation, which it appears people are already seeking to exploit, to one where merely because the apparent purposes of the investment were perfectly worthy and the overwhelming majority of promoters would obviously be people of the highest standing, others would be allowed to fly under their banner.

Perhaps I may make one other point and then I will let my noble friend in. My noble friend Lord Hodgson mentioned the exceptions to the financial promotions order for sophisticated persons. Although I should not discuss the advice I gave Ministers in my previous life as an official, all I would say is that I am extremely familiar with the construction of that order in that particular respect. In my view, Ministers at the time made a very wise decision about that particular provision. I do have form, as it were, in this space. I encourage practical ideas for amending, which will be seriously considered, and although it is not easy to amend the financial promotions orders as regards the Red Tape Challenge, Ministers will look at them. Specifically, Amendment 121A is not needed in order to make that happen.

In his final remarks, my noble friend pre-empted what I was going to ask him, which was to confirm that it is not beyond the wit of this House to take account of the very proper points he raises and, at the same time, to take account of this big, potentially vital sector of social investment. However, I think that he has already impliedly agreed with that.

I have drawn the Committee’s attention to the opportunity that exists at the moment, and of course the Red Tape Challenge is a cross-government initiative. No. 10 and others take it very seriously; it is not simply a Treasury matter; and it goes with the wider drive in this area. I shall leave it at that.

I should say just a little about Amendment 128AA. I do not believe that the FCA needs to have a dedicated panel for representatives of social investors. As the FSA’s panels already do, the FCA’s panels will advise on a wide range of policies and regulations from a broad range of perspectives, and I do not believe that it is necessary or proportionate to establish another panel, at additional cost, purely to represent the interests of social investors and social sector firms. Social sector organisations will be able to feed in their views through public consultations. The interests of socially oriented financial services firms can be adequately represented by the Practitioner Panel and Smaller Businesses Practitioner Panel, and many of the FSA’s Practitioner Panel members belong to firms which are involved in social investment.

However, again in the spirit of wanting to be helpful in response to the amendment, and accepting that the interests of smaller specialist firms also need to be appropriately represented, I have sought and gained assurance from the FSA that from now on it will approach trade associations which represent social investors, such as the UK Sustainable Investment and Finance Association, asking them to put forward nominations to the Smaller Businesses Practitioner Panel. I hope that that will give additional reassurance to the noble Lord, Lord Tunnicliffe, about the approach in this area. Given all that, I ask my noble friend to withdraw her amendment.

My Lords, all of us in this House wish for that sort of reply from my noble friend, although some of us are not so lucky. I am sorry that the noble Lord, Lord Peston, was not present to hear that so that his scepticism on this matter might have been calmed. It was indeed an excellent reply from my noble friend and I very much hope that my colleagues will be able to take advantage of it.

Perhaps I may draw my noble friend’s attention to an organisation called, which is an excellent example of how to do things right in this area. It is concentrating on micro-lending in the third world but the pattern it follows would fit very well the sort of projects that my noble friend Lady Kramer and others have outlined. It takes proper steps to make it absolutely clear to those who lend that there is a serious chance that they will never get back any money. That is crucial. There is far too much opportunity here to induce in those who sell something as a loan the idea that they have a reasonable chance of getting their money back, and that can be very dangerous in unregulated investment.

I join in thanking the Minister for a very positive reply. It sounds as though we have real hope of making progress in this area. I very much appreciate the process that the Government have gone through to get to this point.

I also appreciate the comments of my noble friend Lord Phillips. I read into them that, with his legal-eagle mind, he and some of his colleagues may now be turning to this clause and to this area of the legislation to work out an amendment which, if properly drafted, could both address the issues which I, together with my noble friends Lord Hodgson and Lord Phillips and others, have raised and cover the absolutely fair and relevant point made by the Minister, which is that we have no wish to expose people to scams or to create an opportunity for this to be used as a back door to taking unfair advantage. That is extremely important.

Feeling very positive about all these issues, I beg leave to withdraw the amendment and I look forward to the summer discussions.

Amendment 118AZA withdrawn.

Amendments 118AA to 118E not moved.

Amendment 118F

Moved by

118F: Clause 5, page 19, line 8, at end insert—

“( ) money laundering and the financing of terrorism”

My Lords, I beg to move Amendment 118F tabled by my noble friends Lord Eatwell and Lady Hayter. I assure the Committee that, as time is pressing, this contribution will be brief. We are rather more interested in the Government’s response at this stage, which we hope will be as positive as their responses have been to the last few amendments, and I hope that I can ride that happy tide until lunchtime.

The Bill defines financial crime as including an offence involving,

“fraud or dishonesty … misconduct in, or misuse of information relating to, a financial market, or … handling the proceeds of crime”.

We wish to add to that list money-laundering and the financing of terrorism. It will be evident to all noble Lords why we should put the emphasis on these two issues at present.

There was cross-party agreement on terrorist asset-freezing during the passage of the Bill passed at the beginning of this Parliament. It had a considerable genesis in the work which Labour Ministers had done in the previous Government but the Bill was taken through by the Conservative Government and of course we fully supported it so that it became an Act. The Act’s purpose was to continue the asset-freezing regime that we had previously sought to put in place. Of course, this amendment is moved two days after the allegations of money-laundering activity at HSBC made in a Senate committee hearing led to a matter that has exercised this House over the past couple of days—that is, the position of the Trade Minister. I do not want to dwell on that—it is something to be dealt with on other occasions—but the issue is clearly pertinent, and terrorism is bound to be at the forefront of all our minds against the backdrop of the enormous security arrangements which we are obliged to make for the Olympic Games.

The Bill seeks to define financial crime and lists three categories of crime, which I am sure the noble Lord will say are not meant to be totally exhaustive. However, the list surely ought to contain the two issues to which I have given expression and which are contained in the amendment. Why refer to fraud and dishonesty but not to money-laundering or the financing of terrorism? I am sure that the Minister has thought about these issues deeply and will have a convincing reply. However, it may just be that on this occasion he will say that he will consider the matter further and that we can come back to it on Report. I beg to move.

My Lords, I can be brief on this. As the noble Lord, Lord Davies of Oldham, has explained, the amendment seeks to add money-laundering and the financing of terrorism to the list of matters that are considered to constitute financial crime. First, I should make it clear that the FSA is already able to take action in both these areas because the definition here is broad and the list of matters is indicative and not exhaustive.

On the issue of money laundering specifically, financial crime is defined as including the offence of,

“handling the proceeds of crime”.

Money laundering is plainly part of that—it is one way in which a person can handle the proceeds of crime—so there is no need to list it separately in the Bill.

Turning to the next part of the amendment, it struck me as somewhat odd that the definition of financial crime did not list as major an element as terrorist financing. It seemed a strange omission. I did a bit of research and actually the definition, which is picked up in the draft Bill, stems from FiSMA, the previous Government’s Bill drafted in the late 1990s. I do not intend to be critical of the drafting of the previous Bill but it was drafted when terrorist financing was not as significant a concern as it has since become. I think it would be a good thing to include terrorist financing in the non-exhaustive list in this Bill. The world has moved on. I can confirm that we will consider whether and how to amend the Bill on Report to include terrorist finance in Section 1H.

I am sorry that the noble Lord, Lord Davies of Oldham, seemed to think that I would not pick up his excellent suggestion that we have a look at this again. I am very receptive to all good ideas from the Committee, big and small. I am very sorry that the noble Lord, Lord Peston, is not in his seat because this is one of many concessions and willingnesses to listen to arguments. I should make it clear that I cannot promise that I will continue in this end-of-term spirit for the rest of the day. Even though this will make no substantive changes to the duties and objectives of the FCA, I am grateful to the noble Lord for drawing it to the attention of the Committee and I would ask him to withdraw his amendment on the basis of the assurance I have given him.

My Lords, there is a character in “Cabaret” who expresses herself with “I am overwhelmed,” and that is the only phrase I can think of that is apposite at this moment. I am very glad that I am able to catch the Minister in his wonderfully benign mood. If he can just sustain it to the end of the day we can probably deliver this part of the Committee stage by 7 pm. He has given warning that not all amendments will commend themselves to this extent but I am glad that this one has. I am grateful for his response and I beg leave to withdraw the amendment.

Amendment 118F withdrawn.

House resumed.