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Financial Services Bill

Volume 739: debated on Monday 15 October 2012

Committee (7th Day) (Continued)

Schedule 11 : The financial ombudsman service

Amendment 187E

Moved by

187E: Schedule 11, page 242, line 16, at end insert—

“After section 225 insert—

“225A General obligations

(1) In discharging its functions, the scheme operator must comply with the requirements of this section.

(2) The scheme operator must, so far as is reasonably practicable, act in a way which is compatible with the FCA’s strategic and operational objectives and regulatory principles.””

My Lords, the series of amendments in my name are among those from Amendments 187E to 187T, and are all concerned with the interaction between the Financial Ombudsman Service and the new regulatory bodies under the new order set out in the Bill. I start by saying that I have been extremely impressed with the success of the Financial Ombudsman Service and the work that it has done. When it was set up, I was slightly concerned that its brief went beyond the law, but it has established a very successful record.

I shall go through these amendments. Amendment 187E seeks to require the Financial Ombudsman Service to exercise its functions in a way that is consistent with the FCA’s strategic and operational objectives, and with its regulatory principles—on the same sort of basis on which the Legal Services Ombudsman is subject to a high-level requirement to operate within the regulatory framework for legal services.

Amendments 187F through to 187L reflect some reservations about the new requirement on the FOS to publish reports of all its determinations. While supporting transparency in key FOS decisions, these amendments are designed to focus on more purposeful disclosures, which would be more beneficial for consumers and firms than the necessity to publish all decisions. A more balanced and focused approach to the legislation should give the FOS the statutory option, rather than the statutory obligation, to publish its determinations. This option should be balanced by safeguards for a firm to challenge publications which it considers inappropriate.

Amendment 187N seeks to make the FCA responsible for responding to regulatory issues with wider implications arising from complaints, while Amendment 187P seeks to require the FCA to conduct strategic high-level oversight of the Financial Ombudsman Service to ensure that it operates in a way that is consistent with the FCA’s objectives. In particular, to strengthen the accountability of the FOS the FCA should conduct regular reviews of its overall operations, policies and procedures. This would not and should not compromise the operational independence of the ombudsman when adjudicating on individual cases.

Amendment 187Q seeks to set out that the FCA should set out a clear process for decision-making on cases requiring regulatory or legal clarification. Amendment 187S intends that the FCA, not the FOS, should make the scheme rules. The legislation should more clearly define a fair and reasonable test, and the ombudsman should be required to take into account the FCA’s objectives, laws and regulations in force at the time of the complaint. Finally, Amendment 187T would require the FOS to be obliged to consult stakeholders before it issues guidance or technical notes about its procedures and its approach to handling common categories of cases.

In addressing this group of amendments, I remind the House of my declared interest as the senior independent director of the Financial Ombudsman Service. I hope that the House will bear with me while I go through the many amendments of the noble Lord, Lord Flight, beginning with Amendment 187E. I am concerned that this amendment would begin to compromise the independence of the ombudsman service. The ombudsman’s responsibility is to resolve complaints informally and promptly by considering what is fair and reasonable in respect of each individual complaint. That role is very different and distinct from that of the regulator and it feels important to all concerned that the two are kept distinct.

In making decisions, the ombudsman is already required by the rules to take into account a series of things: the law and regulations, the regulator’s rules, the guidance and standards, the codes of practice, and good industry practice at the time. In that way it is for the regulator to interpret its objectives and for the ombudsman to reflect this interpretation by taking into account the rules and guidance which the regulator publishes. I therefore do not think that this change is necessary, but I will go further and say that it potentially risks the unintended consequence of requiring the ombudsman to interpret the regulatory objectives of the FCA directly. Given that the nature of those proposed regulatory objectives is very wide—going, for example, up to the competition objective—it does not seem to me desirable that the ombudsman service should be put into the position of having to interpret them.

Those comments relate also to Amendment 187P, which seeks to change the relationship between the ombudsman service and the FCA in a way that again risks undermining the model of an independent ombudsman service. The ombudsman should clearly be accountable, and I welcome the provisions already in the Bill to strengthen that accountability: for example, by making formal requirements which the ombudsman has already undertaken voluntarily. The ombudsman will, for example, become subject to audit by the National Audit Office—something that it has embraced by going ahead early and voluntarily asking the NAO to come in and do an audit. However, to move to a compulsory annual review on top would involve significant diversion of effort, both by the FCA and the ombudsman service.

Related issues emerge in Amendment 187S, which would give the regulator the power to decide not just which complaints the ombudsman should decide, as now, but how the ombudsman should go about doing this, which would undermine the operational independence of the ombudsman service as an alternative to the courts. The regulator already determines the jurisdiction of the ombudsman—that is, which complaints can be considered—but the ombudsman service makes its own rules, which set out how it will deal with cases. Those are its own internal procedures, covering, for example, criteria for dismissing cases, evidential requirements, delegation by ombudsmen, rules about case fees and any costs rules. The ombudsman service is required by FiSMA to consult those likely to be affected and to have regard to any representations made by them. The rules are, of course, already subject to approval by the FSA and will be by the FCA, but deciding how to resolve cases is a crucial feature of the ombudsman’s independence, and that must be retained.

A slew of amendments, Amendments 187F to 187L—the noble Lord, Lord Flight, has been prolific—relate to the publication of ombudsman decisions. I am concerned that their effect would be to undermine the main advantage of the publication of decisions, which, it seems to me, is to share a fuller picture—a complete picture, indeed—of the cases the ombudsman deals with and his approach to resolving them. As drafted, the Bill provides a very clear obligation on the ombudsman to publish decisions unless there are very good reasons not to do so. That clarity is very welcome. The ombudsman has talked to stakeholders about how he might go about doing something such as this should Parliament decide to go down that road. Many stakeholders were very supportive of the proposed approach to publish all decisions. In my view, transparency has benefits for all involved; it can help to increase the accountability of the ombudsman, but it can also mean that cases that could be wasteful may be diverted right at the outset.

Amendment 187N also causes me concern for a different reason; it might risk challenging the work of the ombudsman to provide a prompt as well as an informal resolution of complaints, which is an important safety net for consumers. If the aim of the amendment—perhaps the noble Lord, Lord Flight, could clarify this—is to enable the regulator to deal with issues that have wider implications, it is unnecessary because the regulator is already able to do this by using Section 404 powers under FiSMA to impose a redress scheme which the ombudsman is required to follow. Of course, all the FiSMA organisations work well together anyway. The ombudsman regularly meets the FSA, the OFT and the compensation service to discuss emerging issues that could develop into risks, and wider implications can thereby be tackled. Actually, many cases could have wider implications, so if the legislation says that any case with wider implications means that all similar cases should be put on hold, that could be of significant detriment to consumers by introducing potentially massive delays into the system.

Amendment 187Q potentially misunderstands the way in which the ombudsman service is designed to resolve complaints. As I have said, the ombudsman resolves what is fair and reasonable in all the circumstances of the case, including relevant laws, regulations and industry practice. In the same way that a court interprets legislation, the ombudsman interprets laws and regulations. He already has access to guidance published by the regulator and regularly meets the regulator, providing opportunity for any clarification. If the regulator takes the view that he needs to take specific action, he can use Section 404 of FiSMA to impose a redress scheme.

Finally, I am very concerned about Amendment 187T. As proposed, it would mean that the ombudsman would be prevented from publishing almost anything without having first consulted. That would be an unprecedented burden on an organisation that needs to communicate with its many stakeholders. If, as seems likely, the amendment is intended to address the technical notes published by the ombudsman—I see the noble Lord, Lord Flight, nodding, so I will address that point—it is worth noting that the ombudsman is not a regulator and so does not produce guidance on how to comply with regulatory requirements. Those technical notes are not out there as instruction as to how someone should go about complying with what the regulator does; they are simply a better account of what the ombudsman has done in reaching a decision on individual cases, which may go on to be helpful to both businesses and consumers in considering which cases are likely to succeed and how they might be dealt with. They are not regulatory notes and the ombudsman is not in that territory. It seems to me to be crucial that the ombudsman service retains the autonomy to establish and set out its own approach. That is essential to maintaining the independence of the scheme.

The amendments in this group, although individually some of them may seem to address specific issues, are almost all either unnecessary or problematic, but taken together they would tighten control of the independent ombudsman service by the FCA. In doing that, two things would happen. First, we would risk compromising the independence of the service and the very nature of an independent ombudsman service. Secondly, we would risk blurring the distinction between the regulator and what is basically just an alternative dispute resolution service. Any blurring in that territory would be bad for consumers, bad for business and bad for public policy.

I shall deal with our own amendment in this group, Amendment 187RZA, which is virtually the same as Amendment 187T. We should clarify that our idea is not to cover everything that the FOS produces. The Financial Ombudsman Newsletter is one of the best publications I have seen; it beautifully describes the cases and gives a lot of guidance, with a small “g”. The intention of our amendment is that any guidance is fully consulted upon where such guidance could lead to a “safe harbour”, and should therefore take account of all relevant interests, including those of the industry and consumer groups.

I turn to some of the other amendments tabled by the noble Lord, Lord Flight. Two major changes are suggested that worry us. One would virtually make non-publication the default option, with the Financial Ombudsman Service having to justify in each “particular case” when it wants to publish, having given the respondent—but not, interestingly, the complainant—the right to argue for non-publication. In our view this is not in line with the Hunt report and would not amount to the transparency and openness to which consumers have a right.

The second issue is the one that my noble friend Lady Sherlock has just been talking about—cases that have wider implications, such as PPI, where it soon became evident to the ombudsman that the mischief went far wider than a particular provider. While we welcome an early alert from the Financial Ombudsman Service to the FCA that something is going amiss and that regulatory action or new guidance might be required, it seems to us quite wrong to put on hold an individual’s claim for compensation when they have clearly been mis-sold a product and might be out of pocket. We do not agree that the individual consumer’s justified complaint should be suspended while a large bureaucracy—I am afraid that that is what the FCA will be, with its need to consult and so on—gets its act together.

As we have heard, the ombudsman’s role is to resolve complaints—speedily, we hope—that have not been satisfactorily dealt with by the service provider, which is of course always the first and best option. If PPI is anything to go by, though, the banks could and should have refunded the money themselves pretty speedily and stopped selling the product unwisely. It is this that would have stopped the consumer detriment, and incidentally saved the banks a lot of money further down the track.

Other amendments from the noble Lord, Lord Flight, in this group seek to include the rationale for each published decision to be explained. However, our fear is that this would add considerably to the process for handling cases and undoubtedly to the costs, and we would be surprised if the industry were in favour of that since it funds all this.

By including “operations, policies and procedures”, Amendment 189P would appear to us, as my noble friend Lady Sherlock said, to risk undermining the independence of the ombudsman service. We hope that that was not the intent, but we have a similar concern about Amendment 187S, which would appear to give the regulator the power to decide not only which complaints the ombudsman can decide on but, worryingly, how the ombudsman should do so. That would undermine the very independence of the ombudsman, which is of course meant to serve as an informal alternative to the courts.

With regard to Amendment 187Q, as my noble friend Lady Sherlock also reminded us, the FSA—or, as it will be, the FCA—is already able to make a redress scheme under Section 4 of FiSMA, the effect of which is to bind the ombudsman, so there is probably no need for it.

My Lords, I am very tempted to say that I agree with the noble Baroness, Lady Sherlock, and sit down.

Sadly, however, I ought to explain the Government’s view of these amendments. Amendment 187E would require the FOS to exercise its functions in a manner consistent with the FCA’s strategic and operational objectives and the regulatory principles. Obviously the FCA will have an important role making and approving the rules of the ombudsman scheme, and must comply with its regulatory objectives and principles in doing so, but I do not believe that the regulator and the FOS should share the same objectives or be held to the same regulatory principles.

The FOS is not a regulator and should not be expected to act like one. Its role is to provide an impartial alternative dispute resolution service for consumers and firms. It is not a consumer protection body, and I would be concerned that by giving the ombudsman consumer protection objectives we would put that impartiality at risk. Moreover, in practice such a duty would be burdensome and difficult to interpret.

Amendment 187P is similar to Amendment 187, in that it seeks to hold the FOS to the FCA’s objectives and principles. However, it goes further by giving the FCA a role in ensuring that the FOS complies with those objectives and principles, and in carrying out an annual review of the FOS operations, policies, and procedures. The FSA already has a role in overseeing the FOS, which the FCA will retain—appointing and removing the board of the scheme operator, for example. However, the FOS’s claim to impartiality, and hence its legitimacy in making determinations that are binding on firms, is credible only if it is operationally independent of the regulator. This does not mean that it should be unaccountable or free from scrutiny—this is why we have brought in provisions requiring the FOS to be audited by the NAO. Associated with these new powers, the NAO will be able to launch value-for-money studies of the FOS. However, to require the FCA to ensure that the FOS complies with its objectives would require detailed oversight and control of the FOS’s day-to-day operations, which in our view would not be compatible with the FOS’s independence.

Amendments 187F to 187L relate to the new transparency requirements for FOS, under which the ombudsman scheme operator will have a duty to publish a report of determinations unless, in the opinion of the ombudsman, it would be inappropriate to do so. Amendments 187F, 187G and 187H seek to reverse the proposed new provisions, leaving the scheme operator merely with a power to publish determinations if it decides that it is appropriate, and a duty to explain the rationale for publication in that case.

Previously, ombudsman decisions have been published by one or other of the parties involved, leading to a partial and sometimes misleading picture of the way in which the FOS made decisions. Now that the FOS is subject to the Freedom of Information Act, ombudsman decisions may also be published in response to requests for information under that Act, so there is clearly a need for change.

Amendment 187J seeks to modify the transparency arrangements to provide anonymity for the respondents except where they agree to be identified. However, in many cases it will not be possible to redact all the information by which a firm could be identified without thereby withholding key elements of the substance of the decision—for example, the content of a firm’s advertising material, policy wordings, and product names—and there is no reason to think a firm’s reputation should be unfairly tarnished by the publication of a decision. However, I entirely agree with my noble friend that there is a case for withholding genuinely commercially sensitive information. The FOS will have the power to do that, and has made it clear in its consultation on transparency earlier in the year that it intends to protect commercially sensitive information.

Amendments 187K and 187L would provide for a minimum period of 28 days between the scheme operator considering a determination for publication and its taking the decision to publish, during which the respondent may make representations. It is of course important that firms get a fair hearing but, as I have said, by the time a decision is published, firms have had many opportunities to explain their side of the case already, and the ombudsman scheme rules already provide for firms to be able to provide sensitive information to the ombudsman in confidence. Given that this route already exists for the firm to identify information that it would be inappropriate to make public, I would be concerned that firms may see a process to make further references, as the amendments propose, as an opportunity to appeal the substance of the decision itself. However, I reassure my noble friend that the FOS would be very open to listening to proposals from firms about how best to ensure that it does not publish sensitive material.

Amendment 187N would require the FOS to suspend cases and refer the matter to the FCA when it encounters an issue with wider implications. Obviously the FOS will encounter issues that demand a response from the regulator, and there need to be clear duties and routes for the FOS to raise these issues with the FCA. I draw my noble friend’s attention to the measures in the Bill that provide for this. In future the FOS will be required to share information with the FCA that it considers relevant to the FCA’s objectives. The FCA is in turn required to take account of this information. In addition, the Bill introduces a mechanism whereby the FOS and the firms concerned can refer issues of mass detriment to the FCA, and the FCA will have to publish a response within 90 days, which is a very much improved procedure over what has obtained in the past. The response from the FCA might set out a timetable for regulatory action that would allow the FOS to consider whether or not to place a hold, or stay, on complaints. I reassure my noble friend that the Government share his concerns, and we think that we have taken measures in the Bill to address them.

Amendment 187Q seeks to require a clarification procedure for regulatory matters arising from complaints to be resolved by the FCA or for the FCA to provide guidance. While supporting the spirit of these amendments, my concern about the clarification procedure proposed is that it would be overly bureaucratic and could blur the distinct remits of the regulator and the ombudsman. The FOS’s role is to provide swift and low-cost dispute resolution. In doing so it must of course take into account, among other things, the relevant law and the regulators’ rules and guidance. It cannot, in practical terms, be expected to refer an issue to the regulator every time it encounters regulatory matters, any more than it could be expected to refer a matter to the courts every time it encountered a legal matter. We have included a package of measures in the Bill to improve co-ordination and co-operation between the FCA and the FOS. These include the new information-sharing and co-ordination provisions, as well as a new mechanism for the FOS and firms concerned to refer issues of mass detriment to the FCA.

Amendment 187S would require the FCA to make the detailed procedural rules for the ombudsman scheme rather than approve rules made by the FOS itself as at present; and to define the factors the FOS must take into account in its “fair and reasonable” test in legislation. On the first part of the amendment, the FSA already makes rules concerning key elements of the FOS’s compulsory jurisdiction. The more detailed rules of the ombudsman’s procedures are made by the FOS itself with the FSA’s consent. This strikes the right balance. As part of its operational independence, the FOS is responsible for preparing the detailed procedural rules which the regulator must approve. The alternative would be for the regulator to be directly responsible for running the ombudsman.

The second aim of the amendment is to fix in legislation the matters which the FOS must take into account in determining what is fair and reasonable. This is currently set out in ombudsman scheme rules. As such, the amendment does little to change the way in which the FOS applies the fair and reasonable test. Its main effect is to fix in primary legislation part of a description of detailed factors which is currently in more flexible scheme rules.

Amendment 187T would require the FOS to publicly consult on any and all information, guidance or advice it produced prior to publication. It is identical to an amendment tabled and withdrawn in Committee in another place, where it was debated at length. I do not want to dwell too long on the detailed arguments. The Government are clear that it is important that the FOS consults on a wide range of things—its rules and business plan, for example—but not on absolutely all the information it publishes, as the amendment would require. The fact that the FOS receives very little feedback on these notes at the moment suggests that full public consultation prior to publication is not justified.

I hope that the noble Lord can take some comfort from that, and will understand why I cannot accept the very broad amendment to require the FOS publicly to consult in advance on all the information it publishes. On the amendment of the noble Baroness, Lady Hayter, in practice the FOS will publicly consult in those areas which are, understandably, of particular concern to her. In the light of these explanations, I hope that my noble friend will withdraw his amendment.

My Lords, I started off by paying tribute to the success of the ombudsman’s service. There is a clear argument here for saying that if it ain’t broke, don’t fix it. A number of the points underlying these amendments have been raised with me by the insurance industry, to a large extent in a probing fashion. I am pleased to note that quite a lot of the underlying points have already been dealt with; if there is anything ongoing which the ombudsman’s service and the FSA want to pick up between them, they can have a word with the insurance industry. On that basis, I beg leave to withdraw the amendment.

Amendment 187E withdrawn.

Amendments 187F to 187L not moved.

Amendment 187M

Moved by

187M: Schedule 11, page 243, line 17, at end insert—

“In section 232 (powers of court), in subsection (2), after “director or” insert “other”.”

Amendment 187M agreed.

Amendments 187N to 187Q not moved.

Amendment 187R

Moved by

187R: Schedule 11, page 244, line 22, at end insert—

“In paragraph 6 (status), in sub-paragraph (2), omit “board members,”.”

Amendment 187R agreed.

Amendments 187RZA to 187T not moved.

Amendment 187TA

Moved by

187TA: Schedule 11, page 246, line 28, at end insert—

“29 After paragraph 22 insert—

“Part 5Complainant representativesIntroduction23 This Part of this Schedule applies to a complaint under the compulsory jurisdiction, the consumer credit jurisdiction or the voluntary jurisdiction in respect of which the complainant has entered into an agreement with a complainant representative.

24 A “complainant representative” is a person who has entered into an agreement with a complainant with respect to a complaint pursuant to which any fee has been, will be or may be paid by the complainant.

Complainant representative rules25 The scheme operator must make rules, to be known as “complainant representative rules”, which are to set out requirements applicable to complainant representatives and to complaints falling within paragraph 1.

26 Complainant representative rules may, among other things—

(a) require that a complainant representative disclose to the scheme operator the agreement referred to in paragraph 2 when a complaint within paragraph 1 is made;(b) require a complainant representative to take reasonable steps to obtain from the complainant, and as appropriate to supply to the ombudsman, such information as an ombudsman might reasonably require to determine a complaint;(c) provide for the consequences if a complainant representative does not comply with complainant representative rules or other applicable legal or regulatory requirements, including requiring or enabling the ombudsman not to consider any complaint or to consider a complaint only if conditions specified by the ombudsman have been satisfied;(d) enable the ombudsman to dismiss a complaint without consideration of its merits where the complainant representative has not cooperated with reasonable requests made by the respondent, including not providing adequate information as to the true nature of the complaint.27 Complainant representative rules shall not require the disclosure to the ombudsman scheme of any material which is legally privileged.

Consultation28 If the scheme operator proposes to make any complainant representative rules it must publish a draft of the proposed rules in the way appearing to it to be best calculated to bring them to the attention of persons appearing as likely to be affected.

29 The draft must be accompanied by a statement that representations about the proposals may be made to the scheme operator within a time specified in the statement.

30 Before making the proposed complainant representative rules, the scheme operator must have regard to any representations made to it under paragraph 7.

31 The consent of the Authority is required before any complainant representative rules may be made.””

My Lords, in moving this amendment I am seeking to get a proportionate framework in place that is good for consumers, but which is also good for the financial institutions complained about and the responsible claims management companies that take up complaints on behalf of consumers. That will move us all on from the unsatisfactory situation we find ourselves in at the moment.

A number of CMCs do not adhere to best practice and the consumer has little redress. My amendment would improve that situation for them with the drawing up of claimant representative rules, which are long overdue. Between April 2011 and March 2012, CMCs operating in the PPI sector generated 74% of consumer complaints overall. Of these, the majority related to some 15-20 CMCs. The source for these figures is the Ministry of Justice claims management regulation unit, so they are government figures.

I am very clear that in the mis-selling of PPI, the banks and other financial institutions behaved very badly. It is right that consumers have proper redress and compensation for their loss. I agree with my noble friend Lady Hayter that the banks could have done much more much sooner to deal with these issues.

However, the bombarding of financial institutions with claims from people who have never had any sort of relationship with the financial institution is bad practice. It is a fishing expedition that wastes the time and the money of the institution, and it clogs up the system for people who have a legitimate claim, making them wait even longer for redress.

Why is this done? Because there are huge sums of money to be made in fees. Who has not had an unwanted text message or phone call? While there are regulations already in place and mechanisms to deal with these breaches, we all know that they are not enforced and it is the consumer that suffers. An example of this is the Hinckley and Rugby Building Society, which revealed that 97% of the PPI-related complaints it has received in the three months to September 2012 were from people who are not members of, or have any relationship whatever with, the society. While that figure is lower for banks, there is still a huge number of pointless vexatious claims. Last year 69% of all PPI cases went to the ombudsman via CMCs. A small number of CMCs which are not playing by the rules are making an unfortunate situation even worse. They are not acting in the consumers’ interests. My amendment is an attempt to find a positive way forward, good for consumers, good for the financial institutions and good for the responsible claims management companies.

I hope that the noble Lord can give us a full response so that we can understand where the Government are on this matter. While I have no intention of pressing this to a vote, I hope that the noble Lord will agree to my meeting the relevant Minister outside the Chamber as I want to use this process to improve the lot for consumers, and the time has come for the Government to act.

My Lords, I support my noble friend Lord Kennedy in his proposal, not least because, on my way down on the train today, I received a call from 0843 5600827. They wished to talk to me about my PPI claim of £3,350. Notwithstanding that, I received a text message saying that “time is running out”. I have never taken out a PPI policy.

This is an example of the instability which the industry is suffering at the moment because of this situation. I did chair a committee with consumer and industry representatives two months ago, in order for them to approach the MoJ to try to sort this issue out. Given these demands that have been made on the industry, the £8 billion that has been put aside for PPI mis-selling will surely increase. Let us not forget that we have interest rate swaps. On one of the sub-committees of the Parliamentary Commission on Banking Standards, of which I am a member along with the noble Lord, Lord Lawson, I asked an expert on interest rate swaps about the £8 billion. He said that that mis-selling could dwarf the £8 billion for PPI.

So this issue is current and will have a destabilising effect on the industry for the next few years, and also on consumers’ confidence. I do not think that the Government can escape their responsibilities on that by saying that this is not really a financial services matter, but for the MoJ. It is most certainly having an impact on financial services at the moment. Therefore, as a matter of urgency, the Government should take note of my noble friend Lord Kennedy’s amendment so that they can look at this issue in the cold light of day, outwith this Chamber, and get an adequate and decent solution, both for the industry and for the consumers who are suffering.

My Lords, I suspect that everyone in this House has been plagued by the various attempts by the claims industry to get us to pass over all kinds of personal details. That worries me. Anecdotally, I have heard reports of people who responded positively to one of these messages and handed over their credit card details. They then found themselves being charged without realising that they were getting themselves into that situation. We have talked to various institutions, many of which say that half the claims presented to them are from people who have never had any relationship with them whatever. It was entirely a fishing expedition. At a time when we want our banks to focus on appropriate lending to individuals and small businesses, which they are all struggling to do effectively, to have the complete distraction and cost associated with keeping this abusive industry afloat is surely unacceptable to all of us.

I support in particular the comment made by my noble friend Lord Kennedy at the end of his contribution. He asked the Minister whether he would meet with my noble friend and other interested Members to consider if not this then what other action can and should be taken. I think that the House would be particularly interested to hear the Minister’s response on that.

It seems quite obvious that as a market the CMC sector simply is not working. Not only are significant numbers of people being pressured essentially into doing things which they do not want to do, but there appears to be no price competition in the market at all. All the evidence shows that consumers are just as likely to use a claims management company which charges 40% as one that charges 15% of any money that they might get back. Many simply are not aware that they could do it for themselves for free by going directly to the ombudsman.

If the Minister is not minded to go in that direction, will he tell the House two things? First, what would the Government be able to do very soon that would have a significant impact on targeting in particular the minority of claims management companies that are behaving very badly? Secondly, will he at least agree to meet interested Peers to discuss that matter very soon?

My Lords, I share the concerns behind the amendment about the activities of CMCs in relation to financial services products. Like all noble Lords, I have been approached by them with the most spurious and ridiculous arguments about why I should give them details about my financial affairs in return for some often unspecified benefit. We start off by sharing that concern.

I would be more sympathetic to the amendment if I did not think that the Government were already doing something about it. I am very happy to meet noble Lords who would like to discuss the matter, along with colleagues from MoJ, to see what might be done to expedite effective action. But I do not think that it is necessary or appropriate to expect the FOS to step in as a quasi-regulator and make its own conduct rules. The role of the FOS should be to act as an independent dispute resolution service and not to act as a quasi-regulator of CMCs. It is just the wrong organisation to do that.

As I have said, I am sympathetic to what the noble Lord is seeking to achieve and I give an undertaking to set up a meeting to discuss it further. On that basis, I hope that the noble Lord can withdraw his amendment.

I thank the noble Lord for his response. I certainly think that we need to work on something. I know he says that things are in place but it is fair to say that they are not working well at the moment and that we need to do much better. On that basis, I beg leave to withdraw the amendment.

Amendment 187TA withdrawn.

Schedule 11, as amended, agreed.

Clause 37 : Lloyd's

Amendments 187TB to 187TD

Moved by

187TB: Clause 37, page 120, line 20, at end insert—

“(ii) in paragraph (b), for “section 315” substitute “provision made by or under this Act”, and”

187TC: Clause 37, page 121, line 27, at end insert—

“(ii) in paragraph (c), for “section 315” substitute “provision made by or under this Act”.”

187TD: Clause 37, page 121, line 38, at end insert—

“( ) In section 317 (the core provisions), in subsection (1), for “X” substitute “9A”.”

Amendments 187TB to 187TD agreed.

Clause 37, as amended, agreed.

Clause 38 agreed.

Schedule 12 : Amendments of Parts 11 and 23 of FSMA 2000

Amendment 187TE

Moved by

187TE: Schedule 12, page 247, line 24, at end insert—

“(c) after subsection (10) insert—“(11) The PRA should require the submission of reports from any PRA-authorised person for the purpose of assessing the extent to which a financial activity or financial market in which the PRA-authorised person participates may pose a threat to financial stability in accordance with the PRA’s general objective. (12) The PRA shall collect, in a manner determined by the PRA and in consultation with the FPC, financial transaction data and position data from the PRA-authorised person companies.(13) For the purposes of subsection (12)—(a) “financial transaction data” shall mean data pertaining to the structure and legal description of a financial contract, with sufficient detail to describe the rights and obligations between counterparties and make possible an independent valuation; and(b) “position data” shall mean data pertaining to data on financial assets or liabilities held on the balance sheet of a financial company, where positions are created or changed by the execution of a financial transaction and which includes information that identifies counterparties, the valuation by the financial company of the position, and information that makes possible an independent valuation of the position.(14) The FCA shall assist the PRA in accordance with section 3D to ensure that the PRA is able to exercise its function as described in subsections (11) and (12).(15) To facilitate the effective collection of data, the PRA should prepare and publish, in a manner that is easily accessible to the public and in the form of a summary or collection of information so framed that it is not possible to ascertain from it information relating to any particular person—(a) a database detailing relevant counterparties;(b) a financial instrument reference database; and(c) formats and standards for PRA data, including standards for reporting financial transaction and position data to the PRA.(16) Where possible, the PRA shall co-operate with foreign regulators to the extent required to collect relevant information on PRA-authorised persons already collected by those foreign regulators.(17) The PRA shall develop and maintain sufficient resources to review the collection of data referred to in subsections (11) and (12) in order to—(a) develop and maintain metrics and reporting systems for risks to the financial stability of the United Kingdom;(b) evaluate stress tests or other stability-related evaluations of financial entities overseen;(c) investigate disruptions and failures in the financial markets;(d) conduct studies on the impact of policies relating to systemic risk;(e) promote best practices for financial risk management to PRA-authorised persons.(18) The PRA shall publish a report which compiles the data collected in accordance with subsections (11) and (12) on a periodic basis as determined by the PRA, which shall be—(a) made available to the public in an easily accessible medium; and(b) in the form of a summary or collection of information so framed that it is not possible to ascertain from it information relating to any particular person.””

My Lords, Amendment 187TE, in the name of my noble friend Lady Hayter of Kentish Town, is essentially about the quality of information and its provision. To put it in context, I should like to go back to the purpose of the Bill. I put to the House that its purpose is to prevent or mitigate a crisis in the financial services industry. The crisis from 2007 to 2009 came from the selling of subprime mortgages principally in the US. As we know, these mortgages were repackaged and moved down the line. Eventually, they ended up on the balance sheet of what one would have thought at the time were highly sensible banks of great stature and stability.

How did that happen? It happened because of the malicious intent of the original designers of these products and the people who designed the various packages to disguise the essential weakness that they contained. But when you read the various reports about the crisis, there is no question that a fundamental part of this crisis was caused by the poor knowledge and information that passed through the system. In a sense, the poor knowledge was in two places. It was within the firms, and between the firm and the regulator. In particular, the FSA’s report on the RBS brings this out well. Essentially, parts of RBS simply were not effectively communicating with each other.

Perhaps I may add that in my estimate the US also wiped off about $1,000 billion of its overseas debt as a result of the failure of subprime mortgages.

As a great admirer of the US, I would never underestimate its ingenuity but I did not realise that that had been a principal objective. I thank the noble Lord for my improved education. Returning to my speech, the failure in RBS in particular was once again an internal management problem. The refreshingly honest report of the FSA brings that out but it goes on to criticise its own performance as a regulator. It criticises various ways in which it behaved and its allocation of resources but it also criticises the information that it was able to get during the crisis. That was because firms were unable to provide information that was sufficiently accurate, comprehensible and timely.

The Joint Committee on this Bill took a considerable interest in the whole matter of information and pointed out that in the US the,

“Dodd-Frank Act created the Office for Financial Research which was given responsibility for monitoring of systemic financial risks and, in order to undertake this task, has been given powers for the setting of data standards for the industry. In order to allow effective monitoring of systemic financial risk, the Dodd-Frank Act also requires that OTC derivative contracts are recorded in trade repositories, a step that requires standardisation of reporting across the industry”.

The recommendation from the Joint Committee, which the Government effectively rejected, was:

“The Bill should be amended to place a duty on the Bank of England (or its subsidiary the PRA) to develop information standards for the UK financial services industry and to report regularly on progress in improving these information standards in order to support financial stability”.

This amendment does its best to give effect to that recommendation.

In researching the background to this amendment, I looked over a number of areas but perhaps the most inspirational thing I came across was a speech by Andrew G Haldane, Executive Director, Financial Stability, Bank of England, at the Securities Industry and Financial Markets Association, “Building a Global Legal Entity Identifier Framework” symposium in New York on 14 March. That is a long introduction but it was called simply “Towards a common financial language”. He contended that a common financial language would improve risk management in firms because of better flows and understanding of information; improve risk management across firms; map the network of financial transactions; and, shock-horror, lower barriers to entry. He pointed out that the information standards and information systems within the industry are probably 10 or 20 years behind those in other industries, and particularly the major distribution industries.

We put forward this amendment and it will no doubt be countered by the noble Lord saying, “Well, they can do this anyway”. We are trying to say something different. We are trying to say that this is not just an enabler but a doer. It is a requirement not just that the PRA has the ability to take a positive role in the matter of information and information standards, but requires it to take a role. It is quite long so I will not go through it in any detail but it requires the PRA to require firms to report; it requires them to set standards in the manner in which they report; it requires that they should have sufficient resources to be able to use that information; and it requires them to publish reports.

The Bill has a purpose. It is about institutions, it is about governance and it is about enabling. The amendment is designed to give it some teeth. It is designed to make a requirement in the Bill. This is a “must” amendment, not a “may” amendment. I beg to move.

My Lords, as the noble Lord has explained, Amendment 187TE would require the PRA to collect and publish financial transaction data, and require it to maintain the necessary resources to collect and review data from firms. In doing so, it mirrors exactly the provisions of the Dodd-Frank Act and in particular the provision in that Act for the powers within the Office of Financial Research.

We do not think that such a power is necessary because the regulators here have their own powers to gather information, including all the information referred to in the amendment. Indeed in some cases the FSA already requires firms to hold information in particular ways; for example, through rules requiring firms to be able to present a single customer view. The fact that there is now the concept and the practice of a single customer view shows how the system has been able to develop in the light of the stresses and strains that it has found itself under in recent years. Firms already report transaction data and will continue to do so. Specifically mandating the regulator to develop data standards and to publish collected data, as the noble Lord suggests, is not in our view the answer. The legislation will set the regulators clear and deliverable objectives and the regulators already have powers that could be used to require them to hold their data in specific formats if they judge that to be an appropriate and proportionate way of meeting their objectives.

If the FPC requires particular information in a particular format, whether about counterparty exposures or about anything else, this will be provided by the PRA. If for some reason the PRA is not providing the necessary information, the bank has a backstop power to direct the PRA to gather it and provide it. There is a belt-and-braces provision in the Bill.

The regulators will require a whole range of information from firms. It would not be possible or desirable to specify them all in legislation. The legislation gives clear and deliverable objectives and it is up to the regulators to maintain sufficient resources and to gather sufficient information to meet those objectives. They will be held to account for doing so. With that explanation, I hope that the noble Lord will feel able to withdraw his amendment.

My Lords, I have received an unsurprising response. The essence of it is that those powers exist anyway. Perhaps the noble Lord can help me—I am not asking him to do so now—by writing to me setting out where these powers are in the new Bill. I have followed up the invitation of the Treasury and downloaded its very helpful Bill as amended. When you download it, you are told that it is 624 pages long and, therefore, it is not entirely easy to find things. I would be very grateful if I could be told where in FiSMA, as revised, these powers are and which of those powers is new because of the Bill. If there are not new powers because of the Bill, we have had regulators with these powers for a considerable time and as far as I can see we do not have the level of standardisation of data, the matching priority or the counterparty exposure. We do not have anything like the ability to see into the systems that the new American provisions envisage. It is incumbent on us in this country, with our dependence on this important industry and the fact that the real economy depends on it as well, to have provisions which are not only wide in theoretical terms but provide actual knowledge of what is being done to make this industry safer, particularly as regards what this Bill does about making the industry safer. If the noble Lord leaps up now and reads his piece of paper I would not mind.

Section 165 of FiSMA enables the regulators to require information or documents which may reasonably be required in connection with the discharge of their functions. Section 165A enables the regulators to gather information from certain categories of unregulated firms for financial stability purposes. Section 166 enables the regulators to appoint a skilled person to provide a report into any relevant matter that the authority may specify. The regulators can also make rules requiring firms to hold their data in specific formats, if the regulators judge that to be an appropriate and proportionate way of meeting their objectives. As I have already said, the FSA did so when it introduced the single customer view requirements.

In terms of the system as a whole and what is new about the Bill as regards ensuring that the regulators get the information that they require in order to prevent some of the problems that we have seen in recent years, the whole purpose of the Bill is to put in place an architecture that enables a clearer focus by splitting the regulators into two halves so that they will concentrate on those parts of the industry for which they have now been given specific responsibility. I am sure that having those powers in the legislation, coupled with a new, more laser-like focus on ensuring that the system is safe and secure, will ensure that the concerns of the noble Lord about the information that is collected are not realised.

My Lords, I do not want this to go on, but there is a world of difference between having powers and knowing what people are doing with them. It is absolutely clear where the Americans are coming from; they want something done and they want something changed. I can now try to find these quotes in FiSMA and see how they impact but really I want to know what the regulators are doing. We are not opposing the Bill in general, certainly not in this House, and we wish the Government luck in its implementation, but at the end of the day it only moves people about and has a lot of interconnecting clauses. It does not specifically mandate a requirement to improve the quality of information. Any reasonable observer of the recent crisis has to say that one of the key issues in that crisis was the quality of information moving around within firms, between firms, and between firms and the regulator. The Government have to make a persuasive case that they are doing something about this deficit. Having said all that, I beg leave to withdraw the amendment.

Amendment 187TE withdrawn.

Amendments 187U to 187X

Moved by

187U: Schedule 12, page 250, line 35, at end insert—

“( ) at the end of paragraph (i), omit “or”,”

187V: Schedule 12, page 250, line 37, after “insert” insert ““or”

187VA: Schedule 12, page 254, line 20, leave out sub-paragraph (4)

187W: Schedule 12, page 255, leave out lines 29 and 30 and insert—

“(i) officers of, or members of the staff of, the regulator, or”

187X: Schedule 12, page 255, line 43, leave out “or members of its governing body”

Amendments 187U to 187X agreed.

Schedule 12, as amended, agreed.

Clause 39 : Auditors and actuaries

Amendment 188

Moved by

188: Clause 39, page 124, line 20, at end insert—

“( ) In section 340 of FSMA 2000 (appointment of auditors and actuaries) after subsection (2) insert—

“(2A) Rules must require auditors of deposit taking institutions to provide a narrative report on the institution’s risk management policies and its exposure to risk as part of the audited accounts of the institution.””

This is a simple amendment which I believe could have significant effect. Your Lordships will recall that just before our major banks admitted catastrophic losses resulting in multibillion-pound bailouts and the Government becoming a major shareholder in Lloyds and Royal Bank of Scotland those banks were each given clean audit reports. The annual reports which the auditors signed off were packed full of numbers and told us nothing. The auditors received huge rewards for their efforts, yet within months of them signing off those accounts without any qualification the taxpayer was having to fork out £65 billion—that is £1,000 for every citizen in the country.

In February 2007 Northern Rock, which had a hugely risky business model, was given a clean audit report for its 2006 accounts. Within months it was clamouring at the door of the Bank of England for support as the queues mounted outside its branches. In February 2008 Lloyds and RBS each produced accounts for the preceding year. To judge from the unqualified audit reports each received, these were businesses which would happily carry on trading, yet just months later the Government were having to orchestrate a massive rescue package. Audit fees for those accounts were more than £13 million at Lloyds and £17 million at RBS. For what?

Audit is a profession in which the UK has played a dominant role but the profession’s role in the financial crisis does it no credit. The Economic Affairs Committee of this House has done some admirable work looking at the role of auditors but now we need action.

I do not believe that the auditors who signed off those bank accounts could have been entirely sanguine about what they were doing. They must have been aware of the perilous exposures that were building up, not just in derivatives but in loan books which were loaded with extraordinarily generous loans made against a ragbag of properties and businesses. Some of those still sit on the books at valuations which might be deemed “optimistic” at the very least. Yet such is the narrow interpretation placed on the duty of auditors that they were able to give those banks what is seen as a clean bill of health just as disaster was about to fall. Shareholders took comfort from those audit reports, only to see their investments shattered. The Economic Affairs Committee concluded that while the auditors may have carried out their duties properly in the strict legal sense, they had not in the wider sense, and that wider sense is surely crucial.

This amendment would change the requirement of an audit report for banks. It may be that other sectors would benefit from such a change but this is the Financial Services Bill and, as we have learnt, banks are not as other businesses. The amendment would require auditors to provide a narrative report on the risks they perceive in the bank they have audited. How different might those Lloyds and RBS reports have looked had this been the case then?

The Minister may feel that the content of annual reports is a matter for the Financial Reporting Council but this need not always be the case. This month the FRC has launched a consultation on guidance for the audit of financial instruments. I commend it to your Lordships as an exercise in overdosing on acronyms. Whether or not it would improve the audit of financial instruments, I do not feel qualified to judge, but it will certainly take a long time to wend its way through the FRC process. The Government can and regularly have intervened through the Companies Act to determine the shape of annual reports. Only recently the Business Secretary has decided to change the way in which remuneration is reported in annual reports. If there is a belief that the demands made on auditors and banks need to be strengthened, then the Government can use this legislation and provide the change that is required.

I have no illusions that asking auditors to report on perceived risks will go down well with everyone in the profession but some would welcome the wider remit. They would have to exercise judgment over what constituted genuine risks and they would be doing a service to shareholders as well as the wider community. Those familiar with company prospectuses will know that the list of risk factors can be comprehensive, bordering on the ludicrous, but it is not beyond the auditing profession, perhaps working with the Financial Reporting Council, to come up with ground rules that would make this a useful exercise. If all banks had to have such a narrative report, it would give auditors the opportunity to do their job properly. It would stop them being prone to any bullying tactics from executives. It would give shareholders and the community a better picture of what is truly going on in their financial institutions. I beg to move.

My Lords, I would like to support very strongly the amendment moved by my noble friend Lady Wheatcroft. I shall speak briefly but my brevity does not indicate that this is not an important issue. It is a very important issue indeed. We are debating in the shadow of the worst banking crisis of our lifetimes and possibly the worst banking crisis there has ever been. As my noble friend pointed out, the Economic Affairs Committee of this House produced a report called Auditors: Market Concentration and Their Role which was published in March 2011. It was extremely critical and rightly critical of auditors in the context of the banking collapse that we have seen. This was, as is common with reports of Select Committees of this House, a unanimous report, but unanimity can be got in various different ways. This was unanimity where everybody of all parties who sat on that committee and heard the evidence was totally committed to what the report said. My noble friend Lady Wheatcroft mentioned one thing from the report. Let me quote one other thing from paragraph 204. It states:

“There was no single cause of the banking meltdown of 2008-09. First and foremost, the banks have themselves to blame. … But we conclude that the complacency of bank auditors was a significant contributory factor”.

This has to be addressed. How will we prevent—as far as we can—this sort of thing happening again?

In discussion of an earlier amendment, the noble Lord, Lord McFall, referred to the banking commission of which I, too, am a member. It is quite possible, such is the importance of this, that the banking commission will decide to look into the question of bank audits and auditors, and indeed auditing standards and IFRS, which leave a lot to be desired and are probably a step in the wrong direction. However, we must do what we can in the Bill to rectify the position.

I say en passant that what concerned me a great deal when the big four auditors gave evidence to us was the extent to which they seemed to think that they had simply to satisfy the management of the banks at the time, when under law their duty was to the shareholders. Furthermore, the putting in place of a proper system of audit for business and industry as a whole, but particularly for the banks, is a public duty; auditors had a duty to the wider public to do a good job, quite apart from their duty to shareholders of the banks—and they failed lamentably.

What can we do about this? I do not think that my noble friend Lady Wheatcroft would say that her amendment is the complete answer. Of course it is not: a lot more has to be done. However, it is very important that the Bill addresses this question, and I believe very firmly that the amendment before the House tonight is an important part of the answer, even though it is not the whole answer. I strongly support my noble friend’s amendment.

My Lords, I, too, am delighted to support the amendment moved by my noble friend Lady Wheatcroft. With her characteristic delicacy and discretion, she did not mention the name of the auditors in question—but I will. I believe that Deloitte has very serious questions still to answer about its audit of RBS, particularly towards the end. There were some unhealthily close relationships between Deloitte’s auditors and the senior management of RBS. I also believe that PWC has very serious questions to answer about its final audit of Northern Rock before it went bust. I am sure that the Minister will remember that in this House, I moved an amendment calling for a special audit of Northern Rock, organised by the Bank of England. The amendment was agreed, but not approved in the other place. My noble friend has put her finger on a very important question and I very much hope that the Government will take it seriously.

My Lords, I, too, strongly support the amendment moved by my noble friend Lady Wheatcroft. The first point I will stress concerns IFRS, which hugely exaggerated bank profits and hence capital in good times, and has done the reverse in bad times. IFRS has contributed substantially to the destruction of our pension schemes by discounting liabilities at inappropriate interest rates. There have been complaints about IFRS from many quarters. Accounts have been rendered almost impenetrable. Fund managers frequently have to rewrite the accounts of companies they examine in order to make an assessment of the trading state of the business.

I have consistently complained about this subject, but nothing has happened. Who is responsible? When I was shadow Chief Secretary, the point was made to me that it was the job not of Parliament but of the profession to dictate standards. That is entirely wrong. In the USA the political representative bodies have rightly taken up such issues, and it is the duty of both Houses of Parliament to do the same.

My Lords, I will add my voice to support very strongly the amendment of my noble friend Lady Wheatcroft. I will do it in a short and simple way, by giving a reason and an example. The reason is that a very important function of auditors concerns hazards, and it falls into three parts. First, they must identify hazards; secondly, assess them; and thirdly, expose them.

My example comes from something that I have agitated about for a long while: namely, the level of credit card debt in this country. This is not the credit card debt that noble Lords may have, and which they pay off monthly, but that part of the debt that overruns and is therefore subject to very high interest rates, which very often the people with the debt have no hope of paying back. That level of credit card debt for the British banks is currently still more than £50 billion. The figures are from the British Bankers’ Association and the Bank of England, which both publish a series of monthly figures.

I have mentioned this over a long while in your Lordships’ House. When the previous Government were in power, at my instigation the noble Lord, Lord Myners, who as Treasury Minister fulfilled the role that my noble friend Lord Sassoon now fulfils, wrote to the chief executives or chairmen of the major banks, asking them for details of their credit card debt. The crucial question is: at what value do the banks hold this credit card debt on their balance sheets? Unless they have written it down hugely, the debt is unlikely to be paid and could be a serious hazard to the sustainability, liquidity and indeed continuing existence of those banks. This is the sort of thing that a narrative account by auditors would identify and reveal. I ask the Minister to refer to this example when he replies to my noble friend’s amendment.

My Lords, I will not take up the time of the House with detailed comments on the amendment. We have listened to the debate, and all noble Lords who spoke were most persuasive. I hope that the Minister will give careful consideration to their points. We will certainly listen with great care as we decide on the extent to which we may support the noble Baroness, Lady Wheatcroft, if she plans to take the matter further.

My Lords, the question of the audit of banks is indeed an important one, and one which has recurred in policy debates over the past 20 years. I looked back to see what the Banking Act 1987 had to say on the topic and what Lord Justice Bingham had to say when he looked into the BCCI collapse. Various changes were made at that time and since in FiSMA but it is important that we learn lessons from the recent banking disasters, and I address the particularities of this amendment from a position of agreeing with the considerable concern around this issue. However, I do not believe that the amendment before us completely achieves what we are trying to do.

Clearly auditors are uniquely placed to identify and flag to the PRA current and potential risks in a firm. We would also expect the PRA to share relevant information with auditors, for example where it views a firm’s approach to asset valuation or provisioning to be significantly out of line with its peers. It is worth pointing out that there are areas in which the present regulator, the FSA, believes that auditors should be looking at particular issues and reporting on them and it can require that to be done in rules under Part 22 of FiSMA. So, for example, under the client asset rules, auditors are required to report on whether investment firms have properly segregated their client assets.

I do however have some difficulty with this particular amendment. My noble friend Lady Wheatcroft says that if only provision like this had been in place before or at the time of the crisis the auditors might have given a lot more help which might have prevented some of the disasters. On the other hand my noble friend Lord Lawson of Blaby quotes from your Lordships’ committee’s report which talks of the complacency of bank auditors at the time. Taking as read for the moment that the complacency thesis is the right one, I wonder if that complacency would have run through what was required to be done under a particular provision like this one in the amendment. I think that we are on to something important here but I am not convinced that this quite hits the sweet spot that the Committee is aiming for and that requiring auditors to provide this general narrative report will achieve what we want. Risk assessment is a highly-specialised process and it goes to the heart of the job of the prudential regulator. What I think we want of auditors is to see if there is something more that they can do which supports the prudential judgment rather than cuts across it.

I am most grateful to my noble friend. Of course this is not the whole answer; I made that clear in my remarks. However, does he not think that this amendment would have been helpful and that it is therefore worthy of support from the Government?

For the reasons that I have given, I am not absolutely convinced that it would have been helpful against the background of complacency of the bank auditors at the time of the crisis. Having said that, I agree with the Committee that there is something here that we need to look at further, so I want to see whether the Bill can and should go further to require the regulator to make the most of the expertise that auditors can undoubtedly offer. I am happy to take this issue away and consider whether there is an amendment that I can bring back at Report that recognises the important role of auditors without cutting across the role of the regulator in the way that I believe this particular amendment may do. I will look at it and come back to the House with something that addresses this area. On that basis I hope—

It sounds as though the Minister is encouraging the regulator to ask the auditors more questions. If we have complacent auditors, surely it is even more important that they sign something, that their complacency is questioned and that they take more responsibility for their work.

I certainly agree that if we can get more value out of the auditors we should do so. It should be on the basis of something that helps people—I am not sure whether that is the regulator or directly the public—towards a better understanding of the risks embedded in bank accounts. On that basis, as I say, I will take the issue away. I ask my noble friend to withdraw her amendment, which would, of course—I should say for the benefit of my noble friend Lord Marlesford, who asked me to mention credit card debt—wrap up credit card debt and many other things if we can get this right.

I thank the Minister for his reply and for his willingness to at least consider this issue. Like my noble friend Lord Lawson, I do not see this as a total answer to the huge problem. However, I ask the Minister to consider whether the complacency of auditors might have been due to the fact that so little was required of them, and thus requiring rather more might be a step in the right direction. I look forward to hearing what he comes forward with and, if it is not very much, reserve the right to push this a little further. I beg leave to withdraw the amendment.

Amendment 188 withdrawn.

Clause 39 agreed.

Schedule 13 agreed.

Clause 40 : Provisions about consumer protection and competition

Amendment 188A

Tabled by

188A: Clause 40, page 124, line 33, at end insert—

“( ) A designated consumer body may make a complaint to the PRA that a feature, or combination of features, of the market for with-profits insurance policies is, or appears to be, significantly damaging the interests of consumers.”

My Lords, in previous debates on the Bill we strongly welcomed the super-complaints process included in Clause 40. Particularly in a market such as this, it is important that independent consumer bodies, expert in intelligence-gathering and in touch with clients, can bring a complaint about something which is causing general consumer detriment.

However, it is not only the FCA which will regulate issues with the potential to cause consumer detriment. The PRA, via its role over with-profits policies and bank-lending ratios, might also be the regulator to intervene in particular cases of market failure. We are therefore asking that in such cases the super-complaint can be made to the PRA where appropriate. There are 25 million customers in this market, with some £330 billion of with-profits policies, so we are talking about significant consumer questions. The Bill transfers responsibility for these to the Prudential Regulatory Authority but without giving consumer bodies the ability to call conduct issues to account via a super- complaint. Why should the voices of consumers not be properly heard given the size of the market and the chequered history of some of those policies and, indeed, regulatory failures?

In the other place, the then Minister, Mark Hoban, agreed that,

“the super-complaints power should be wide enough to cover complaints about with-profit policies”,

although he did not agree that,

“the PRA should be designated as a recipient of the super-complaints”.—[Official Report, Commons, Financial Services Bill Committee, 15/3/12; col. 519.]

He seemed to think that such super-complaints should be taken to the FCA, even though it had no responsibility in this area. Despite reading that exchange and what he said very carefully, I do not understand how a complaint to one body could affect the regulatory actions of another, no matter how good the dialogue or the MoU between the two. Therefore, we again ask that, for with-profits insurance policies, the super-complaint should be made to the PRA.

On the amendment in the name of the noble Lord, Lord Flight, in this group, we would not want to see the FCA lose this power and are content with the way it is set out in the Bill. I beg to move.

My Lords, I shall not move Amendment 189A. I am now satisfied that the powers here do not contradict or are not repeated by powers under Section 404 and that the potential arrangements of the ombudsman’s power to refer to the FCA are quite helpful. Similarly, I shall not move Amendment 189B.

My Lords, this group is now slightly confusing in that more amendments will not be moved than have been moved. However, I shall do my best to speak to the one that has been moved, but if I find myself speaking to one which will not be moved, no doubt someone will tell me.

On Amendment 188A, which would enable super-complaints to be made to the PRA about the with-profits market, the Government recognise the thrust of the argument that the Bill is drafted so as to give the sole responsibility to the PRA at the moment. However, in the light of our earlier debate about “with profits”—in particular, the points raised by the noble Baroness, Lady Drake—the Government committed to giving further consideration to this matter. I can confirm that the Government intend to amend the Bill on Report to enhance the role of the FCA in “with profits” regulation, in a way that I hope will meet the noble Baroness’s concerns. We will write shortly to the noble Baroness, Lady Drake, on this point and I will of course copy the letter to interested Peers. This may be the first absolutely firm concession that we have made this evening, and I am delighted to be able to do it.

Amendment 188B seeks to ensure that designated consumer bodies are “independent and impartial”. I note that the Enterprise Act framework on which the FCA super-complaints are consciously based takes a similar approach. I can offer the noble Baroness, Lady Hayter, some assurance that the first of the draft criteria that we will publish for consultation requires that designated consumer bodies can be expected to act “independently, impartially and with complete integrity”. I hope that this offers her the assurance she is seeking.

I think that Amendments 189A and 189B are not going to be moved.

Perhaps we can suggest that the noble Lord, Lord Newby, answers all the amendments. We seem to have slightly more success with him than with his colleague on the Front Bench. Obviously, I am delighted by that assurance and we look forward to seeing exactly how the Bill will do that, but it sounds as though it will meet our aim. With that in mind, I beg leave to withdraw the amendment.

Amendment 188A withdrawn.

Amendments 188B to 189B not moved.

Amendment 189BZA

Moved by

189BZA: Clause 40, page 127, line 25, leave out from beginning to end of line 5 on page 128, and insert—

“234H Power of FCA to make request to Competition Commission

The FCA may, subject to subsection (4) of section 131 of the Enterprise Act 2002, make a reference to the Commission if the FCA has reasonable grounds for suspecting that any feature, or combination of features, of a market for financial services in the United Kingdom prevents, restricts or distorts competition in connection with the supply or acquisition of any financial services in the United Kingdom or a part of the United Kingdom.”

My Lords, I should like to know which Minister is going to respond to this—it may help.

We are pleased that the FCA now has a new competition objective and wider competition powers. However, these powers do not go far enough to enable the FCA to deliver its objectives. As the Bill stands, the FCA will still have to refer cases to the OFT, or its successor body, which will then conduct a market analysis before being able to take further action. This looks like a slow and rather unfair regulatory process, even after the merger of organisations that will take place under another Bill.

We therefore support the view of the Joint Committee that the FCA should have concurrent competition powers in respect of a market investigation reference, together with the OFT. That would empower the FCA to conduct its own economic analysis and deal with distortions in the market without the need for any delay.

We have heard a lot about the lessons learned from PPI, which highlight the need for the FCA to have the market investigation reference powers. In 2005, the FSA signalled its concerns about the PPI market and began an investigation. After the investigation, the FSA took its concerns to the OFT, which had to look at the issues before passing the case on to the Competition Commission. Eventually the Competition Commission passed the issue back to the FSA. The process took far longer than necessary and allowed the banks and other credit providers to continue selling PPI to their unsuspecting customers.

Giving the FCA concurrent MIR powers would allow the FCA to escalate concerns about competition failures quickly and efficiently, with any failures addressed before consumer detriment crystallised. By giving the FCA powers equivalent to the OFT under Section 131 of the Enterprise Act 2002, a single organisation would be able to tackle significant market issues such as PPI without the substantial delay through referral to another body. We therefore seek to amend the Bill accordingly and I beg to move.

My Lords, since my noble friend is a bit lonely on the Front Bench just now, I intervene very briefly to support her on this. Quite often in regulatory structures the sector regulator is very nervous of referring anything to the competition authorities because it regards that as part of its failure. Under the terms of this amendment, it would be part of the process that was available—I will not say normally, but if necessary—to the FCA to refer things to the competition authority, having itself examined the structure of the market with its concurrent powers.

I am very mindful of an equivalent sector—namely, energy—where one of the problems has been that Ofgem has always refused in effect to refer the structure of the energy market to the competition authorities, even though, I happen to know, at the time the competition authorities or the members of the Competition Commission were very anxious to look at it. We might have to change the form of words slightly but I think this is the better formulation—that the FCA has concurrent powers but that it is not seen as a complete departure for a case to be referred to the competition authorities themselves and that the process is not prolonged.

My Lords, I can see that the noble Baroness is delighted that I am on my feet. I listened to the very clear and detailed arguments that the noble Baroness, Lady Drake, gave in an earlier session, to which we have come back today. I may not always respond there and then but I listen very carefully to everything that is said. However, I do not want to raise the expectations of the noble Baroness on this one.

This amendment seeks, as we have heard, to give the FCA a power to make a market investigation reference to the Competition Commission. I am sure that the Committee is aware that the Joint Committee that scrutinised the draft Bill recommended that the FCA should be given concurrent market investigation reference powers. However, noble Lords will also be aware that the Treasury Select Committee, in its report on the FCA, concluded that the case for the FCA to have market investigation reference powers has not yet been made, and that the issue should be reviewed when the FCA has bedded into its new role.

Having considered the matter very carefully, the Government have adopted the proposal of the Treasury Select Committee. The FCA’s competition objective will require it to keep the markets it regulates under review and it may of course perform its own competition analyses as part of that. The evidence-gathering and analysis carried out by the FCA will support any subsequent intervention by the OFT. For example, on a referral from the FCA, the OFT may have sufficient evidence to launch a market investigation reference almost immediately. There is precedent for this in the OFT’s response to the report of the House of Lords Economic Affairs Committee on the audit market. In the light of the evidence collected by the committee, the OFT felt able to consult on a reference to the Competition Commission without conducting its own market study.

As the Government have made clear in their response to the Treasury Select Committee, we will review the question of the FCA competition powers when it has bedded in to its new role, five years after it comes into being. I hope that with that reassurance, and confirmation that we are following the Treasury Select Committee’s recommendation, the noble Baroness will feel able to withdraw her amendment.

My Lords, I thank my noble friend Lord Whitty for his support for the amendment. His experience in this field is much greater than mine. I am surprised by the Government’s lack of interest in the relationship between the OFT and the FCA, given its new competition powers. In an earlier debate, the Government would not even agree to an MoU between the FCA and the OFT. I am pleased that the Government will keep the matter under review and therefore accept that there are some issues here. Part of the concern is that, with the merger under the other Bill of the OFT with the Competition Commission, those organisations, as all organisations are when they get together, will be tied up with working that out just at a moment when the FCA has these new competition powers and perhaps would like to use them in the way described. I beg leave to withdraw the amendment.

Amendment 189BZA withdrawn.

Amendment 189BA

Moved by

189BA: Clause 40, page 128, line 5, at end insert—

“Collective proceedings234J Collective proceedings and collective redress

(1) In respect of claims to the courts covering a significant number of consumers with equivalent or near equivalent interests or complaints, the following procedures will apply.

(2) The court may, on the application of a person (“the representative”), by order authorise the representative to bring collective proceedings before the court in respect of financial services claims of a kind specified in the order.

(3) “Collective proceedings” means proceedings brought by the representative on behalf of persons who are entitled to bring (or have brought) proceedings in respect of the specified kind of claim.

(4) “Collective proceedings order” means an order under subsection (2).

(5) A collective proceedings order may be made only if it appears to the court that the specified kind of claims raise the same, similar or related issues of fact or law.

(6) A person may be authorised under subsection (2) to bring proceedings even if the person would not otherwise be regarded as having any interest, or any sufficient interest, in the proceedings.

(7) Proceedings may be authorised under subsection (2) even if each represented person does not have a claim of the specified kind against all of the defendants to the proceedings.”

My Lords, I shall also refer to Amendment 189BB. Both amendments make up two pages of amendment to an already massive Bill, but the text should be familiar to some of the Minister’s officials in the Treasury, for reasons that I shall explain in a moment.

The Bill, by way of a pretty radical restructuring of the regulation of the financial services, greatly enhances the power of the Bank of England. One hopes that it will greatly enhance the consumer protection power of an FCA replacing a relatively feeble FSA. It enhances some consumer powers, and it arguably also enhances the role of the consumer panel and the financial services ombudsman, but it does nothing to enhance the position and powers of consumers.

The amendments suggest that we should move to a system of collective redress when the misdemeanour, or illegality sometimes, of the financial institutions involves a large number of people. The amendments would provide for the Secretary of State for the Treasury to come forward with regulations allowing for collective redress procedures.

We have had a number of such issues over the years, from mis-selling through to PPI, which has been debated substantially today and during other consideration of this Bill. Those issues involve a range of problems and a very large number of people. We know that the inability of individual consumers to get redress is difficult. We know that it also creates the kind of confusion to which my noble friend Lord Kennedy of Southwark referred just now, with intervening bodies and claims management companies confusing rather than enhancing the position for the individual consumer. Whether tens or thousands of people are involved, a more collective approach would sometimes be desirable. The PPI scandal, for example, could probably have been largely resolved by now for the vast majority of potential claimants. Instead, we are getting a “fishing trip” from the CMCs, and a huge number of claims will take years to settle and involve the banks, the intermediary companies and the courts in time, effort and cost.

The issue of collective redress in consumer matters has a considerable history. It is true that all consumer bodies have agitated under successive Governments to provide for a general system. The last Government and previous Governments were resistant to a general power. However, in the wake of the financial collapse and financial scandals, it was recognised by the last Government and many around this issue that some provision was necessary on the financial side. Indeed, the Bill that was produced in 2009-10, which became the Financial Services Act, included in its original form whole sections on collective redress—Clauses 20 and onwards of that Bill. They were considered in part very briefly by the House of Commons. They were not rejected by that House; there was actually support for those provisions at Second Reading from those on all Benches. Of course, they ended up being dropped by the advent of the general election in 2010 and the rather peculiar Byzantine proceedings that we call in constitutional jargon “wash-up”, and disappeared. I particularly objected to them disappearing, but by then it was too late.

These are in effect the self-same provisions that were seen by the Treasury and the FSA at the time as necessary. Nothing has occurred since to suggest that they are no longer necessary. They are written in the language of the parliamentary counsel and obviously backed by the Treasury’s lawyers. The Minister can no doubt tell me whether they are in quite the right place in this Bill, but it is appropriate that the Government reconsider this dimension, look at what was in the Bill at that point and reproduce it in the final version of this Bill in this form or something similar to it.

It is a very serious omission in this Bill, which otherwise provides for a total restructuring of financial regulation, that no leverage is given directly to consumers to act collectively. It is an omission that could easily be put right. I would hope that the Minister in his present mode of conciliation—the noble Lord, Lord Newby, will probably reply, so I am even more confident—will recognise that this would be a major improvement to the Bill and one that would avoid the cost, complexity and time-wasting of dealing with issues that affect so many consumers, both individual and business. It would ensure that a lot of that complexity was cut out and that we would not go on for years over a single issue that actually had multiple dimensions but in cases that were in essence the same.

I hope therefore that in principle the Minister can accept the insertion of these clauses into the Bill or at least say that he will bring back his own version of them. I am looking forward to such a recommendation from the Minister. If he feels that he cannot go that far at this stage, he also has my noble friend Lady Hayter’s amendment in this group, which says that the new authorities should look at the provision for collective redress and deliver it within three months. I would be very happy to go along with that, but certainly accepting the principle of providing consumers in these circumstances with a collective redress system—one that did not have to be invented every time there was a new scandal—would be extremely helpful. It would help to redress the balance and complexity faced by many consumers at the moment, such as in the PPI scandal. I beg to move.

My Lords, in addition to all the comments made by my noble friend Lord Whitty, which we obviously support, I would like to speak for a few moments to Amendment 189BC, which stands in my name. Had that been in place, it would also have provided a route for small firms that were sold totally unsuitable interest rate swaps to have reached a speedy cross-industry solution.

The committee will know that many SMEs took out loan agreements, having been told that they also needed to take out an interest rate swap. Those SMEs, usually with no professional legal or accountancy staff, are sitting targets for financial services companies out to make a fast buck. They need the protection that this amendment could provide. I hope that the Minister will accept it, or a suitable alternative, to ensure that small and medium-sized companies, on whom we all depend to kick start our economy, get easy access to complaint resolution where their interests are damaged.

The amendment would give small firms the ability to complain and bring proceedings—court proceedings if necessary—to ensure that they could get proper adjudication on whether they were indeed mis-sold a particular product. As we have heard, the amendment would require the Government to introduce proposals within three months of Royal Assent to make it easier for groups of small firms to bring collective proceedings before the courts in respect of financial services claims, with the right to opt out for companies not wanting to be party to the outcome of the cases.

The amendment would also empower SMEs to complain to the regulators and to give their representative bodies the right to complain about market failures to the FCA, in the same way in which individual consumers can.

There is a gap in the legislation for small firms wanting to make complaints in their role as consumers of financial products. A case can be made for the representative bodies of small firms being able to take civil complaints. On 22 May this year, the Minister in the Commons, Mr Hoban, said that,

“the provisions in the Bill will not prevent bodies representing small and medium-sized enterprises which fit the relevant definition of consumers from making super-complaints”.

We therefore seek clarity in the Bill to that effect through the amendment.

Mr Hoban also said that:

“what type of consumer body should have access to super-complaints is complex and will require more detailed criteria than can be set out in the Bill.”—[Official Report, Commons, 15/10/12; col. 1031.]

He announced that the Treasury would publish draft criteria “later in the year”.

I might have missed it, but it is now later in the year and I think it is yet to appear. Perhaps the Minister could provide those further details.

The Government believe that collective proceedings, in the appropriate circumstances, can deliver access to redress and a potential deterrent effect. That is why the Government have been consulting on a range of proposals to make it easier for consumers and small businesses to bring private actions in competition law—including whether to extend to businesses the current right of consumers to bring a collective action following a breach of competition law, and whether to make it easier to bring such actions. The Government are considering the consultation responses and hope to publish their response before the end of the year. We want to take the opportunity to learn from the outcome of that consultation and reflect on the implications for the financial services sector before proceeding to legislation.

The noble Baroness may say that her amendment would provide adequate time for consultation. However, her amendment specifies that small businesses should be able to bring collective proceedings on an opt-out basis. The type of persons who might bring collective actions, whether on an opt-in or opt-out basis, are substantive questions on which BIS has been consulting. We think that it is a lot better to await the outcome of the BIS consultation and reflect on the implications for financial services than to seek to pre-empt that process and require a particular model now. If the Government were to conclude from this exercise that it would be appropriate to bring forward legislation on collective proceedings for the financial services sector, any proposals should then be subject to proper consultation.

As an addendum to the second part of Amendment 189BC, I note that the Bill would not prevent bodies representing small and medium-sized enterprises that fit the relevant definition of “consumers” from making super-complaints. As was explained in another place, the issue of what type of consumer body should have access to super-complaints is complex and will require more detailed criteria than can be set out in the Bill.

We have considered this matter carefully, and I can inform the House that the consultation document that the Government will shortly publish covering this issue will include the proposal that the Treasury should be able to designate bodies that primarily represent the interests of small to medium-sized enterprises as super-complainants and that this will be reflected in the draft criteria.

I hope that, with the reassurance that the Government will consider proposals on collective proceedings carefully and that they will shortly consult on allowing SME representatives to make super-complaints, the noble Lord and the noble Baroness will feel able to withdraw their amendments.

My Lords, I was aware and was of course pleased that BIS is once again consulting on this issue. Given the way in which these amendments are framed, the Bill would simply say that the Treasury had the power to bring forward regulations for collective procedures and collective redress on an opt-in or opt-out basis. They do not specify more than that. They do not, unlike my noble friend’s amendment, actually specify a timescale. Having this in this Act would therefore allow the considerations arising from the more general consultation to be tailored to the financial services arrangements without any new primary legislation. I would therefore have thought the Minister would welcome that.

In the discussions in the run-up to the Financial Services Bill in 2010—noble Lords do not often hear me say this—the Treasury was much more progressive on these issues than was BIS. Of course, we are under new management now and maybe that has changed. There are some very special situations in the financial services sector, and we do not want to wait for another PPI, another pension mis-selling, another sub-prime mortgage crisis or whatever where we have to construct from scratch a new system to protect consumers, both business and individual.

These amendments would allow the Minister to do that, after the general consultation if necessary, so I do not accept the argument that we have to wait for that consultation before they are included here. It is clear to me and, I think, to a lot of people that the financial sector needs such provisions, and I would not like to be in a position 18 months down the line where we had to go back to a new form of primary legislation in order to provide them. I therefore advise the Minister to have another look at these amendments, but for the moment I shall withdraw my amendment.

Amendment 189BA withdrawn.

Amendments 189BB and 189BC not moved.

Clauses 40 and 41 agreed.

Schedule 14 : Amendments of Part 24 of FSMA 2000: insolvency

Amendments 189BD to 189BL

Moved by

189BD: Schedule 14, page 263, line 8, before “the appropriate” insert “or recognised investment exchange,”

189BE: Schedule 14, page 264, line 6, at end insert—

“(1A) In subsections (1), (2) and (6), after “authorised person” insert “or recognised investment exchange”.”

189BF: Schedule 14, page 264, line 24, at end insert “, and

(b) in paragraph (a), after “authorised person” insert “or recognised investment exchange”.”

189BG: Schedule 14, page 265, line 12, at end insert “, and

(b) in paragraph (a), after “authorised person” insert “or recognised investment exchange”.”

189BH: Schedule 14, page 266, line 17, at end insert—

“(1A) In subsection (1)(a), after “authorised person” insert “or recognised investment exchange”.”

189BJ: Schedule 14, page 266, line 37, at end insert—

“(1A) In subsection (1)(b), after “authorised person” insert “or recognised investment exchange”.”

189BK: Schedule 14, page 267, line 20, at end insert “, and

(b) in paragraph (a), after “authorised person” insert “or recognised investment exchange”.”

189BL: Schedule 14, page 269, line 19, at end insert “and

(b) in paragraph (a), after “authorised person” insert “or recognised investment exchange”.”

Amendments 189BD to 189BL agreed.

Schedule 14, as amended, agreed.

Clause 42 agreed.

Schedule 15 : The consumer financial education body

Amendment 189C

Moved by

189C: Schedule 15, page 272, line 2, at end insert—

“In paragraph 3 (status), in sub-paragraph (2), omit “board members,”.”

Amendment 189C agreed.

Amendment 190

Moved by

190: Schedule 15, page 272, line 4, at end insert—

“Omit paragraph 5.”

Like the noble Lord, Lord Whitty, I, too, am fighting one of the battles left over from the Financial Services Act of 2010. As the Committee will find out, mine is a very much more modest affair.

I shall move Amendment 190, which is a probing amendment to Schedule 15 to this Bill. This schedule makes a number of amendments to the law governing the consumer financial education body which likes to go by the name of Money Advice Service. This body was created by the 2010 Act. As noble Lords who were involved in that Bill will be aware, it received little detailed scrutiny in your Lordships’ House and was eventually passed into law, as the noble Lord, Lord Whitty, said, under the wash-up procedure and the Bill ended up in somewhat truncated form. The provisions relating to Money Advice Service received no scrutiny whatever in your Lordships’ House. My noble friends and I had tabled 40 amendments at the time, all of which went undebated. I said when we did the final wash-up procedure that I hoped that if we formed the Government after the general election, we would revisit these remaining unsatisfactory aspects of Money Advice Service. Of course, other more pressing issues faced the Government in 2010 and going back over legislation creating minor public bodies was clearly never going to be a priority. However, as we have the opportunity of this Bill before us, I have decided to raise just one of the 40 issues that I wished to explore in April 2010.

The model set up in what is now paragraph 4 of Schedule 1A to FiSMA is that Money Advice Service can discharge its functions, inter alia, by arranging for other people to do things for it. Paragraph 5 goes on to say that if Money Advice Service makes such an arrangement with another person, including one established by statute, that person,

“may do that thing despite any limitation on its capacity (whether under a rule of law or otherwise) which, but for this paragraph, would have applied”.

That seemed to me to allow Acts of Parliament or the governing instruments of companies or charities to be overridden at the will of an unelected quango. If that is the case, I suggest that the paragraph is unconstitutional. It may be quite worse than the Henry VIII clauses to which we customarily object, because Henry VIII clauses at least give powers to Governments who are democratically elected and accountable.

The effect of my amendment—which, as I have said, is a probing amendment—is to remove paragraph 5. It would still be possible for Money Advice Service to work through other bodies, but only if those bodies were not constrained by some kind of legal impediment, which paragraph 5 seems to do away with. My amendment is really designed to find out what limits, if any, exist around paragraph 5. Is it the case that if Parliament sets up a public body, or a quango to carry out a specific activity, that body can do what it likes with Money Advice Service whatever the governing legislation says? Is it the case that if a charity is set up with specific aims—for example, animal welfare—it can divert onto working with Money Advice Service with no further ado? Is it the case that if a company was set up to explore for and extract oil, say, it could choose to do work with Money Advice Service without any reference to shareholders? I may well have misunderstood the way in which paragraph 5 operates. It may well not be unconstitutional, as it appears to be on the face of it. I look forward to hearing what my noble friend the Minister has to say and I beg to move.

My Lords, I hope that I can reassure my noble friend. As she says, this amendment removes the provision that specifically aims to allow organisations that wish to act on Money Advice Service’s behalf to do so, even if there is otherwise a limitation on their ability to do this. This is to enable bodies such as charities, credit unions or friendly societies to work with MAS without constraints imposed by, for example, tightly specified charitable objectives. This provision, as my noble friend pointed out, was inserted into FiSMA by the Financial Services Act 2010. I vaguely remember her tabling amendments on that point when the Bill that became that Act was being considered by this House but, as she said, there was insufficient time to debate them during the wash-up.

I think that I can put my noble friend’s mind at rest relatively straightforwardly: there is a direct precedent for what is being proposed here in relation to the National Lottery. National Lottery distributors encountered similar difficulties working with particular bodies whose constitution was narrowly drawn. Accordingly, amendment was made to the National Lottery Act 1993, in Section 25A, to permit charities and similar bodies to act on behalf of the distributor. A similar provision was included in paragraph 7 of Schedule 3 to the Dormant Bank and Building Society Accounts Act 2008. An example of the circumstances in which such a power might be used is where a charity’s objects may be wholly in sympathy with Money Advice Service’s objectives, but when read narrowly the objects are narrower than a particular project on which Money Advice Service wishes to work with the body. This provision lifts that constraint and, given the active interest of a large number of charities in the financial capability agenda, I hope that the noble Baroness would not wish such organisations to be prevented from working with Money Advice Service in future. Having received this explanation, I hope that my noble friend will feel able to withdraw the amendment.

My Lords, that explanation has left me as concerned as I was to begin with. While his examples seek some sort of plausible minor extension of a body’s activities, paragraph 5 is not confined to minor changes to a body’s constitution and it is not confined even to charities whose objectives are related to those of Money Advice Service. It is very broad indeed and would apply under a very much broader basis, including to a large number of bodies set up by statute. I shall consider carefully what my noble friend has said and look at the precedents that he has offered as justification for this, but I have to say that I am not entirely happy with his explanation. I beg leave to withdraw.

Amendment 190 withdrawn.

Schedule 15, as amended, agreed.

Clause 43 agreed.

Schedule 16 agreed.

Clauses 44 to 46 agreed.

Clause 47 : Mutual societies: power to transfer functions

Amendment 190ZZA

Moved by

190ZZA: Clause 47, page 131, line 7, at end insert—

“( ) making provision for the increased diversity of the financial services sector and promotion of mutual societies, including arrangements to measure the number of members of mutual societies, and the market share for mutual societies as a proportion of the UK financial services sector.”

My Lords, I shall speak also to Amendments 190ZZB, 190ZZC and 190ZCA. Mutual and building societies and the friendly society sector have played an important part in the organisation of savings and investments and the provision of credit in this country for centuries. Their existence, against all the odds on some occasions, has sometimes been a close-run thing and their constitutions and management structures are redolent of an earlier age of prudence and sobriety in financial matters. Many people regret that we do not do more to support this sector. There have been reports and initiatives aplenty in recent years, but not too much action. I am sure that all noble Lords will share our concern that the Bill should not disadvantage these important organisations.

Our amendments therefore have three purposes. The first is to invite the Minister to update us on the question raised in another place about the need to modernise the register of these bodies. As was indicated during the Committee stage debates, credit must be given to the FSA for bringing the registry out of the 19th century and into its present form, but unlike Companies House, where all filings can be done online, at the Registry of Friendly Societies, located at the FSA, it still takes 48 hours to get a search of certain records of a mutual society. In comparison, a search at Companies House is a simple process which takes minutes, if not seconds. Mutual societies deserve a modern registry which can support and promote the mutual society model. The amendments would provide for any function of the FSA in respect of the Registry of Friendly Societies to be transferred to a register established at Companies House, though, of course, we would be happy if the location of the registry could be unchanged. If the Minister could confirm that a modern registry can be established within the FCA, that would satisfy us.

Secondly, this part of the Bill empowers the Treasury to amend by order legislation on mutual societies for a number of different purposes. When this was raised in the other place the issue seemed to be whether the FCA and PRA responsibilities for the functions that we are discussing are broadly the same as those for the plc sector and that there are no anomalies for the mutual sector as opposed to the non-mutual sector. Unfortunately, it is not clear from Hansard whether the Minister was able to clarify whether or not this was the case, so it might be useful if the Minister could outline how the clause affects the mutual sector and confirm that it is simply a technical matter with no new provisions.

Thirdly, Clause 47 introduces provisions for credit unions in Northern Ireland. Credit unions play a very important part in the organisation of savings and the provision of credit in the Province. As I am sure the Minister is aware, some attention was paid to this issue when the matter was debated in Committee in the other place. Subsection (2)(g) lists the Credits Unions (Northern Ireland) Order 1985 as legislation that the Treasury may amend by order. As was raised in the other place, the 1985 order is specifically included in the Northern Ireland Act 1998, established by the Good Friday agreement. Again, therefore, it would be helpful if the Minister could clarify the general position, particularly that subsection (4) is purely an enabling provision that will allow the transfer of functions on an agreed and acceptable basis and will not automatically dictate such.

I take this opportunity to invite the Minister to update us on the outcome of the consultation on the draft mutuals order, and particularly on whether it has now been agreed which matters will go to which body. The Minister will recall that the draft mutuals order talked about transfers to the FCA or the PRA as though the question of which regulator will actually step in at which moment had been left as a rather grey area. As was said when this issue was discussed in another place, surely that ambivalence suggests uncertainty as to what will happen in future, at a time when we should be encouraging the sector to have confidence and to grow. It also seems to run contrary to the commitment on page 9 of the coalition agreement, which states that the Government,

“will bring forward detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry”.

Given that we are talking about transferring responsibilities between regulators, which regulator will be the champion for the mutuals model; who will actively encourage the benefits that can flow from a non-plc corporate form; and will either of the regulators have any responsibilities for such matters or none? I beg to move.

My Lords, the draft mutuals order has been published this evening. My officials will send the noble Lord a link to it in the morning so he can be completely up to date. That cuts through that point: the draft order confirms that the Government are moving steadily ahead with lots of action, and I will briefly remind the Committee of some of it. The order is the next thing that is due to make progress in the Government’s important objective of promoting diversity. As we have discussed before, the important thing, as the noble Lord said, is that we want a level playing field. The Government do not see this Bill as the vehicle through which to promote particular sectors of the financial services industry—I think that the noble Lord understands that—but I will sketch out some of the other things that we are doing.

To reassure the Committee why in my view Amendment 190ZZA is not necessary, the Government have demonstrated a clear commitment to promote mutuality and to diversify and strengthen the mutual sector. We are taking action to give concrete effect to this commitment, including the new requirement in the Bill for the regulators to analyse the impact of proposed rules on mutuals and building societies, so helping with the local level playing field; the protection given to members of Northern Ireland’s credit unions; and legislation to reduce restrictions on the growth of credit unions. The Government are committed to ensuring that building societies continue to operate on a level playing field with banks while maintaining their unique identity—for example, in the draft Banking Reform Bill published last week, we proposed to exempt building societies entirely from the definition of a ring-fenced bank, although changes will be made to the Building Societies Act 1986 to bring it into line with the ring-fencing provisions of the draft Bill, which was the proposal supported by most respondents.

The information requested by the amendment is easily available online, for example from the Building Societies Association’s website. In this instance, placing additional burdens on the regulator and the sector through legislation is both disproportionate and unnecessary. More widely, we consider the appropriate measures of success in this area to be not only a growing mutuals sector in terms of market share or number of members, but also evidence of mutuals being competitive with their plc counterparts, and mutuals not being subject to unfair obstacles or unfair regulatory burdens. Focusing on just these two quantitative measures of success, as this amendment does, would only tell part of the story.

Amendments 190ZZB, 190ZZC and 190ZCA are to Part 3 of the Bill, which provides an order-making power to amend certain legislation relating to mutual societies, including Northern Ireland credit unions and industrial and provident societies. The problem with these amendments is that the registry of friendly societies does not actually exist, so there is nothing to transfer. The Government have previously considered transferring the registration of mutuals to Companies House, but decided against doing so because, in our view, the costs and legislative changes required would be much greater than the benefits, if any. Considerable legislative changes would be required to alter the status of Companies House, including giving it the necessary framework, objectives, and the ability to charge fees to mutuals. Accordingly, there would be cost implications. Currently, registration at Companies House is self-financing. It is processed electronically with the emphasis on a cheap and fast process with a high-volume turnover. In contrast, mutuals registration is manual and would require a bespoke system and a number of staff in order to accommodate this. Transferring the registration of mutuals from the FSA to the FCA retains the current mutuals expertise. The FCA would have the staff, processes, and knowledge to continue fulfilling this role.

I am aware of the industry concerns about the ease of public access to the register to which the noble Lord draws attention. The FSA introduced online access to the public records of mutual societies in April 2011. This has made it easier to access annual returns and accounts at a lower cost than was previously possible. The FSA is also now scanning newly submitted annual returns and accounts, which currently exist in hard copy only. There is significant progress here.

However, the FSA has not, to date, scanned all historical documents. To do so would be likely to incur a significant additional one-off cost which was recently estimated at £2.5 million by the FSA and would be paid for through levies on mutuals. It is right that the regulator should assess whether the benefit of a full transition to an electronic public record is worth potentially significant additional costs to the mutuals sector through the levy. Therefore, it is not a straightforward matter. I hope that, on that basis, the noble Lord will feel able to withdraw his amendment.

I will talk, just quickly, about government Amendments 190ZA to 190ZD. This is a group of four minor and technical amendments to Clause 48. Currently, Clause 48 permits an order under Clause 47—an order transferring functions of the FSA under mutuals legislation to the FCA and/or the PRA—to apply provisions of FSMA to the transferred mutuals functions. For example, this will allow functions under mutuals legislation to be brought within the regulators’ governance and fee structures. It will also allow FSMA objectives to be applied to non-FSMA mutuals functions. A draft of an order under Section 47, transferring the FSA’s functions under mutuals legislation to the FCA and the PRA, was published on introduction of the Bill to help inform parliamentary debate. A revised draft, as I have said, will shortly be published for consultation; indeed, it is out this evening. The draft order applies the PRA’s objectives to its functions under mutual legislation.

It is possible that in future new objectives might be given to the PRA by an order made under new Section 2D of FiSMA, which provides an express power to impose additional objectives, or by an order under new Section 22A of FiSMA specifying activities as PRA-regulated activities. As drafted, Clause 48 would not permit such new objectives to be applied to the PRA’s non-FiSMA mutuals functions. These four amendments will remedy that.

I thank the Minister very much for his detailed explanation, particularly of the government amendments. I should like to make two points about level playing fields since that was the recurring theme. If there is a level playing field in terms of the generality of the mutual sector—I include in that the provident societies and friendly societies—there is still a problem which the Government have caused. An aspiration of the coalition agreement is that more support should be given to mutuals, yet we are saying that there must be a level playing field. I think that we would also accept that it is not the job of the regulator to pick and choose between them. I just leave on the table the thought that perhaps the Government might think again about how they proselytize for a sector in which they clearly believe. We all think that it does a good job, yet we are going to leave it to suffer the scourges of competition from whomever it is and from every quarter of the globe, which seems a little unfair. Perhaps that can be thought about again.

On upgrading the many years of records of friendly societies going back many centuries, many of them are probably on velum and therefore very difficult to transfer, which I understand. Again, it seems a little unfair that this cannot be given a little bit of priority. The Committee debates in the other place were redolent of support for this idea. Clearly, progress is being made, which we welcome. New listings and registrations will be online and therefore available. On those bases, I think that the level playing field is sufficient and we will just have to wait for that to come through. With that, I beg leave to withdraw the amendment.

Amendment 190ZZA withdrawn.

Amendments 190ZZB and 190ZZC not moved.

Clause 47 agreed.

Clause 48 : Further provision that may be included in orders under section 47

Amendments 190ZA to 190ZC

Moved by

190ZA: Clause 48, page 131, line 47, leave out subsection (3)

190ZB: Clause 48, page 132, line 7, leave out “subsections (2) and (3)” and insert “subsection (2)”

190ZC: Clause 48, page 132, line 12, leave out “or (3)”

Amendments 190ZA to 190ZC agreed.

Amendment 190ZCA not moved.

Clause 48, as amended, agreed.

Amendment 190ZD

Moved by

190ZD: After Clause 48, insert the following new Clause—

“Power to apply or disapply provision made by or under FSMA 2000

(1) The Treasury may by order provide—

(a) for any relevant provision that would not otherwise apply in relation to transferred functions to apply in relation to those functions with such modifications as may be specified;(b) for any relevant provision that would otherwise apply in relation to transferred functions not to apply in relation to them or to apply with such modifications as may be specified.(2) “Relevant provision” means a provision of, or made under, FSMA 2000.

(3) “Transferred function” means a function that has been or is being transferred by an order under section 47; and section 48(4) applies for the purpose of this subsection.”

Amendment 190ZD agreed.

Clauses 49 to 56 agreed.

House resumed.

House adjourned at 9.23 pm.