Report (2nd Day) (Continued)
Clause 6 : The new Regulators
25D: Clause 6, page 21, line 13, at end insert—
“( ) the general principle that, where consumers properly repose trust in a firm’s discretion and are vulnerable to the exercise of that discretion, the firm has a duty to act in the consumer’s best interests”
My Lords, financial services is perhaps less problematic than broadcasting at the moment. Amendment 25D stands in my name and that of my noble friend Lord Eatwell. This is perhaps the key amendment in all the ones that we will discuss today. We will simply not get this industry back on track and working in the interests of its savers and borrowers until firms put clients’ interests above their own bonus levels, remuneration or promotion prospects. Rather as doctors take care—above all else—of their patients, so must the banks, the insurance companies, those who lend us money and those who care for our savings put our interests centre stage.
These amendments seek to ensure that where consumers put trust in a firm’s discretion, and are vulnerable to the exercise of that discretion, the firm must act in their best interests. Trust is key to this industry. As John Kay wrote in his July review for the Government:
“Financial intermediation depends on trust and confidence: the trust and confidence that savers who invest funds have in those they choose to manage these funds”.
This goes to the heart of the behaviours, ethics and very thought patterns of this vital industry. Surely, as we have heard already today, we have enough evidence from LIBOR, precipice bonds, mortgage mis-selling and interest rate swaps that cultural change is needed in this industry. The costs of the PPI scandal, which has already been referred to, are now being picked up by those very offending banks. I believe that this amendment is in their interests. If they were stopped from doing these things beforehand, they would not then have to put things right afterwards.
The PPI scandal has sometimes been blamed on the lack of early intervention by the FSA, on the insufficiently rapid transmission of intelligence from the Financial Ombudsman, or on absolutely anything or anyone other than the mis-selling banks themselves. Had those banks had a duty of care towards clients, or been required to consider their best interests, there is no way that they could have continued to sell those products once they realised how few of their purchases would actually be covered by them.
Surely it is strange that where a saver puts their money into a trust-based pension scheme it is governed by trustees who have fiduciary duties to act in the best interests of beneficiaries, but that if that same saver puts their money in a contract-based pension scheme or similar scheme run by commercial providers, the FSA’s rules governing such contracts impose no duty on providers to put beneficiaries’ interests first. That cannot be right. It is not what savers expect of their provider.
The amendments would ensure, in an enforceable way, that authorised persons act in the best interests of their clients. As I argued in Committee, the Bill expects consumers to,
“take responsibility for their decisions”—[Official Report, 11/6/12; col. 1255]—
but without placing a corresponding requirement on firms to act in the best interests of their clients. This lacks balance. As the Kay review says:
“Stewardship is incompatible with conflict of interest”.
Kay calls for all those involved in the equity investment chain to observe fiduciary standards in their relationships with clients. Thus financial services should owe their customers the same duty of care as a lawyer or other professional by acting honestly, fairly and professionally in the best interests of their customers and in managing conflicts of interest. It is no good relying on rules to ensure this. Such requirements on firms have been in the FSA’s principles for business, yet consumers have still been shabbily treated.
We want there to be a duty of care in the Bill to ensure proper oversight and to emphasise its importance both to the regulators and the regulated. Such a duty of care will ensure that financial services can no longer profit unfairly at the expense of their customers. It is not enough—in case the Minister is going to say it—to leave this simply to the banking commission. It should be central to the Bill.
The Kay review calls for the application of fiduciary standards of care by all those who manage or advise on the investments of others. That is what we seek in these amendments and what I hope this House will now support. I beg to move.
My Lords, I support the amendment. The issue behind the amendments in this group is that the investment industry’s duties to savers appear to be poorly understood and observed. As the Law Commission has confirmed, where firms are managing other people’s money or giving them financial advice, they have strict fiduciary duties to act in those people’s interests. This includes both individual clients and institutions such as pension funds which represent large numbers of underlying savers.
Fiduciary duties are stricter than FSA rules, yet they are not universally accepted within the industry. There is anecdotal evidence that firms often seek to exclude or restrict their liability for breach of fiduciary duties through contractual terms which may not be read or understood by the lay trustees of pension funds. Even where they are accepted, it is very clear that they are not being applied. In the past week, the FSA has published a “Dear CEO” letter on conflicts of interests among asset managers which found that,
“many firms had failed to establish an adequate framework for identifying and managing conflicts of interests”,
“in most cases senior management failed to show us they understood and communicated this sense of duty to customers”.
In other words, firms are often not meeting even the FSA’s standards regarding conflicts of interest, which are lower than fiduciary standards.
As these are common law duties, they do not form part of the FSA’s regulatory approach. Indeed, there is confusion over whether it is appropriate for the FSA to enforce them, with some arguing that it is for beneficiaries to pursue court actions if duties are breached.
Where pension savings are concerned, this is unrealistic and unsatisfactory as a means of achieving high standards of care across the market. An explicit, best-interests principle in a Financial Services Bill would give the FCA a powerful tool to ensure that consumers’ interests were protected.
The concern is that the Bill’s new wording is significantly weaker than that proposed by the Joint Committee and may not provide a high enough level of protection for consumers. It lacks clarity in what might constitute an appropriate level of care, thereby leaving open the very question it was intended to resolve. Where those managing people’s long-term savings are concerned, the problem is precisely that there is confusion and misinformation about what is the appropriate level of care. Explicit confirmation that those managing other people’s money must act in their best interests would be a clear and effective way to help achieve the Joint Committee’s intention. Amendment 25D would provide that confirmation, since anyone managing somebody else’s money would meet the criteria of discretion and consumer vulnerability.
The noble Baroness, Lady Hayter, drew attention to the fact that this issue has the potential to seriously undermine the aims of auto-enrolment. In trust-based pension schemes, it is clear that the trustees are there to act in beneficiaries’ best interests. Indeed, as the ABI pointed out in oral evidence to the Joint Committee, one positive feature of the National Employment Savings Trust—NEST—is that it has a trustee structure that looks to protect its members. However, many savers are likely to be auto-enrolled into contract-based pension products where, as things currently stand, no such protection exists. Since the House of Lords considered the Bill in Committee, we have had the Kay review of UK equity markets. It recommended that:
“Regulatory authorities … should apply fiduciary standards to all relationships in the investment chain which involve discretion over the investments of others, or advice on investment decisions. These obligations should be independent of the classification of the client, and should not be capable of being contractually overridden”.
This amendment seeks to address a number of objections to similar amendments raised in the Commons and in the Lords in Committee. First, it does not rely on the term “fiduciary duty” but rather seeks to enshrine the common sense principle that underpins these duties—that where consumers rely on a firm’s discretion, that discretion must be exercised in the consumers’ best interests. Secondly, it would not supersede or restrict the specific standards to be laid down in FCA rules but rather would provide an overarching principle that the FCA should bear in mind when setting those rules. Thirdly, it would not apply across the board but only where appropriate—that is, where consumers have a particular relationship with providers that justifies a best-interest standard.
When we looked at a similar amendment to Amendment 25D in Committee, my noble friend Lord Sassoon expressed sympathy with the intent but argued that it was a matter for the FCA to make detailed rules on, rather than to be included in the Bill. However, as I have already said, part of the problem is that the common law status of fiduciary duties makes it unclear whether it falls within the FCA’s remit to uphold them, hence the need for an explicit reference in the Bill. It has also been suggested that refusal to amend the Bill in this way indicates a lack of political support for robust action to challenge the interests of financial intermediaries. Indeed, this could make the FCA feel that it has limited room for manoeuvre. Therefore, I hope that my noble friend will be more prepared to consider accepting the amendment and, at the very least, that he will give some indication of the support that the Government will give to the full implementation of the Kay recommendations.
My Lords, in supporting my noble friend’s amendment I reread this section of the Bill, and I realised that I did not understand it at all. On the face of it, we are discussing here the consumer protection objective—that is, a series of statements most of which could be read as totally vacuous. In fact, as I read them again, I immediately thought, “What does it leave the FCA to do, rather than simply tell them?”. There are remarks like:
“the general principle that consumers should take responsibility for their decisions”.
If that is a general principle, why do any of the other principles hold?
“the needs that consumers may have for the timely provision of information and advice that is accurate”,
and so on. Anyone who knows anything about systemic risk knows that the relevant amount of information is massive and that few people on this planet would be capable of processing it in order to come to a view.
My noble friend’s amendment at least seems to have some impact on the FCA possibly doing something. Reading the Bill, I have great difficulty seeing what the FCA then does. Perhaps the Minister can tell us.
Let us take the simple case where a particular part of the financial services industry is managing a fund for a consumer. How does the consumer know whether their funds are being managed properly? What is the process whereby the consumer would ever get to the stage of thinking, “Something has gone wrong here”? I can find nothing in the Bill that tells me that the FCA will play an active role. Will it be rather like the Press Complaints Commission where, if no one complains, we end up with the ghastly press that we have and no one does anything about it?
I should have raised this earlier but it did not dawn on me until I read the Bill again, apropos of my noble friend’s amendment, how peculiar this whole new section is. There may be another new section that states, using my noble friend’s favourite word and mine, that the FCA “must”, when it examines any questions under this heading, act to change things. I cannot find anything in the Bill that says that, but the Minister knows the Bill better than I do, so he may well point to that. One outstanding thing about my noble friend’s amendment is that, compared with most of what is already in this new section, it is substantive and not vacuous.
Another example is that,
“the FCA must have regard to … the differing degrees of risk involved in different kinds of investment or other transaction”.
If you wanted a vacuous statement that more or less takes the biscuit. In fact, I am trying very hard to find any sentence that is not vacuous. When the noble Lord replies to my noble friend—with any luck, he might even accept my noble friend’s amendment—he might explain the point of the whole of the rest of this new section. It would get about a C- in any economics first-year exam on what should be the objectives of consumer protection.
My Lords, this is another group of amendments where we have not only debated the issues at length at previous stages but seen broad agreement across the House on the driving principle behind them. The notion behind the amendments is both clear and unarguable. Firms have and should have responsibilities to their customers. I agree that consumers have, all too often, suffered detriment at the hand of financial services firms because the regulator’s overly broad remit meant that such important matters were not given sufficient attention. The main answer to the challenge of the noble Lord, Lord Peston, is that it is for that very reason that we are creating a focused conduct of business regulator with a new suite of powers to tackle firms that do not take their considerable responsibilities in this area seriously.
Is the Minister telling your Lordships that the FCA will have the power to intervene with specific firms? On the basis of what information, I wonder.
Yes, I can confirm that. The information may come from a whole range of sources. Obviously, consumer complaints could be one source, but I know that the noble Lord postulated a circumstance in which there was no consumer complaint. It will clearly be going in regularly to review how a firm operates and conducts its business. That will be another source of information. I am sure that it will regularly compare products on offer, one against another, and if there are outlying products, that is another source of information. There is a whole range of sources of information. The key thing here is that we have in the FCA a regulator that does not have to be concerned, as the FSA does, with all the considerations of prudential regulation and supervision and can therefore take a much clearer approach. As we discussed, there are specific product intervention powers, which the FSA does not have.
The noble Lord helpfully raises the general background. We are putting the FCA in a much better position to tackle those issues proactively. Specifically, Amendment 25D would insert a factor that the FCA would have to consider when advancing its consumer protection objective. Namely, it would require the FCA to have regard to,
“the general principle that, where consumers properly repose trust in a firm’s discretion and are vulnerable to the exercise of that discretion, the firm has a duty to act in the consumer’s best interests”.
As I reflected in Committee, this is a cleverly worded amendment and the motivation behind it is noble, but I am still not convinced that it would result in firms acting in the way that the amendment is intended to ensure.
I am clear that the best way for the regulator to ensure that firms act in the best interests of their customers is through detailed, clear and unambiguous rules. Noble Lords have already highlighted the FSA’s “treating customers fairly” principle, under which it has carried out important work to protect consumers. With the renewed focus on consumer protection which I have just highlighted, the FCA will be empowered to go further. The precision attached to rules offers a much more effective shield for consumers than a broad duty, which will be near-impossible for the FCA—or, indeed, firms or consumers—to interpret, given the breadth of interests of different consumers at different times.
Moving to Amendment 26B, we return to the thorny question of fiduciary duty. Amendment 26B is drafted to reflect the recommendations of the Kay review in this area. The Government are in the process of responding formally to the recommendations of the review, and I hope that the House will concede that it would be inappropriate for me to pre-empt that response. I assure my noble friend Lord Stoneham of Droxford that we are taking the Kay review recommendations very seriously and that they will receive a substantive response.
I reassure the noble Baroness, Lady Hayter of Kentish Town, that the regulatory framework that we are establishing will enable the FCA to consider to what extent current regulatory rules in this area support these standards, if they advance its objectives. However, I am concerned that there are aspects of this amendment which would not have the effect that we desire. In particular, the proposal that the regulator gives guidance as to what is the effect of common law, notwithstanding what we have heard, seems very dangerous to me. It risks absolving firms of the duty to consider their role and duty under common law and places the burden on the regulator to outline how the common law applies. Seeking to codify common law in guidance in this way also means that the scope for the common law to develop and adapt to reflect changing circumstances—which is, of course, one of the great virtues of the common law—may be impeded. As a general point of principle, this amendment is unnecessary, because the FCA is empowered to issue such guidance as it sees fit.
The last amendment in this group, Amendment 45A, is another that we have seen before. It would require the FCA and PRA to have regard to,
“the principle that authorised persons should act honestly, fairly and professionally in the best interests of consumers who are their clients”.
Of course firms should act in this way. The right way to ensure that is to empower the FCA, when firms do not act in that way, to act under its consumer protection objective, with strong mechanisms in place to ensure that it co-ordinates effectively with the PRA when it does.
I agree that we want financial services firms to act in a way that puts customers first. It is precisely for this reason that we are creating the FCA as a focused conduct and business regulator. I maintain that the regulatory framework that we are putting in place will lead to better outcomes for consumers, with a focused regulator empowered to act and armed with substantial new powers to ensure that it does. On this understanding, I ask the noble Baroness to withdraw her amendment.
My Lords, I thank the noble Lord, Lord Stoneham of Droxford, and my noble friend Lord Peston for their support. When my noble friend Lord Peston spoke of vacuous statements, it slightly reminded me of the Simon Hoggart test of everything: if one says the opposite of a statement and it is absolutely meaningless, then maybe the statement was not worth saying anyway. If one says the opposite of “firms should act in their clients’ best interests”—that is, “firms should act in their clients’ worst interests”—it shows that this is an important statement and is worth considering.
The uncertain and rather confusing reply from the Minister is not the one he should have given. His reply is not good for the industry, it is certainly not good for consumers, and it is not good for UK plc, which needs this industry to be thriving and therefore trusted. He is not right in saying that detailed rules are the answer; they did not work before. Treating customers fairly—that phrase that some of us know very well—is not the answer either, because it did not work before. A broad duty is needed.
In these amendments we ask for what we believe to be the common law position, and what the Kay report recommended. Why the Government could not have responded to that report by today so that we could have known whether this could be in the Bill I do not know; they have had it since July—I had a holiday, I do not know if the Government did. In these amendments we ask for what every other profession has to offer its clients or patients. It is what consumers, whether savers or borrowers, expect from their providers—that authorised persons, managing other people’s business, have a duty to act in their clients’ best interests. This means avoiding conflicts of interest, acting in good faith, not profiting unreasonably at the expense of customers without their knowledge and consent, and a duty of confidentiality. It is not that painful. This needs to be in the Bill: first, to make sure it happens; and secondly, to empower the FCA. I feel sure that noble Lords will support this move, and I therefore wish to test the opinion of the House.
Amendment 25E not moved.
25F: Clause 6, page 21, line 19, at end insert—
“( ) the need to balance protection for consumers against the desirability of consumers having affordable access to appropriate products with appropriate information or advice or both”
My Lords, in moving Amendment 25F I should ask the House to take note of my interests as set out in the register. The purpose of this amendment is to make it explicit that the FCA is able and, indeed, required to balance the absolute objective of consumer protection against the desirability of ensuring that the costs and risks of regulation do not result in customer detriment by discouraging providers from serving customers with products from which they can benefit.
The context of this amendment is the retail distribution review, which is coming into force shortly and to which my noble friend Lord Flight referred earlier. In my view, this quite properly moves the industry from selling investment products through often hidden commissions and ensures that independent advice is truly independent, high quality and paid for through a transparent fee. While my noble friend Lord Flight raised a number of practical issues, I am supportive of the aims of the RDR. Clearly, industry practices in the past led to some customers being sold inappropriate products and paying high commission charges without being clear about the size of those charges, how they were levied or how they might influence the advice they were receiving. The new regime should, on the whole, lead to those who want advice being clear what they are getting and what they are paying.
However, one consequence of higher standards is that those with relatively modest amounts to invest, or with relatively modest pension pots to turn into retirement income, may find that the cost of advice is prohibitive. By modest I am talking about people with tens of thousands of pounds, at and above the population average, not just those on low incomes or from disadvantaged communities. We are talking about a large part of the population finding the cost of advice prohibitive. Yet such people, while they have the need to invest, are less likely to be financially sophisticated and need the most help and guidance—particularly as they approach retirement.
It is important that the industry is therefore able to do its best to support those customers by providing information and guidance that helps individuals to understand their options, weigh up the risks and, where they do not want to take or cannot afford personal advice, come to their own decisions about which investment is best for them. We are talking here not about exotic investment products but simply, for example, about whether to stick to a cash ISA or purchase one with potentially higher long-term returns, or a decision about what kind of annuity to purchase—a decision that an increasing number of ordinary citizens will face over the coming years as direct benefit plans decline and more direct contribution pension plans mature. It is clearly up to the industry to provide the best information and guidance it can to help these customers, but, inevitably, without personalised advice and the full fact find and high costs that go with it, there will be some customers who make the wrong decisions.
The aim of this amendment is to make it clear that the FCA can and should balance the objective of protecting consumers in these circumstances against the risk that placing too high a bar for consumer protection will discourage providers from seeking to serve this market, for fear of the compliance risk that they take on. Of course we should want high standards of protection for everyone against deliberate mis-selling or plain negligence, and there may well be many customers who are better off doing nothing than being encouraged into inappropriate products, but there needs to be a balance to enable those providers who seek to act responsibly in providing information and guidance to do so with some confidence that the compliance risks are acceptable.
As the Bill stands, the absolute objective of appropriate consumer protection is guided only by the considerations in new Section 1C on page 21, none of which, I contend, adequately recognises the need for the balance I have described. The general principle in paragraph (d) that,
“consumers should take responsibility for their decisions”,
is helpful, but I do not believe resolves the issue. Indeed, given the other statements in the Bill, I am not sure how the FCA is supposed to interpret this paragraph. I believe it would help the FCA and the industry and benefit consumers if the need for balance in defining the appropriate level of consumer protection were explicitly recognised in the Bill. I hope the Minister will agree with that.
Before I sit down, I shall comment briefly on the other, government, amendment in this group. It deals with the related but different issue of how the competition objective may affect, and potentially support, access by disadvantaged groups to financial services and, in particular, the availability of basic financial services in areas of economic and social deprivation. These are important issues, but I hope the Minister will recognise that I am drawing attention to a much wider issue affecting a much higher proportion of the population that requires a different response. I beg to move.
I added my name to this amendment because my noble friend has raised some important issues, and I support everything he said. When approaching consumer protection, it is often easy to want to insure or underpin the consumer in every possible way, but we have to have a market in which financial service providers can be confident that when they provide a financial product, whether it is a mortgage, an ISA or an insurance or pension product, they know the risks they are undertaking in relation to that. Understanding the balance that will be taken by the FCA when approaching its consumer protection objective is extremely important to the financial services industry. If the financial service industry gets very unconfident about how this will play out in practice, we will end up with a worse outcome for consumers because it is almost certain that the range of products and the degree of financial innovation that will be invested in would decline. It will not happen immediately, but it will decline over time because firms will not be confident about how they can approach them.
The financial service industry reads very carefully what the people involved in regulation say about these things. The FSA recently put out a document dealing with the direction for the new FCA. It was very useful to be updated how those in the part of the FSA which is migrating to the FCA developed their thinking. In the introduction to that document, Mr Martin Wheatley, who will be the chief executive of the FCA, said:
“We expect a mortgage that is affordable”.
That sounds like an uncontroversial statement, until you think that that might mean that a variable rate mortgage could never be provided to a consumer if it were at all possible that plausible fluctuations in the interest rate could end up with some kind of consumer detriment. We might end up closing off certain products that would benefit consumers because the firm cannot be confident that the standard by which it would be judged will allow it to provide those products safely. The issues raised by my noble friend are extremely important, and I look forward to hearing what the Minister has to say.
My Lords, I refer again to my declaration of interests. I understand the reason for this amendment, but it seems not the right way to achieve its end. To suggest that you have to balance protection on the one hand with access on the other seems a misunderstanding of what protection ought to be. I am sorry that the Government have so far been unwilling to place upon the regulator a responsibility to have regard to the extent to which advice is available. That ought to be part of what the regulator does when he thinks about how he is going to regulate and the demands that he is going to make. There is a real argument that we are going to find that there will be fewer opportunities for those of modest means to get proper advice. It is important for the regulator to take that into account when he lays burdens upon the industry. I think that is right, but I am sure that this is not the way to achieve that end, partly because it does not help the industry to suggest that somehow or other protection for consumers is necessarily contrary to the need to provide for a wider range of people to have advice. The failure to get this right has been one of the problems with the industry in the past.
I hope that the Minister will resist this amendment, but that he will do so recognising that there is a real concern behind it, which is that the cost of regulation and the degree to which regulation is disproportionate falls most on those who most need advice and very often are not in receipt of a great income and do not have large reserves. I hope that the Minister will accept that there is a concern here. It is one that the Government have failed properly to address, and it is not well addressed by suggesting that there is a kind of conflict where conflict does not necessarily occur.
My Lords, my name is on this amendment, and I briefly rise to support my noble friend. The key phrase in his remarks was “responsible behaviour by providers” and the key phrase in the comments by my noble friend Lady Noakes was “nervousness among providers”. This comes about because this is an industry where there is huge opportunity for ex post judgments. What appears extremely fair and reasonable at one point can, with the effluxion of time, without any malfeasance on either side, come to be seen as having been perhaps not a very suitable way to provide information, products or whatever. We have to be very careful that we do not shut off opportunities for the moderately wealthy or the less than moderately wealthy to get access to proper advice. In doing this, we will need to address the sorts of issues raised by my noble friend.
It is now made worse by the activities of claims management companies that jump on the bandwagon. It is instructive that each firm that is complained against is charged £850 by the Financial Ombudsman Service, irrespective of whether the claim is found to be genuine. This is not a completely free exercise because it will end up on the shoulders of the consumers, or customers, because of the circularity of the way that these firms have to operate. The combination of products with a very long life, a volatile financial services system and a predatory claims management system will lead, unless the regulator has the proper balance in his requirements, to withdrawal of advice, products and services to a large number of our fellow citizens.
My Lords, I have lent my name also to this amendment. I am seriously concerned at a contrarian impact from quite a lot of what is in this Bill. There will be less and less product and advice for ordinary people. I have already made the point with regard to RDR. The FSA itself has decided that VCTs and EIS are not suitable unless people are sophisticated investors. In the end, mostly ordinary folk will just be left with cash deposits for their savings. Anyone who has studied economics must expect that at some stage in the not-too-distant future there will be a period of very high inflation as a result of QE so people will be severely damaged if they hold all their investments in cash long term. I am not sure whether the balanced approach is correct, but if you want providers to continue to provide other than to the more sophisticated part of the population, if you make the risks and penalties in so doing sufficiently high, the common-sense commercial judgment is to say that we are not interested in being in that part of the market. It is important and makes sense to think of a balance between the two.
My Lords, I am a bit concerned about the wording of Amendment 27 with which this amendment is grouped. It refers to,
“the ease with which consumers … may wish to use … services, including consumers in areas affected by social or economic deprivation, can access them”.
I am very concerned, as many of us are, with people who are perhaps in a rather vulnerable situation being persuaded into services that are really not appropriate for them. This wording here at least lays that open so it would be possible for consumers who are affected by social or economic deprivation to be persuaded into services which are certainly not available or should not be available for them because they are not really suitable. This particular wording gives that impression and I am not very happy about it.
My Lords, the question of access to financial services is obviously one that the House has considered very carefully as we have been going through the Bill. We all agree that it is very important that consumers, irrespective of where they live, their income levels, or any other characteristics, should have access to the financial services they need. However, while we have agreed on the principle, we have found it less easy to reach the same consensus on what should happen if the needs of people for access to financial services are not being met.
In debate in Committee, my noble friends Lord Sharkey and Lady Kramer in particular spoke eloquently about the problems caused by a lack of access to basic financial services in deprived communities and by a lack of lending and funding for SMEs in those same communities—a state of affairs that can further inhibit growth. The noble Baroness, Lady Hayter, offered her support in speaking up for the importance of ensuring access to financial services for everyone. I know this is a subject also very close to the heart of the right reverend Prelate the Bishop of Durham and I am delighted to be able to be the first Member of your Lordships’ House to congratulate him from the Dispatch Box on his new appointment.
I will reiterate that I agree with these important points. Access to financial services is crucial. However, the Government have had concerns about the role assigned to the Government as opposed to the regulator in addressing these issues. We have made the point on several occasions that while the Government believe that the regulator has a role in promoting access and helping the most vulnerable, this should extend only as far as the FCA making sure that markets deliver, and that supply and demand meet people’s needs. Where effective competition cannot deliver, the Government, not the regulator, should step in.
To put beyond doubt that we want the regulator to play a role in promoting access where markets already exist, the Government have tabled Amendment 27 that would add a new “have regard” to the FCA’s competition objective. The Bill already states that in considering whether there is effective competition, the FCA may have regard to,
“the needs of different consumers who use or may wish to use financial services”.
The new “have regard” inserted by Amendment 27 complements this by setting out that the FCA may have regard to,
“the ease with which consumers, including those in areas affected by social or economic deprivation, can access the services they may wish to use”.
What do we think the FCA will do to put into effect this “have regard” in practice? In support of the new amendment, the FCA will need to undertake, where appropriate, an assessment of whether consumers have access to products and services that meet their needs. In order to do this, it will necessarily gather data from industry on existing provision and work with relevant organisations to understand what problems with access actual and potential consumers are facing. We will return to the question of data later this evening but I wanted to put beyond doubt that the FCA will collect data relating to access. It is in its interest to do so, and as the FCA’s CEO-designate, Martin Wheatley, said just this morning:
“The banks have to make a commercial decision as to when they loan and when they don’t loan, but getting information out there is an important part of getting society able to judge those banks”.
Where the FCA has identified a problem with access, the regulator will consider whether it could take action that could close gaps in provision by promoting competition in the interests of consumers. It may also consider whether in fact its own rules and requirements are posing a burden on competition and restricting access.
Picking up the concern of the noble Baroness, Lady Turner, the Government’s main concern here is that in deprived communities there is a real lack of access to products. There is a lack of access very often to basic bank accounts, ATMs and the possibility of loans to SMEs. We equally recognise, however, that inappropriate products are sold and we have discussed at considerable length some of the difficulties with payday loans, for example. The key legislative safeguard, which I hope will reassure the noble Baroness, is that the FCA can only close gaps in provision by promoting competition where it is in the interests of consumers. It is going to have to place a lot of weight on making sure, as a general rule, that the interests of consumers are at the forefront of what it does. If it does that effectively it will reduce the scope for inappropriate products being sold.
The other amendment in this group, Amendment 25F, deals with the balance between protection and access. It follows on from the debate we had earlier today about some of the impacts of the RDR and the concern that people have that the RDR will create an advice gap and that the bar will be set too high, as the noble Lord, Lord Blackwell, put it, in terms of consumers of more modest means getting appropriate advice. The purpose of the RDR, as we have debated, is to instil more trust and confidence in the retail investment market. It is intended to lead to more engagement by consumers and to provide an opportunity for advisers to demonstrate how they add value and meet the demand for good quality financial advice, potentially to grow their business as they do so.
I accept that this may mean that a band of consumers who might previously have used an IFA might now have concerns about whether they can afford to use the new advice services. However, we believe that, in some cases, it may not make economic sense for consumers to purchase investment advice. Instead, these consumers may benefit more from generic financial advice. Free financial advice and information is available from a number of sources. For example, the Government set up the Money Advice Service to provide free generic financial advice and to raise levels of financial capability for members of the public across the UK. I realise that that puts a big burden on the Money Advice Service but it is a relatively new service, and the Government and the regulators will want to look carefully at the effectiveness with which it does its work to make sure that it is as effective as it possibly can be.
The amendment looks at how the FCA should balance consumer protection against the desirability of enabling ordinary members of the public to get affordable access to appropriate products. The challenge, which the amendment seeks to meet, is how to maintain the balance between delivering protection and maintaining access, and avoiding killing off a market by pursuing a too aggressive, zero-failure approach to regulation. We have considerable sympathy with the thrust of the amendment but I hope that I can reassure noble Lords that it is not necessary.
The consumer protection objective is one of three operational objectives, which, as I have already said, sits alongside the FCA’s objective to promote effective competition that is in the interests of consumers. The FCA will always have to strike a balance between its different objectives. Effective competition is very much about access and affordability, as I have explained. Therefore, the check and balance that noble Lords wish to see is built in at the level of the objectives.
In addition, in advancing its general functions, the FCA must have regard to the principle of proportionality, which is the concept raised by the noble Lord, Lord Deben. The FCA is required to carry out and publish a cost-benefit analysis for all rules and guidance issued by it. The FCA cannot simply pursue absolute safety for consumers, for example, at the cost of choking off supply. That would not be compatible with either of its objectives or the proportionality principle.
I can see what my noble friend is arguing. However, at no point do I see where the FCA is supposed to say about its own activities that they may be good for perfection but may reduce access. It is really a question of the non-accountability for the costs which the FCA lays on an industry. There does not seem to me to be a precise way—perhaps he would like to point to it—when its own activities and regulatory costs are assessed in that way. Proportionality is one word, but there are many occasions on which it looks as if the cost of regulation itself reduces accessibility to poorer people.
Perhaps the noble Lord will look at the government amendment, which refers to the need for the FCA to consider,
“the ease with which consumers who may wish to use those services, including consumers in areas affected by social or economic deprivation, can access them”.
The ease with which consumers can access products is affected directly by the costs that might be imposed by the FCA. This puts a duty on it to consider how its own costs, and not just the product characteristics, impact on consumers in those communities. I think what is required is there.
It seems to me that the FSA is already doing this. It is weighing access against consumer risk. It said that you cannot market UCIS, VCTs or EIS to other than sophisticated investors because it has been judged that it is better to ban unsophisticated investors completely from being able to use these products as they are too high risk for them. That judgment has been made already.
I am sure that the noble Lord is right. However, with this amendment, we are seeking to address the problem that people in deprived communities are denied access to many of the products that are available in more affluent communities. We want to give the FCA a nudge towards trying to see how simple products and various other products can be developed, which will support people in deprived communities. It does not in any way detract from the FCA’s requirement to protect unsophisticated investors from sophisticated investment products.
The challenge that this amendment seeks to deal with is that, for many people in deprived communities, the range of products available, even simple products, is very limited. We want to see how we can help to ensure that the regulatory framework does not keep that straitjacket as tight as it sometimes has been.
I hope that I have been able to persuade your Lordships that the government amendment will have a material impact on access in deprived communities. I hope that I have also been able to reassure noble Lords that what they intend to provide through Amendment 25F is already enshrined in the Bill and that the noble Lord will be persuaded to withdraw his amendment.
I support Amendment 27 and I am grateful to the Minister for bringing it forward. It is a significant and important change. As we discussed in Committee, we believe that the question of ease of access to financial services is key to a proper and robust regulatory system. Ease of access to financial services absolutely needs to be a factor in any consideration of whether competition is effective or not. Nowhere is this more true than in areas of social and economic deprivation. There is already evidence of market failure in precisely these areas, to which we will return in some detail with Amendment 28A.
I am very glad to see that in this amendment the Government propose to put explicitly into the Bill consideration of ease of access to financial services in areas affected by social or economic deprivation.
My Lords, perhaps I may add a word. Frequently when I get to my feet in the debate on this Bill, it is to criticise the language being used by the Government. In this case, I want to express real pleasure at what is now becoming the “access clause”. As others have said, this is quite a big step forward for the regulator. The original concept of the role of the regulator was financial stability, guarding against anything that would challenge financial stability and looking out for and dealing with market abuse, partly because the language in the Bill has been very much driven by the appalling experiences of the financial crisis of 2007.
As time has gone on, it has become more and more evident that we also have an underlying problem with market failure. I am one of the many who think that when market failure occurs, in some way the regulator must be engaged in that process. The banking institutions take notice of the regulator in a way which they will never do either of BIS or the Treasury. If you look at other countries, the United States is a very good example where the regulator is absolutely key in tackling issues around market failure with the consequence that even in the most deprived communities of the United States, a range of products is available to individuals and small companies which, frankly, we can only dream of in the UK. We will be going on to the data issue later.
I am on the Parliamentary Commission on Banking Standards, as are others here including the right reverend Prelate. I, too, will take this opportunity to offer congratulations. I think that in this House we are all thrilled at his role of designated leader of the Church of England. However, the whole issue of socially useful banking has been absolutely key. This access provision in many ways deals with, or takes on, that issue of socially useful banking. It makes sure that there is a role for the regulator to look particularly at areas of social deprivation—but it is broader than that—to ensure that there is genuine access to financial services. In today’s world, without financial services, it is very difficult to live successfully as an individual and even harder to begin to thrive as a small business.
I very much want to congratulate the Government on a forward-looking amendment, rather than one that simply responds to the crisis of 2007.
My Lords, I am grateful to the noble Lords who have spoken to my amendment and to my noble friend the Minister for his response, in particular for his statement that he and the Government are sympathetic to its aims. It is a very difficult issue. As he and I recognise, full advice based on a full fact find is a very expensive process. Only a small proportion of the population with significant assets would sensibly be able to afford that scale of advice and the costs that go with it. My amendment concerns the larger group of people who will not have personalised advice and will need to rely on what the Minister called generic advice, and which I described as guidance and information, where people will have to make their own decisions based on the information provided for them.
The essence of my amendment was not focused on more people having access to personalised advice—while that would be desirable, the costs speak against it—but on ensuring that where providers are trying to serve the market through generic advice, guidance and information, the level of protection that consumers can expect reflects the reality of the level of information and guidance that they can be provided with, and that the industry is not discouraged from entering into that market because of the potential costs of compliance. I note my noble friend’s comments that he believes this is adequately dealt with in the Bill. I am not completely convinced, but I will go back and read his comments and look at the Bill again before Third Reading. I encourage him and his colleagues to do the same to see whether there is a better way of resolving this difficult issue. In the mean time, I beg leave to withdraw my amendment.
Amendment 25F withdrawn.
26: Clause 6, page 21, line 26, at end insert—
“(ea) the differing expectations that consumers may have in relation to different kinds of investment or other transaction;”
My Lords, this group of amendments concerns social investment, a topic that we have already spent considerable time discussing during the various stages of the Bill. It is an important issue, and one that the Government have given considerable thought to, and so it is only right that we return to it at Report.
There is one point that we have made on numerous occasions and that I would like to reiterate before I turn to the detailed amendments. There is no doubt in my mind that the Government are committed to supporting the nascent social investment sector and will stand firmly behind it. However, we must not forget that this is, after all, not something in which consumers engage for purely altruistic reasons. If that were the case, individuals would simply donate or gift their money. That means that we must offer the appropriate protections to consumers entering into a social investment, as we would expect for any other financial transaction. As my noble friend Lady Kramer noted in our discussion on 25 July,
“we have no wish to expose people to scams or to create an opportunity for this to be used as a back door to taking unfair advantage. That is extremely important”.—[Official Report, 25/7/2012; col. 717.]
I could not agree with her more.
I turn to the government amendments in this group. Amendment 26 adds a new “have regard” to the list of matters which the FCA must consider when assessing what constitutes an appropriate degree of consumer protection. In future it will need to consider the different expectations of consumers in relation to different types of financial advice. This is intended to ensure that the regulatory approach takes into account that consumers might have non-financial—for example, social—goals.
Amendment 45 will add a new regulatory principle to proposed new Section 3B which applies to both the PRA and FCA and will require them to have regard to the different nature and objectives of different financial services businesses. This is intended again to make clear that there should not be a one-size-fits-all approach to regulation.
Noble Lords will be aware that these amendments do not refer to social investment specifically. That is because we want them to apply across the board rather than exclusively to social investment. We want the regulator to take a measured and targeted approach to regulating both alternative and existing firms and business models and protecting their consumers, and we do not want this to be limited to social investment alone. For example, there are other innovative sectors that would benefit from this, such as peer-to-peer lending. Incidentally, I can confirm to the House today that the Government will be transferring the regulation of peer-to-peer platforms to the FCA as part of the wider consumer credit transfer in April 2014.
My noble friend Lord Sassoon promised an update on two matters of policy concern that my noble friend Lady Kramer and others have raised on previous occasions. My officials have been working very closely with the Cabinet Office and the FSA over recent weeks and months. On suitability, I hope noble Lords will be pleased to hear that the FSA has confirmed that its assessment is that the existing rules do not restrict advised sales of social investment products. I have therefore agreed with the FSA that it will find a suitable way of communicating this to the industry and to consider whether anything more needs to be done to increase certainty for industry, because I know that that has been a major issue. To decide on the best way forward, the FSA will liaise with industry and other interested parties in the coming months.
On financial promotions, at this point the Government are not proposing to make any changes either through the Bill or through secondary legislation. We are alive to the potential for consumer protection concerns to arise in this area, and the potential for any instances of consumer detriment to have a highly damaging impact on a nascent sector. However, the issue is still being actively debated and is open for consideration as part of the Cabinet Office’s red tape challenge. Interested parties may make representations on the issue until the final panel meeting takes place at the end of the month.
There are also opportunities to explore whether there are any other, non-legislative ways of mitigating costs to social investment offerings of complying with the financial promotions regime, for example working with larger firms which may be able to provide assistance with compliance or approval. I encourage large firms to step up their efforts in this area. Finally, I can confirm that the FSA will provide a named contact to industry and other interested parties on matters relating to social investment. I hope that I have given noble Lords some reassurance that progress is being made in this area.
My Lords, my Amendment 31 is sandwiched between the two government amendments in this group. I think it is important not to look a gift horse in the mouth. Amendment 26, which adds to the consumer protection objectives, and Amendment 45, which adds to the regulatory principles, are a substantial improvement. The situation is certainly a great deal better than it was when we were in Committee and we had to rely on proposed new Section 137R, which is entitled “General supplementary powers”. Therefore, I am most grateful to my noble friend, the Bill team and the Government for the thought that they have given to this matter.
I shall speak briefly to Amendment 31. I recognise what my noble friend Lord Newby has said—that the Government have got it. By “got it”, I mean they understand the importance of creating a regime which, while recognising the need for proper consumer protection, will provide an appropriate regulatory structure, which in turn will not impede the proper and measured development of social investment. I hope that the Government will keep up the pressure and continue to stress this policy clearly and strongly to a wider audience. The wider audience has two major parts to it. The first is the regulator, which my noble friend referred to.
The Financial Services Authority very kindly arranged for me to meet two of its staff between Committee stage and now. They were interested, considerate, and keen to learn. However, without being in any way critical, they were a long way down the learning curve as far as social investment was concerned. When I discussed with them what their other responsibilities were, which included RDR, I was worried as to how they would be able to give sufficient time to the work that will be needed to provide and develop a proper regulatory framework for the issue of social investment. We have heard already this afternoon about the size and complexity of RDR and one is worried that social investment will be squeezed as a result. I hope that when my noble friend responds to my brief remarks he will feel able to stress again the importance that the Government place on the FCA in future and the FSA now in devoting the necessary time to the intellectual heavy lifting required to establish the right regulatory framework. This is not just a UK-centric issue; we have the thought leadership on social investment here in the UK, and some of the most innovative ideas have been pioneered here and are now being copied around the world. There is a real opportunity for the UK to lead the way in creating a new asset class, and we must not let it slip by allowing the regulator to put the issue into the “too difficult” tray.
The other audience that I hope the Government can spend some time persuading is that of the professions. If the Government want the social investment market to grow, there are many professional groups that have the power to help or hinder—inter alia, financial advisers, bankers, accountants, lawyers, auditors and investment managers. Each of these groups will have their individual concerns, the intellectual heavy-lifting required to devise rules and procedure for the new activity and the inevitable risks in anything new. The argument will run among some in each of those groups that we could stand back until it is clear that the social investment market will take off. In part, this reluctance to move forward is one reason why it is not taking off.
There are plenty of examples of how the attitudes in the professions have impeded this development. We came across a charity that wanted to make an investment of between £50,000 and £75,000 in activities in Nepal. It was told that if it was going to do that it would have to take a due diligence programme, which would have cost about £25,000. The result was that instead of making an investment, it gave a grant. It is those sorts of attitudes that one has to tackle—and it requires a fresh type of thinking. That example will not be dealt with by my amendment, but my amendment was designed to help to create an atmosphere in which social investment can become a mainstream rather than peripheral activity. That is why my preference has always been to have the words “social investment” in the Bill.
As I have said many times in the Chamber, I have been involved in the private equity industry for most of my career. It is worth remembering that all these concerns, worries and questions arose 30 years ago as private equity investment got under way, with doubts about interim valuations, suitability and investor protections. We overcame the doubters then to the great benefit of the UK and, in doing so, made the UK a world leader in private equity—and we can do the same with social investment, if the Government are prepared to make their support and encouragement clear. Nevertheless, I recognise that the social investment movement is at a very early stage. There are great hopes for it, but it is still a very fragile flower. That is why my amendment, while mentioning social investment directly, is entirely permissive; it does not require the regulator to do anything now.
It would be helpful if my noble friend the Minister could confirm that, in relation to the consumer protection objective, the Government recognise the different expectations that the social investors may have; that in relation to the competition objective, they recognise the importance of community finance provision to the financially excluded; and that in relation to the regulatory principles, they recognises the different natures and objectives of social investment businesses. I would be most grateful if he could do this when he comes to reply. Notwithstanding that, I again reiterate my thanks to the Government for the improvements that they have made.
My Lords, it seems to me that social investment is clearly a territory that should be confined only to more sophisticated investors. It is unrealistic to imagine that unsophisticated retail investors will really understand investing in a project that might return them 10% or 20%, or they might lose all their money—or it might really be a charitable gift. I would be extremely concerned if social investment was something that was being made widely available to unsophisticated investors. In terms of the list of the products that the FSA or FCA might decide to keep away from unsophisticated investors, it ranks much higher than a VCT, for example, in terms of understandable risk.
My Lords, my name is on Amendment 31, but before saying a word or two about that I would like to thank my noble friend the Minister for government Amendment 26, which is surely another big step forward to take account of social investment.
Amendment 31 is a harmless amendment, I am almost inclined to say, which gives a bit of flexibility in the light of experience for the Government to amend the considerations to which they must have regard when considering what degree of protection to make for consumers under proposed new Section 1C. That seems a bit of good common sense, so I hope that the Government will accept it.
My Lords, I hear what the Minister said about the drafting of Amendment 26 not referring to social investment or anything like that. As drafted, however, it says that the things which the FCA must take into account include,
“the differing expectations that consumers may have in relation to different kinds of investment or other transaction”.
Read as it is, that seems to require the FCA to take account of consumers’ expectations, whether or not they are reasonable. So if consumers have unrealistic expectations about what they will have in return from their pension investment, for example—and that is a fairly widespread misconception—because the Government have chosen to use this unspecific form of drafting this could quite easily be interpreted as applying to expectations that operate in a quite different sphere from that intended. While the Government might say that it is intended only for social investment, these are clear words; they do not need any other explanation from the Government to make them understandable. It may be dangerous in its current drafting to leave it without the reference to social investment that my noble friend’s Amendment 31 has. His amendment is clearly rooted in what it is that is trying to be achieved.
My Lords, I just want to join in the chorus that essentially says to the Government that we appreciate the move forward that comes with their amendment. I am very supportive of the noble Lord, Lord Hodgson of Astley Abbotts, and his thought process over Amendment 31. It has tremendous overlap with Amendment 26—and I think that I can be very happy with Amendment 26 today. But the financial promotions order issue is going to have to be tackled. I would like to reply very briefly to the noble Lord, Lord Flight, who suggested that a social investment should be marketed only to sophisticated or high net worth individuals. The kinds of projects involved in social investment may be an extension to a local school, or a resettlement programme attached to a local prison. It is quite likely to be a small project—that is the whole point—of the kind that cannot afford to go and get regulated so that it can be marketed to the general public. It is the kind of project of £1 million or £2 million, which cannot pay the £150,000 that would put it into a regulated environment so that it could be marketed to the general public. The whole point is to provide those people with an alternative who, typically, might be asked to donate to a local project, so that they could invest in that local project. You are talking about people who would be close to the project, understand the community and perhaps even engage themselves in the work that the community does. So we are looking at a very different range of projects when we talk about social investment.
Although the language is very tricky and I recognise that it will not be easy, at some point the Government will have to get a grip on the financial promotions language and find a way to craft it so that it can be sold appropriately to people who know and understand what is going on but will never meet that benchmark of being a high net worth individual or a sophisticated investor. They might put £1,000 or £2,000 into a project, or perhaps even £50 or £100. At the moment, they are barred from doing anything other than donate, which seems reasonably insane when we look at the kind of projects that are involved.
My Lords, I thank all noble Lords who spoke on these amendments. The noble Lord, Lord Hodgson of Astley Abbotts, asked for specific confirmation about the Government’s approach in respect of consumer protection, regulatory principles and competition. I am very happy to confirm that, in respect of consumer protection, the Bill will now require the regulators to consider expectations; the regulatory principles, ditto. As far as the competition objective is concerned, it will consider access in general terms. I hope that I have satisfied him on those points.
On his concerns in respect of the regulator and the professions, I am not at all surprised at what he said about the regulators being on a learning curve—not least because this is a rapidly growing, innovative area which has been very small. Because I think it is rapidly growing, and because we are giving it a bit of a push, I think that the regulator will be required to take it more seriously. I think that all those involved in the sector now have a lever to apply to the FCA to ensure that it does not get submerged as an area of interest.
As far as the professions are concerned, as I said earlier, the one area where we are hoping that some of the larger firms will get involved—particularly in terms of bringing products to market—is where the bank can act as an umbrella under which social investment projects can seek funding, so they themselves do not have to go through huge regulatory hoops. We are at a very early stage in evolving a mechanism for doing quite a lot of these things because they are so new.
The noble Lord, Lord Flight, raised the point about sophisticated investors; he said these were sophisticated investments. The noble Baroness, Lady Kramer, answered him in large measure, because although they are sophisticated—in the sense that you might lose all your money—we do not envisage that, unlike many sophisticated products, they will be restricted to people putting in very large amounts of money. We hope they will be projects that will attract relatively small sums, albeit with the acknowledgment that there may be a very considerable risk attached to the investment.
I thank the noble Lord for giving way. It seems clear to me that, whether spoken or unspoken, government policy is to keep unsophisticated investors away from any form of higher risk investment. You do it by the RDR getting rid of the majority of IFAs; you do it by banning the ability to market VCTs—pretty low risk—and EIS to unsophisticated investors. Both of these could be quite small investments. I think the Minister has followed the logic that if that is the policy, it does not fit to say, “Ah, but it is perfectly all right to market a new concept which people will not particularly understand, or understand that they might lose all their money”. In the spectrum of risk, it is a relatively high risk investment. As far as I can see, the policy is all over the place.
It is not all over the place because people who are investing in these products are doing so for different motives. They are doing so because they want a project to be successful and to achieve a social outcome. That is not the kind of product that one normally associates with a product that is limited to sophisticated investors, so I think that the noble Lord is talking about two different sorts of products entirely. Very often, the products that are marketed to sophisticated investors have the attraction that, if all goes well, they will bring a larger than average rate of return. Nobody expects the kind of products we are talking about here ever to be generating vast returns for anybody; that is not their purpose. The purpose is to get new money into socially desirable areas of activity. There is a distinction and I hope that he is persuaded that we are not all over the place.
Although I was beguiled, as always, by my noble friend Lord Phillips’ comments about my accepting Amendment 31, I am sorry that I am not able to do so. I think that our amendment does the business.
I am terribly sorry to interrupt my noble friend. He says that Amendment 26 does the business. With respect, Amendment 31 is a very gritty one: it simply gives the Government of the day the chance to amend, or add to, the crucial provisions by order. Surely that is desirable, because we wait to see how all this is going to work out.
Yes, we do indeed, but the government amendment is broader and gives considerable flexibility to the FCA in the way that it deals with this new mandate.
The noble Baroness, Lady Noakes, raised the question of what happens if consumers have unrealistic expectations, and she thought that this could, in effect, be a dangerous amendment. I do not think that it is, because I do not believe that this is the way that the amendment will be interpreted by the FCA when it looks at products in this area and gives advice about them. While I can see where she gets the arguments from, I am confident that the FCA will ensure that we do not have the kind of dangerous consequences which she mentions.
I thank the Minister for that, but how can he be confident that the FCA will—for all time—interpret the words in the way that he wishes them to be interpreted?
My Lords, it is very dangerous to be confident about anything for all time, but if you turn the proposition of the noble Baroness on its head, is it conceivable that the FCA would interpret this clause at any point in a way that would be dangerous? Frankly, I cannot see why it would. One can never say absolutely that in 50 years’ time—assuming that this piece of legislation is on the statute book—interpretations might be exactly the same as they are today, but it would be perverse to think that the FCA would interpret this provision in a way that opened up the dangers about which the noble Baroness is concerned.
Amendment 26 agreed.
26ZA: Clause 6, page 21, line 31, at end insert—
“( ) the need of the Consumer Panel to have its views heard by the PRA”
My Lords, there are two major reasons for these amendments, which seek to ensure that the PRA hears the views of consumers or their spokespeople. First, it is imperative that those who understand, follow and monitor the experience and needs of users of financial services—whether individual clients, SMEs, or holders of collective investments—can input into the decision-making of the regulator of banks, the PRA. There will be many decisions falling to the PRA, not least on leverage rates and, if the press is to be believed, even over bank charges. In both the mortgage and the insurance markets, there is clear interaction between conduct and prudential regulation and the potential for overlap between the PRA and the FCA. The importance of co-ordination is illustrated by the role the consumer panel played in the FSA’s review of mortgage market regulation, where it ensured that unnecessary or onerous restrictions on lending were not introduced.
The PRA could also have a significant impact on mortgage customers where decisions about the stability of the market will affect prospective and existing customers, with the latter at risk of becoming trapped in their existing arrangement. Rules around forbearance and repossessions also impact on consumers, particularly when pressure on household budgets is acute. We know that the ABI is concerned that the PRA risks being too narrowly concerned with banking and insufficiently focused on insurance. This is more rather than less likely with the absence of any consumer viewpoint. Given that many PRA decisions will impact significantly on consumers, it needs to hear their viewpoint.
Secondly, it seems extraordinary that the Government should think it right to set up a special PRA practitioner panel yet totally ignore the needs, interests and, indeed, the rights of those whose money, savings and expectations drive the system, provide its profits and who depend on this part of the regulatory architecture for their well-being. This is not even-handedness; indeed, it is worse. It suggests that regulation will be a rather cosy business between the regulator and the regulated community, with no outside user interest to counter the view with the particular inside vested interest. This is not the successful model that existed with the FSA. It was not the first choice of the industry and it is not one that your Lordships’ House should accept. We therefore want to see the PRA set up appropriate arrangements to consult consumers or their representatives, and in particular to take account of submissions from the FCA’s consumer as well as its practitioner panel. It will not be sufficient for the FCA to put the consumer panel’s contribution on its behalf second-hand to the PRA, as the FCA will have a broader role to play in its interaction with the PRA. Should we fail to persuade the Government of the need for the PRA simply to hear the consumer panel—that is surely not too much to ask—we have suggested that the FCA must specifically take account of the need of the panel to have its views heard by the PRA. This should at least ensure that the FCA takes steps to act as a proper conduit. I beg to move.
My Lords, I am grateful to the Government for the amendments that they have tabled, commencing with Amendment 32, in regard to the PRA practitioner panel. However, as the noble Baroness, Lady Hayter, said, that is not the solution that the industry wanted and it is a rather narrow solution. Therefore, I have considerable sympathy with what the noble Baroness said in relation to the need for the PRA to listen to a broad spectrum of views, including that of the consumer panel. In particular, I am more attracted to her Amendment 37ZB, which would require the PRA to have some sort of dialogue with each of the panels which are being set up for the FCA: that is, the practitioner panel, the smaller business practitioner panel, the consumer panel and the markets practitioner panel. Each will have their own particular issues which would be usefully communicated to the PRA in certain circumstances.
Notwithstanding the fact that there will now be a practitioner panel for the PRA, I continue to have concerns that the PRA’s concept of consultation is a narrow one when it should be a broad one based on regular dialogue and feedback loops with the industry. Therefore, I have very great sympathy with what the noble Baroness, Lady Hayter, has said.
My Lords, I support the amendment and the proposition of the noble Baroness, Lady Noakes. If we look at the history of prudential regulation and consumer interest, we find that prudential regulation has trumped conduct of business for a number of years. I suggest that the PRA will be a more enhanced body than the FCA and therefore will win out all the time. Therefore, what the noble Baroness is saying about a broader range of opinion is extremely important. We need to look at the history of the representation of consumers in the financial services industry over a number of years. I lobbied the FSA for years to get a consumer representative on board. It came back to me very excited one day and said, “We have someone on board”. However, one out of 12 or one out of 13 is inadequate. It is very important that we redress the asymmetry of knowledge that is at the centre of selling because we have to restore trust and confidence in the industry, and to do that we have to balance the needs of the industry with those of the consumer. Therefore, I could not agree more with the need to have broader representation. That would put the status of the PRA at one with that of the FCA so that they served the interests of the industry and the consumer.
My Lords, the Government obviously recognise that consumers have an interest in the outcome of the PRA’s actions and decisions. In particular, consumers will be beneficiaries of a safer and more stable financial system. However, the PRA will not focus on consumer protection as an end in itself. That will be the job of the FCA.
New Section 3D in the Bill requires the PRA and the FCA to co-ordinate their functions in areas of common regulatory interest where one may have relevant expertise or a material adverse impact on the objectives of the other. This means that while it is right that the PRA must focus on its safety and soundness objective, where its actions may impact adversely on consumer protection it will need to listen to the FCA, which obviously has the lead consumer protection objective. As the regulator with expertise and analytical capacity in relation to consumer protection, it is right that the FCA should consider stakeholder perspectives, including the views of the consumer panel, come to a balanced view and then communicate this view to the PRA. I do not think that it would be sensible to require the PRA, which will not have detailed expertise in general consumer issues, to consider separate consumer representations and potentially develop an alternative rival consumer view about the best way to deliver consumer protection.
For these reasons, I cannot support the amendment. I hope the noble Baroness will be satisfied that the system will enable all consumer concerns to be represented to the PRA, but that that will be done through the principal channel of the consumer panel that the FCA is to establish.
My Lords, I thank the noble Baroness, Lady Noakes, and my noble friend Lord McFall for their support. I am sorry the amendment does not find favour with the Minister. I think he misunderstands. If he thinks consumer protection is just about conduct, he does not understand the impact of things that the PRA will be doing. The FCA will put only a combined view to the PRA; it will not put the consumer viewpoint.
If we listen to the Minister, the PRA will still listen to consumers but through newspapers, through lobbying, through letters, and so on. I would like something different: a grown-up dialogue between the consumer panel and the PRA, rather than the sort of campaigning that the rest of us have done as lobbyists for many a year. I still hope for that. Therefore, I would like to test the opinion of the House.
26A: Clause 6, page 21, line 31, at end insert—
“(3) In discharging the consumer protection objective, the FCA shall work with the Department of Education to secure the provision of teaching on financial literacy at both primary and secondary level as part of the core curriculum.”
My Lords, I return with an amendment relating to the teaching of financial literacy in schools essentially because when I raised the matter in Committee, understandably, the Minister referred me to the Department for Education. I took up the issue with the Chief Secretary and I am afraid there was yet a further sort of ducking motion and eventually I received a kind letter from the Minister David Laws to the effect that this was really about teaching mathematics and that perhaps I should take it up with a different Minister.
It seems to me that we have a lot of academic debate about how to deal with appropriate consumer protection, whereas, for the long term, the biggest thing that we can do is achieve a situation where at least the next generation understands finance—not in all its intricacies but the fundamental concepts. What is a mortgage? What is a pension? What is debt? What is equity? What is a student loan? What is compound interest? With the greatest respect to the Department for Education, I think the mathematics bit is way down the line. I suggest that the first bit is teaching people the concepts.
I may have made this comment before, but both of my parents were at London grammar schools in the 1920s when a standard part of the general certificate was the teaching of the concepts of finance and basic accountancy. Unfortunately, that was got rid of at the time of war, when I think it was regarded rather as a dirty subject to teach children. I well remember that my mother was pretty much equipped for the rest of her life with what she learnt in her teens at her school.
There is widespread agreement across all parties that this is something worthy to achieve, but there is a lack of ability to grasp it and to make it happen. The experiment with PFEG did not work particularly well because PFEG’s role was to try to teach existing teachers to teach financial literacy and few teachers felt confident enough to do that, often because they did not understand the subject themselves. Interestingly, the more successful courses have been put in by RBS, where the teachers are provided directly, but that does not extend to all schools by a long chalk. I think the majority of schools are still relatively uncomfortable with the territory and pupils are not being taught financial literacy.
PFEG has lost much of its funding. It has gone to an alternative body which I hope will use it more constructively. As we presently stand, the biggest single problem in the whole area of consumer protection is that people do not understand what they are investing in. Not only do they not understand the complexities but very frequently they do not understand the basic concepts and how they operate. I would hope that this amendment, which deliberately ties in with the consumer protection objective, might see the light of day in some form and see a commitment to make the teaching of financial literacy happen. It has been on the agenda since the FSA was established back in 1999-2000 and the progress to date is disappointing. To put it bluntly, unless the Department for Education and the Treasury get together, work out what is wanted and implement it with some constructive work from the FCA, nothing much will happen for quite some time to come. I beg to move.
My Lords, I support the sentiment of the noble Lord’s amendment. He is absolutely correct in diagnosing the woeful inadequacy of education for ordinary pupils as being a source of trouble now and the problem is getting worse. I should declare an interest as the founder and now president of the Citizenship Foundation. We work with over half the state primary and secondary schools providing citizenship education, including a very big vein of financial education which was for many years supported by Deutsche Bank. I wonder whether this amendment attacks the issue in quite the right way in that it seeks to insert, as a matter of primary law, financial literacy into the core education curriculum. That has been hugely debated for the past year or more and I am not even sure that Mr Gove has not already come out with his latest proclamation on what shall be the core curriculum in the future.
The noble Lord, Lord Flight, is absolutely right in the broad thrust of what he says. As with my complaint about the failure of governments of all persuasions to provide adequate implementation resources for legislation such as that we are putting through in this Bill, so too governments of all persuasions fail consistently to give our young people the chance to be citizens with sufficient knowledge and confidence to deal with the complicated world they are supposed to be citizens of.
My Lords, I would like to support the comments of the noble Lord, Lord Phillips. This may not be the right amendment but I hope the Minister will accept its thrust. It seems to me very curious how the education curriculum excludes for many schools and scholars two issues which may be of most importance to them in future life. One is financial literacy, which should be taught to boys and girls, and the other is proper cooking, which should also be taught to boys and girls. The obesity problem which we have today is very much affected by the fact that we do not seem to be able to produce at home the food which enables us to have a proper balance. The financial problems we have today seem to be very much affected by the fact that we do not seem to be able to produce in the average family the ability to make the sort of decisions which necessitates a basic understanding of the way in which finance works.
I hope the Government will not just brush this amendment aside on the basis that it does not quite work. I think it probably does not quite work but I hope the Government will take it seriously as one of those things that we really have got to stop hiding from. If young people do not learn how to balance their budgets and do not understand the basics of finance, it will not be surprising that financially illiterate people will make choices they should not make. The fault is not theirs. It is the fault of an education system which has decided that these necessary tools of life can be left on one side. I hope that the Government will take seriously the amendment of the noble Lord, Lord Flight.
My Lords, we can indeed all agree on the importance of financial education so that young people and adults are able to take responsibility for their finances and make informed financial decisions or, to repeat what the noble Lord, Lord Flight, said, know what they are investing in. I absolutely agree with the noble Lord, Lord Deben, about schools getting better at teaching the necessary tools of life. He mentioned cooking. Before I took up this post, a number of years ago I was an adviser to the School Food Trust, which has been extremely successful at starting cooking clubs across the country. We are looking to provide the same kind of experience in financial literacy.
There are a number of ways in which we can do this, one of which is through the formal curriculum. The All-Party Parliamentary Group on Financial Education for Young People is one of the largest in Parliament and it has been giving guidance to the Department for Education about financial education and the curriculum. Another is to consider how we can insert financial literacy into school life in a way that young people will find engaging. In that regard, the work by organisations such as the Citizenship Foundation and some of the banks has been really valuable. The Royal Bank of Scotland’s money sense for schools programme and Nationwide’s financial skills programme provide materials which make the subject interesting and bring it to life. That is very important. It is worth underlining that £25 million of initiatives by the financial services sector took place last year.
The amendment requires the FCA to work with the Department for Education. The FCA is the regulator but the Money Advice Service is the appropriate body to work with the DfE at an operational level on matters of financial literacy. The Money Advice Service was established by the FSA and its objectives are set out in new Section 3R of FiSMA, as inserted by Clause 6 of the Bill. Those objectives specifically include a requirement to promote,
“the publication of educational materials or the carrying out of other educational activities”.
The Money Advice Service has been engaged with officials from the DfE and has provided a written response to the department’s invitation to engage in the debate on financial education in the curriculum. It will continue this engagement when the formal consultation on the national curriculum takes place in the new year.
I am extremely sorry that the noble Lord, Lord Flight, has not had a reply from my right honourable friend David Laws in the terms that he would wish. The Department for Education has attempted, through the new EBacc, to make sure that all children have basic academic skills at school. The life skills we are now talking about need to be added to those parts of the curriculum that are not given statutory cover. However, curricula are definitely beyond my pay grade and the exact way in which we ensure that financial literacy is better promoted in schools is an issue that the Money Advice Service and the Department for Education need to be engaged in.
I agree with the noble Lord, Lord Flight, on the importance of financial education and on the need to improve the way in which we teach it in schools, but I do not think that his amendment is the way we will achieve it. I hope the other ways that I have mentioned will prove more effective and that my noble friend will feel able to withdraw the amendment.
My Lords, I accept that the amendment is not appropriate, although it was the only way in which I could raise the issue. I would like to think that the Treasury will be motivated to co-operate with the Department for Education to address this issue. That is the only way in which we will make significant progress. I beg leave to withdraw the amendment.
Amendment 26A withdrawn.
Amendments 26B and 26C not moved.
26D: Clause 6, page 21, line 42, at end insert—
“( ) the fairness and integrity of policy and conduct of those directing or operating in the financial markets”
My Lords, it is now three and a half hours since we had the debate on this amendment and scarcely anyone who was present then is present now and vice versa. Therefore, it would be rather fruitless to do as I had intended originally and put the amendment to the vote. However, I shall bring back the principle involved—which is the primacy of integrity over the other two objectives—at Third Reading. On that basis, I withdraw the amendment.
My Lords, as the noble Lord has spoken to the amendment, I must give the opportunity for other noble Lords to speak if they so wish.
Amendment 26D withdrawn.
27: Clause 6, page 22, line 9, at end insert—
“( ) the ease with which consumers who may wish to use those services, including consumers in areas affected by social or economic deprivation, can access them,”
Amendment 27 agreed.
Amendment 27A not moved.
Amendment 28 had been retabled as Amendment 28A.
Consideration on Report adjourned until not before 8.36 pm.