House of Lords
Monday, 12 November 2012.
Prayers—read by the Lord Bishop of Ripon and Leeds.
Armed Forces: Reserve Forces
My Lords, the Government are committed to taking the lead as an employer of reservists. The Ministry of Defence works closely within the public sector to establish best practice; this includes providing standardised special paid leave for training, providing visible leadership, promoting the benefits of reserve service and also monitoring reservist employee numbers. In collaboration with the Defence Medical Services, the Department of Health traditionally provides a major part of the military medical manpower and has provisions in place to allow its staff to serve in the reserves.
My Lords, since the Army will increasingly continue to rely on territorial forces, in particular to man its medical services, is it not incumbent on the National Health Service to ensure its staff are able to take time off to attend to those duties? Is there anecdotal evidence that hospitals are being—understandably—difficult in that regard?
My Lords, in Scotland the NHS boards have implemented a national HR policy covering training and mobilisation of reservists in which staff are allowed a minimum of 10 days of special paid leave and so on. Outside Scotland the HR policy is devolved to individual trusts and boards. It would appear that there is no centralised policy, so many organisations have no idea if they employ reservists and do not always record whether an employee is in the reserves. There is evidence to suggest that if leave is requested it is recorded as special leave, similar to jury duty, and so we are not entirely aware of the exact position.
I must declare an interest. When I was demobilised from the Royal Army Medical Corps on emergency commission in 1948 I joined the Territorial Army and served for 16 years, eventually commanding the 1 Northern General Hospital TA. At that time there was an agreement that the TA would never be called out except in the event of a world war. Of course, the situation has changed beyond all recognition and members of the successor unit to mine, the 201 Field Hospital, have served with great distinction in the Gulf, Iraq and Afghanistan. They found that experience to be invaluable, professionally and in many other respects. However, does the Minister agree that there is now growing concern that, under new plans, the Reserve Forces may be called out more frequently, that their employing authorities may be reluctant to give them the leave of absence that is necessary, and that such frequent recalls would have an adverse effect on their career progression within the NHS?
I commend the noble Lord for his service, and will add that we also have evidence that medical reserves develop additional skills, which they bring back to the NHS at the end of their deployment. For instance, the National Institute for Health Research has brought both military and civilian trauma surgeons and scientists together to share innovation and research. This has also been to the benefit of civilian trauma patients. I hear what the noble Lord says about the concerns within the service. We hope that the consultation that is about to take place will allay some of those fears.
That is an interesting question. Obviously there will be a need for medical services, which will have to be provided either by regular troops or reservists. On how the balance will pan out, again, we need to wait to see what the need is and then make sure that the need is met.
My Lords, in the Minister’s previous answer she made reference to the contribution that people who have served in our Reserve Forces bring back to their companies. Many companies across the country will testify that when their reservist staff return, they have had new experiences and gained new skills, and add value. Can we make sure that those good stories are spread throughout the public sector as well so that people can see that there is a huge value in allowing their staff time to serve in the Reserve Forces?
I entirely agree with the noble Lord that a great deal is brought back. Of course, we have to balance that against the disadvantage that employers see in having their people away for set periods of time. Under the proposals of the new consultation that should be more manageable—employers should have more notice of when it is going to happen—and we hope that all the good stories that the noble Lord has highlighted will be evidence that having reserves in your employment is a good thing.
My Lords, on Friday 9 November, my noble friend Lord Astor reported that 75 members of the Reserve Forces had been called out in the year to date under Section 56, which allows continued permanent service. He also reported that 530 reservists are currently deployed in Afghanistan. Can my noble friend Lady Garden say how many of these are currently employed in the NHS, and what positions they hold?
My noble friend picks up an interesting point. We do not currently keep statistics about Reserve Forces membership. It is not asked for and nor is it necessarily supplied, so it is not possible to give an accurate figure. We have an estimated figure of 2,400 clinical staff in the reserves, but this excludes auxiliary staff who may serve in other, non-medical reserve units.
My Lords, I had not intended to ask a question but I was rather shocked by the response to the Question of the noble Lord, Lord Trefgarne. It seems from what the Minister said that we do not quite know how we are going to provide these people from within the National Health Service; that we have no knowledge of exactly how many people are part of the Reserve Forces anyway; and that there is no central ability to monitor any of this. Can the Minister reassure me that we have got a grip on this and that we are not stepping into the unknown?
I think that the noble Lord somewhat misunderstood me; perhaps I was not clear. I said that individual trusts do not necessarily have a note of which of their people are reservists when they are away. However, the overall tally of reservists is monitored for numbers and a note is kept of the numbers we have and how many we will need. We hope that the consultation paper will clarify how we can keep a record of that.
My Lords, the use of the reserves is absolutely crucial to achieving military objectives. Can we be more specific on the matter of policy? Command 8475, Future Reserves to 2020, envisages a kitemark with graduated levels from basic to top level, and in Appendix C it envisages an employers’ charter for reservists. Can the Minister assure me that all parts of the public service will achieve the top level in the kitemark and will sign up to the charter?
These matters will be discussed in the consultation paper that has been issued. However, it is not intended that this will be imposed on all employers. We must talk with employers to ensure that the reservists they have on their staff also fit in with their employment needs. Of course, we hope that the kind of employers mentioned by the noble Lord, Lord Touhig, will see all the advantages and will wish to sign up to the highest levels.
Economy: Quantitative Easing
My Lords, the Bank of England has estimated that the first round of quantitative easing reduced gilt yields by one percentage point, raised real GDP by around 1.5% to 2%, and increased inflation by around three-quarters to one-and-a-half percentage points. The Bank has also launched the funding for lending scheme to reduce bank funding costs and provide a strong incentive to make loans to companies and households cheaper and more easily available.
My Lords, therefore without QE, the recession would have been even worse. Is the Minister aware that since then, the Governor of the Bank of England said that the MPC would have to “think long and hard” before it restarted QE. The deputy governor said that it would be inappropriate to go on with it because there is no appetite to borrow and invest. On top of that, the chief economist of the Bank of England said recently that the economy is stuttering to start. He said that after knowing all that the Government are now proposing. What else are they going to do?
My Lords, first, since the noble Lord talks about the state of the economy, we should recognise that employment is at a record high; inflation, for which the MPC has responsibility, has come down very significantly; the trade deficit is down; and the economy is growing again. We really do not need too much unreasonable doom and gloom. I could cite many other recent quotes from the Bank of England, which has made its position completely clear. In October 2012, the governor said that the MPC stands,
“ready to inject more money into the economy”.
As, when and if it thinks the assessment is right, it is free and able to do it.
My Lords, what is the Government’s latest estimate of the reduction they have achieved in the deficit since taking office? Is it still a quarter? Will the noble Lord assure the House that that is more than would have been achieved at this point by the previous Government’s deficit reduction strategy, as evidenced by the Office for Budget Responsibility’s pre-Budget forecast in June 2010?
My Lords, we are straying a bit from the effect of quantitative easing and on to the Government’s fiscal policy, for which the Bank of England is not responsible. However, the fiscal deficit that we inherited has been cut by over a quarter. We are on track. As to what would have happened under a Labour Government at this point, the independent research shows that the country would have been left with an additional £200 billion of debt on top of the present Government’s plans.
I think it is the Liberal Democrats. We have had a Labour Member and a Cross-Bencher.
My Lords, there is an urgent need in British industry for long-term loans for SMEs. The trouble is that our banks are not very good at this. Banks in Germany, France, the Netherlands and Canada are much better. Will the Government seriously consider following their pattern and setting up an investment bank or institution that specialises in providing such loans, perhaps modelled on the German Kreditanstalt für Wiederaufbau?
My Lords, we are putting together a British business bank in order to bring together the various schemes that SMEs and all companies have access to. I entirely agree with my noble friend that this is an ongoing and very serious issue. We will continue to use the strength of the Government’s balance sheet, which is due to the credible deficit reduction plan, to back up schemes such as the infrastructure guarantee scheme, which goes precisely to one part of the demand and need for long-term bank finance. We will, and have already, come forward with schemes, because I completely agree with my noble friend that this is a critical area.
My Lords, could the Minister just clarify his Answer a little? Is he saying that the economy is now on a continuous expansion path of a sustainable nature, and therefore that everybody else—all the experts who say that there are nothing but bad times ahead—is mistaken? Is that the Government’s view?
My Lords, I merely stated that, on the last numbers from the ONS, the economy is growing again. If we bring this back to the subject of the Question—quantitative easing—the Bank of England’s analysis of 23 August is that economic growth would have been lower in the absence of the asset purchases and unemployment would have been higher.
My Lords, the Bank of England accepts that quantitative easing has pushed up the value of equities and other assets, so favouring the 5% of households which own 40% of those assets. Have the Government any plans to recoup any of this windfall gain that has accrued to the wealthy?
My Lords, what the Bank of England has been doing through the quantitative easing programme has been targeted at 2% inflation but it has been completely clear about the other effects of the policy on the economy, GDP, inflation and equity prices—it says that that was a large but uncertain impact, estimated within the range that the right reverend Prelate gave. It is wrong to see that as a one-off windfall. In that case, was it a one-off disastrous fall in asset prices caused by the banking crisis that preceded it? It is difficult to say what was the one-off windfall.
My Lords, the Treasury announced on Friday that it is to take over part of the Bank of England’s profits from the quantitative easing programme to offset the fiscal deficit. What provision is to be made in the national accounts for those funds to be returned when, as the Governor anticipates in his letter to the Chancellor, interest rate differentials are reversed?
My Lords, these were never the profits of the Bank of England, so I am afraid that the noble Lord, Lord Eatwell, has got it wrong. They were always profits that would fall to the Treasury—to the taxpayer. All that has been done by the announcement on Friday is very sensible, prudent cash management to make sure that £11 billion—in total, £35 billion—of taxpayers’ cash is not sitting idle at the Bank of England but is used to pay the Government’s bills. That is prudent cash management.
My Lords, the Quality and Outcomes Framework already includes obesity. The process for reviewing clinical and public health indicators in that framework is overseen by the National Institute for Health and Clinical Excellence, which recommends changes annually for consideration as part of the GP contract discussions. NICE will continue to lead on this process but from April 2013 priorities for public health indicators will be set by Public Health England in consultation with the devolved Administrations.
My Lords, I thank my noble friend for that full Answer. Does he agree that one of the successes in primary care has been the introduction of the Quality and Outcomes Framework, which incentivises GPs? Unfortunately, one of the incentives is to keep a register of obese patients—nothing else, just a register. In fact, that incentivises them to keep people fat. Does my noble friend also agree that obesity, which is forecast to cost the nation, or the NHS, £45 billion, needs prompt action? Will he assure me that under the new reforms that he just mentioned, Public Health England will prioritise the development of these indicators in the Quality and Outcomes Framework?
My Lords, as my noble friend knows, the Secretary of State will set the strategic objectives and policy priorities of Public Health England. It will have operational autonomy and operate transparently. Rates of obesity remain high across England and continue to have clear links to health inequalities. GPs can play a key role in making every contact count by raising the issue of obesity and providing advice or referral to appropriate services, so I do not necessarily accept the criticism that my noble friend levelled at the current QOF indicators. GPs have every reason to act when they see obesity in front of them. I cannot pre-empt exactly what Public Health England will wish to prioritise in the development of the QOF, but I fully expect that it will want to work with NICE to review the evidence base for building on the current QOF obesity indicator.
My Lords, the role of Public Health England will undoubtedly stretch across government departments, because it should and will involve energising the efforts of not just the Department of Health and at not just national level. However, I agree that there is no single magic bullet to solve the problem of obesity. The call to action on obesity published last year set out a range of actions in which government and individuals, as well as local organisations, need to engage if we are to beat this threat to public health.
Are the Government considering including in commissioning from health service employers a requirement to address obesity in their staff at all levels, given that the staff are often quite severely obese and act as a very poor role model for those patients whose obesity should be being addressed?
My Lords, this is a very important point. Dame Carol Black and I chair a network within the responsibility deal in the Department of Health which draws together employers from a range of sectors to address health in the workplace. It is a tremendously important opportunity if we can engage employers to realise that it is in their direct interest to ensure that their employees enjoy good health and lead healthy lifestyles.
I suggest that we hear from the noble Lord, Lord McColl.
I congratulate the Government on rejecting the misleading advice of that quango, NICE, which misled politicians by denying that the answer to the obesity epidemic was to eat less. What plans are there to prevent NICE making such serious mistakes in the future?
I congratulate my noble friend, as ever, on his powerful advocacy in this area. He is absolutely right that NICE recognises in its guideline that dietary management, including calorie intake, is of predominant importance in battling obesity. It does, however, recognise that exercise is important. It emphasises that although an individual’s ability to be physically active may be hampered by their level of fitness, recommendations can be built up gradually. It is a balance. NICE will continue to act as a source of advice for the medical profession. It is an independent organisation, as my noble friend understands, and Ministers consciously do not interfere with its operational integrity or independence. However, we expect it to take advice and evidence from a range of clinical sources.
My Lords, I, too, have an interest to declare; I think it is fairly obvious if you look at me. That is why I want to ask a serious question of the Minister. Will he say to medical practitioners and others that it does not help to be critical and condemnatory of those of us who are obese? It is important to give information and encouragement. Otherwise, there can be complications and people can end up with depression and other illnesses, so it is very important to give encouragement. I am glad to say that that is why I have been able to lose more than a stone in the past month.
Not for the first time, the noble Lord is an example to us all. I agree with the point he makes about the way in which doctors engage with their patients on this often sensitive subject. That is why the previous Government very commendably put in place a suite of resources to guide GPs in this area. Those have since been supplemented by electronic training modules on the identification and management of obesity and supporting behaviour change in patients. NICE has produced a clinical guideline to supplement its advice on obesity and exercise to guide clinicians on exactly how they approach this topic.
Tourism: Chinese Visitors
China is a priority tourism market. Compared with five years ago, there has been a 39% increase in visitor numbers from China, a 111% increase in nights they spend in the UK, and a 97% increase in their expenditure while they are here. VisitBritain is investing more than £125 million in a major four-year international promotional campaign in key overseas markets. The Government also recently announced additional funds for the GREAT campaign to drive trade and tourism from China. We are making the visa application process more user-friendly for Chinese visitors.
My Lords, that is all very well, but at present a potential visitor from China must fill in a 30-page visa application form in English and find £650 for a family of four in visa fees and air passenger duty. Is it therefore surprising that mainland Europe gets four times as many visitors from China as we do? I know that my noble friend is a great supporter of tourism. He led the last tourism debate in your Lordships’ House. However, when are the Government going to take tourism seriously? When are they going to fund VisitBritain properly, realise that its chairmanship is not a two-days-per-week job, and bring tourism into the title of DCMS? Is it not time that we had a national champion for tourism? Perhaps the noble Lord, Lord Coe, could take that on as part of his Olympic legacy.
We must do all that we can to keep visa application costs down, even though research backed by the tourism industry shows that visa costs and indeed the process for applying are not a significant barrier to in-bound Chinese tourists. It is true that the cost of a UK short-term visa is £78. A Schengen visa is less, at £50, although this cost is expected to increase when the biometric capture is included in the near future. A UK visa has biometric capture, which we regard as important for our security. It is worth pointing out that by 2030 China will have 1.4 billion middle-income consumers. There is therefore a great opportunity for us all to capture some of this market in the future.
My Lords, does the Minister agree that comparing the whole of Schengen—more than 20 member states—with one country here and saying that their visa costs are a bit lower is not really the answer? Once one has bought a Schengen visa, one can go around all these states; just one visa is needed. Worse still, to get a visa to come to this country, Chinese people must give up their ID cards for eight weeks, I believe, which is quite serious. Is there not more that the Government could do to rebalance the problems of coming here compared with going to the continent?
The noble Lord makes a very good point. I can reassure him that much is being done as we debate on this issue. I am not in a position to give any more details than that. However, we are aware that tourism in the UK is the fifth biggest industry and the third highest export earner, generating £115 billion in direct and indirect business for the economy and supporting 200,000 jobs. There is therefore much to bear in mind when we look at streamlining and sorting out the issues.
My Lords, is it not a fact that tourism from China is a fraction of what it could be? One way of dealing with this is to waive visas for trusted Chinese tour groups, which are already closely controlled through the bilateral approved destination status agreement between China and Great Britain.
My Lords, is the Minister aware of the severe damage being done to British universities and larger long-term British interests by the heavy restrictions on those Chinese visitors known as students? Does he realise that Leeds University, of which I am chancellor, is only one of the many universities in the UK that are suffering financially every year—and in the long term massively—through these ridiculous, unfair and unbelievable restrictions on Chinese students as well as Chinese visitors?
The noble Lord makes a point about Chinese students; the Question relates more to Chinese tourism. But, having said that, it is very important indeed that we encourage all Chinese citizens to come to Britain, whether they are students or tourists. There is much going on in terms of marketing Britain abroad to China. VisitBritain has a £100 million marketing fund, jointly funded by the DCMS and the private sector. To answer the noble Lord’s question to this extent, it is particularly important that we improve the perceptions of the UK. By that, we should improve digital marketing, invest in trade engagement and improve the packaging and promotion of the UK to Chinese visitors.
Disabled Persons' Parking Badges Bill
The Bill was brought from the Commons, read a first time and ordered to be printed.
Scrap Metal Dealers Bill
The Bill was brought from the Commons, read a first time and ordered to be printed.
Prevention of Social Housing Fraud Bill
The Bill was brought from the Commons, read a first time and ordered to be printed.
Town and Country Planning (Fees for Applications, Deemed Applications, Requests and Site Visits) (England) Regulations 2012
Motion to Approve
Benefit Cap (Housing Benefit) Regulations 2012
Motion to Approve
That the draft regulations laid before the House on 16 July be approved.
Relevant documents: 7th Report from the Joint Committee on Statutory Instruments, 10th Report from the Secondary Legislation Scrutiny Committee, considered in Grand Committee on 6 November.
Financial Services Bill
Report (2nd Day)
Clause 6 : The new Regulators
25A: Clause 6, page 20, line 37, at end insert—
“(5A) In discharging its general functions the FCA must have regard to the desirability of not requiring the persons whom it regulates to observe any principles, rules or requirements that extend beyond those directly arising under the requirements of the EU single market legislation and of any other EU obligation (as defined in the European Communities Act 1972) or any directly applicable EU legislation, or of any related technical standards or guidance.”
My Lords, perhaps I may remind noble Lords who are seeking to leave the Chamber rather than listen to my noble friend Lord Flight that it is a courtesy of this House that they do not walk in front of him as they are leaving. I mean my own colleagues on my left.
My Lords, Amendment 25A stands initially on its face. It proposes that the FCA should have regard to the desirability of not gold-plating EU directive regulations for the financial services industry. I have tabled it particularly in the context of the RDR reforms due to go live at the beginning of next year because the European Parliament has voted quite decisively not to ban commission as a form of remuneration. The German Government have elected to retain the commission structure for Germany’s IFA industry. It is my great concern that proceeding with RDR will ultimately cause grave damage to saving levels in this country but, more particularly, will rob the great majority of people of any access to financial advice. They will be left having to do it themselves or to buy the products of the large banks, which are not necessarily bad or good, but are, ironically, products on which commission will be paid.
I am certainly not attacking extremely professional financial advisers, many of whom have functioned on a fee basis for some considerable period. The reality is that their clients are upmarket clients. They are the elite. The great majority of people, to the extent that they save, do it occasionally. In my observation, they are extremely unwilling to pay fees, and it is uneconomic for them as well. Every time anybody phones their accountant or their lawyer, the clock ticks and they get a bill, so they do not do it any more than they can help. The existing sensible practice is that ordinary folk phone up their IFA from time to time to discuss the bit of money they have to invest and they have a sensible exchange. Only if some form of investment is made does remuneration by commission come into effect.
My first big criticism of RDR is that it is elitist. It is fine for the better off or for financial intermediaries who have those sorts of clients, but for the great majority it is not fine at all. I estimate that some 5 million people will be left without any form of advice as RDR works its way through. Although the FSA has sensibly committed to a review later on, by the time that happens it will be closing the stable door after the horse has bolted because there will be a very limited number of IFAs left.
On 7 September, the FSA announced that RDR would go ahead from the beginning of next year, but it gave individual IFAs the ability to apply for a waiver if they were not ready. It did not specify the conditions for the waiver being granted, nor is it clear whether the FSA has the staff to deal with what may be many applications. A money marketing survey as recently as September found that only 36% of financial advisers had their statement of professional standing. That means that 22,000 financial advisers are not going to be RDR compliant. The FSA stated that 91% were, but I do not know the basis for that figure. It is significantly in conflict with the latest information.
In the face of RDR, the financial advice industry is already contracting. There was a 6.2% reduction this year, and over the past two years there has been a 10.6% fall. That represents 4,300 financial advisers ceasing to be in business. If each of them had 600 clients, that is about 2.5 million people who no longer have access to financial advice. Under the new regime, it will be uneconomic for those financial advisers who survive to have occasional clients because the fee level they would need to charge for the work they would have to do is considerably higher than people would be willing to pay.
There is the separate problem that many financial advisers are not young—perhaps 50 to 70 years old. Many have been in practice for 20 or 30 years and many, despite the unfair criticisms that are often made, have a clean bill of health with their clients. However, unlike everyone else they are not being grandfathered and people of that vintage are extremely unwilling to take examinations in their modern form, having not taken any for ages. Many find the examination syllabuses not particularly relevant to their part of the industry, so older IFAs are not, in the main, willing to take the examinations, and are likely to close shop instead.
I asked the other day whether the Government were considering requiring regulators to have exam qualifications. The answer was no. This seems somewhat ironic when the SFA has refused to budge on grandfathering well performing, long-standing IFAs. The Financial Ombudsman’s findings show that in the main the sinners have been the large banking institutions, and that the record of IFAs—I am not saying they are all wonderful—has actually been fairly good; the ombudsman has mostly found in their favour.
The bottom line is that the Treasury Select Committee very powerfully advised a pause. In my experience, the investment management industry in the main is highly critical of RDR but has felt it not worthwhile raising its criticisms because RDR was going to happen anyway and it did not want to upset the FSA. Many advisers have now spent a lot of money on installing systems to deal with RDR. I believe that there will be a significant shambles in the savings industry next year. The life insurance companies I talk to tell me that their systems are nowhere near ready and that they are not at all clearly organised about how to conduct their business in a post-RDR world. There is a very powerful argument at least for pause or, if not, for some adaption.
Historically, those advising small and medium-sized companies on their pension arrangements were remunerated by life insurance companies discounting their series of charges over 25 years and paying the advisers up front to cover the cost of the work. That is no longer being permitted. The SMEs are simply unwilling and unable to pay the sort of fees that are economically required. I believe the buzzword is “factoring”, but unless factoring—a present-value calculation of future commissions—is one way or the other permitted there will be a particular problem with small and medium-sized companies, with all they need to do to reorganise their pension schemes, where they are generally not in position to pay the sort of fees that this will cost.
I greatly urge the Government to follow—for once—the EU and to accept the EU’s finding on RDR reforms that there is an ongoing role for commissions. I beg to move.
My Lords, my noble friend raised some very interesting points. Of course the RDR issue has two parts. He referred to the basis for charging, but there is the qualification aspect as well. RDR will require advisers to get QCF level 4, which is only A-level standard. It does not seem to me to be too much to ask that people who are advising on savings should have an equivalent of an A-level qualification. I rather support the idea that RDR should endeavour to encourage the emergence of a profession. He referred to the fact that the profession was largely an elderly one and that we needed to encourage some new, younger blood. Careers will be more likely to be attractive if the idea of RDR with some qualifications—making you like the solicitor and accountant in your high street—comes to pass.
My noble friend’s second point was about the method of charging. We have here the question of how we square the circle between the reluctance to pay fees and the need for continuing advice. If you have a pension scheme that will last you for 15, 20 or 25 years, you need someone who is prepared to step up and advise you as to how it is going ahead. My problem is that we are now sufficiently far down the track on the idea of fee paying and the ending of commission. There is no doubt that commissions were raised not so much from the IFAs but often from the producers, to try to make the sale of the product more attractive. I do not think, as my noble friend said, that by any manner of means the IFAs have been the only people to blame, but we are sufficiently close to the start now that we need to continue with the approach of fees. It is not ideal, but I think that order plus counter-order would equal disorder. We have been marching the IFA community towards a fee-based remuneration schedule for two or three years. To pull back in the middle of November, when it is due to go live on 1 January, would cause the most enormous difficulties for the producers and the industry.
My Lords, I was not intending to take part in this debate. At one time, I was chairman of the Children’s Mutual, which was a friendly society/insurance company. At the weekend, in Northampton, I had discussions with some friends whom I would call middle-class savers. Not a single person, frankly, was the least bit prepared to pay a fee. It goes deeper than that. One’s own children are not prepared to pay fees up front.
There may have been much wrong with the old system in that it was not as closely scrutinised as it should have been in terms of the total cost to the saver. Nevertheless, here we are three and a half years into a major austerity programme and sufficient resources are not available for people who are genuinely wanting to or having to save. I do not know what the minimum fee will be and perhaps my noble friends on this side will be more up to date on that. I cannot see that it can be less than £500, if not considerably more.
I say to my Front Bench that it is all very well ploughing on because this has to happen in January but, as an aside, I reflect on how the FSA took three and a half years to realise that the projections on pensions were totally out of court. We have all been living with a base rate of 0.5% for a couple of years. Here we have projections approved by the FSA at, I think, 5%, 7% and 9%. That was totally out of court and nothing happened from the FSA. There had jolly well better be a plan B somewhere in the hip pocket because I very much fear what will happen. During the first three or four months nothing much will happen but, thereafter, there will be a major crisis unless there is a plan B ready to deal with it.
My Lords, my noble friend Lord Flight has spoken eloquently on the issue of the retail distribution review both on this and a number of other occasions, both when we have been discussing this Bill and at other times as well. Clearly, his concerns go to the heart of the RDR. I respect him for the force and strength of his arguments and for the clarity with which he has put them. However, I think that my noble friend Lord Hodgson of Astley Abbotts, in his short remarks, takes a more realistic and pragmatic view of some of the things that are necessary in the RDR and of the practicalities of where we are now some five or six years into the process which was initiated back then by the FSA.
The RDR certainly goes beyond the requirements of the markets and financial instruments directive; that is true. It is to be implemented at the end of this year. It will, among other things, as we have heard, prevent product providers from offering commissions to advisers. These rules will go beyond the requirements of the directive, which does not prevent product providers paying inducements to intermediaries. I think that it is a bit of a leap from there to say that the EU has taken a positive view that commissions should be paid in the way that they have been to date, as I think my noble friend possibly recognises.
The Government are supportive of the RDR, which is intended to address long-running problems that impact on the quality of advice and consumer outcomes in the UK retail investment market. The financial detriment caused to consumers as a consequence of poor, biased financial advice leading to the mis-selling of products cannot be overstated and has led consumer groups such as Which? to support the measures in the RDR. For example, following the FSA’s pensions review in 2002, 1.7 million consumers received compensation totalling £11.8 billion due to pension mis-selling alone. More recent scandals such as Arch Cru, where between 15,000 and 20,000 people lost out on thousands of pounds because they were told that high-risk investments were low risk, demonstrate the devastating effects of poor financial advice. Indeed the FSA has estimated detriment to consumers to be in the region of £223 million per annum, so we cannot wish the problem away.
To tackle the problem, the RDR will raise the professional standards of investment advisers, address the potential for adviser remuneration to distort consumer outcomes and improve transparency for consumers. As part of this, the rules banning commission payments to advisers will tackle the risk as well as the perception that commission paid by product providers may bias advice, and rules requiring advisers to agree their charges upfront will promote transparency for consumers. Taken as a whole, the Government’s view is that the RDR should improve consumer confidence and trust in investment advice and it fits with the Government’s wider agenda on increasing transparency in the market.
I am not going to repeat all I said in answer to my noble friend’s recent Question, which led into the points about training. Again, while he and my noble friend Lord Naseby are quite right to raise concerns around the transition, I think that my noble friend Lord Hodgson of Astley Abbotts is right to point out the need for and desirability of professionalisation, but also that the bar has not been set excessively high. I do not want to trade data, but I think that this is quite important. The FSA’s latest research shows that the proportion of advisers who meet the RDR’s new qualification requirements has increased from 50% in summer 2011 to 71% in spring 2012. The FSA research also shows that 93% of advisers are still on track with their prediction—93%, not 91%. I know that my noble friend challenges that, but the FSA has looked at this very carefully and its advice and research shows that 93% are still on track with its prediction to complete the appropriate qualification in time.
Having said all that, I should just spend a minute on the amendment itself. As we discussed in Committee, the FCA and the PRA will be required to have regard to the principle that any burden they impose should be proportionate to the benefits that flow from it. This proportionality principle will apply to any proposed requirement whether it originates in EU law or purely domestically, so it already covers gold-plating. I would also point the House to government Amendment 44, which we will be debating in due course, and which adds a new regulatory principle giving the regulators the duty to have regard to the desirability of sustainable UK economic growth. That is a principle that will apply also to both the FCA and PRA. I am sure they will take it very seriously when they consider gold-plating. It will also be pointed out to them as a hook, as it should be, to avoid unnecessary gold-plating. So, in short, I do not believe that the amendment is necessary, nor does it fit with the Government’s wider aims in this area. I hope that my noble friend will feel able to withdraw it.
My Lords, first, I am glad to learn that the amendment taken at its face value is not necessary, in the sense that the FCA already has the obligation when implementing EU directives to have regard to proportionality and reasonableness. With regard to the RDR situation, I remain of the view that the FCA, the FSA and the Treasury are complacent about what is going to be quite a serious situation for those who are not professionals, are not used to paying fees and have modest savings, who will be left with very few conduits. That is a particularly undesirable outcome.
I do not entirely agree with the noble Lord, Lord Hodgson. Clearly, yes, the industry wants to become professional going forward, but the point that I was making with regard to qualifications was about grandfathering existing practitioners. I would repeat the noble Lord’s comment, in that I hope that the Treasury has plan B in its back pocket—and, for that matter, I hope that the FSA has plan B in its back pocket. My understanding is that by no means all the senior members of the FSA are entirely happy about RDR.
It is clear that it is not appropriate to put this amendment to a vote, but it has at least served to air a subject that has been rather ignored in both Houses of Parliament. I beg leave to withdraw.
Amendment 25A withdrawn.
25B: Clause 6, page 20, line 41, after “codes” insert “, including a code of conduct, as set out in section 1LA (Code of conduct), for the financial services industry”
My Lords, there can be little doubt that an enforceable code of conduct is sorely needed in this industry. Many banks publish so-called codes of conduct that read impressively. The Barclays code of conduct says:
“We … expect every Barclays employee, and others who work on our behalf, to conduct themselves according to consistently high professional and ethical standards. This expectation applies equally to all, whatever their role”.
This from the bank that sold PPI and whose employees fixed the LIBOR rate. HSBC encourages employees to make decisions based on,
“doing the right thing but without ever compromising the ethical standards and integrity on which the company was built”.
Yes—that is the same HSBC that we learnt on Friday had been facilitating tax and AML-avoiding bank accounts in Jersey. Some integrity.
The Chartered Banker Code of Professional Conduct, which sets out the ethical and professional attitudes and behaviours expected of bankers, has been endorsed by virtually every major high street bank. But there is clearly something missing. The words are there, but the behaviours do not follow. The code does not have the necessary sanctions to strike people off the register, nor does it have governing structures independent of the industry.
Other professions have codes of conduct which are independently supervised and enforced. In the case of barristers and solicitors, the functioning and enforcement of these are overseen by the Legal Services Board. In the case of accountants, auditors and actuaries, they are overseen, and in the last resort enforced by, the Financial Reporting Council, which I noted before, sadly, gets no mentions in this Bill, despite the importance of its role. But here we are concerned with those bankers, and others, who do not belong to one of those professions and therefore have no individual code of conduct to cover integrity, the avoidance of conflict of interest and other behavioural matters. For them, there is no supervision of their individual behaviours, and no professional enforcement procedure; action kicks in only when specific rules are broken. This is not good enough for an industry that has shown itself lacking in the very attributes that this vital sector should have engraved in its DNA. The evidence read out about the last amendment by the Minister is ample evidence of that. It is an industry where conflicts of interest are too rarely identified, declared and avoided. LIBOR and PPI are examples.
There is a Bank of England code for members of the FPC, but there is no requirement for a code for directors and senior executives of banks and other parts of the financial services. Yet as the noble Lord, Lord Turner, acknowledged, bank directors bear responsibilities to the public which go beyond those of other private sector directors. Any failure on their part is therefore,
“of public concern, not just concern for shareholders”.
Hector Sants, then of the FSA, told the Treasury Select Committee that,
“we should change the regulatory regime to … ensure that people who have shown … serial misjudgment are not allowed to run financial institutions again”.
However, where does this Bill stop them? Simply relying on the significant influence function procedure may not be enough and, anyway, it is a slow burn. If the person concerned moves abroad, no penalty is exercised and no bonus returned. Or if they apply for a significant influence function after some years, there may be no current or warm evidence or witnesses on which to base a decision. A code of conduct is needed to which these people must individually sign up and a breach of which should expose them to investigation and possible action. Without this, we will continue as before with all our interests at risk.
I should note that the Government have accepted the need for a code to cover one aspect of banks’ day-to-day work—the submission of rates for the LIBOR benchmark. Amen to that; we will welcome that shortly. However, surely it is nonsense to agree the need for a code for just one aspect of the banks’ work, because it has been found wanting, but not to the myriad other decisions which banks and their staff take every hour of the day. The exact name of such a code may be debated: John Kay’s review spoke of good practice; some professions call it a code of ethics. The principle is that it governs behaviours, outlaws conflicts of interest and is enforceable. It governs the profession of stewardship, which is what most of this industry is about.
Since the Parliamentary Commission on Banking Standards was established, the BBA has launched a taskforce to investigate a code of conduct. However, I believe that a standards board run by the BBA—the organisation that administered LIBOR—would have zero credibility. A standards board must be independent of the industry, with the ability to set high standards, the tools to supervise the code and the power to strike off those who breach the code. The other professions’ codes of conduct lay down exactly what is expected of people and we need the same for banking. Anyone who breaks the conduct code should be struck off, whether for market manipulation, gaming indices or deliberate mis-selling. People should not be allowed in banking again if they have mis-sold a product.
I believe that confidence will not return until we strike off those whose conduct has let us all down. The details of the code need not detain us here. Amendment 31A, which is consequent on Amendment 25B, allows for the code to be drawn up by, we hope, the FCA and the PRA in consultation with relevant stakeholders. No one, I am sure, can argue against the intention of this amendment. I trust that the Minister will not argue against its wording. I beg to move.
My Lords, I rise to support both of these amendments in the names of my noble friends. I think that my noble friend Lady Hayter is right to place all of this in the context of the experience of the past few years. The general proposition on which our discussion must be based is that, if the financial services sector misbehaves, we all suffer—not merely those who buy financial products directly, but everybody in the country. I use the word misbehave advisedly. Systemic risk and systemic events do not appear as if by black magic but result from the way that people who work in the financial sector conduct their business.
Why do they occur? They occur because of the way that people in the sector do things. The solution to the problems must be found partly through regulation, as the Bill recognises. On the one hand, we must bring in regulation to deal with some aspects of this matter. On the other hand, improved behaviour by the enterprises operating in financial services is not merely required but urgently required, as I think my noble friend said. Until recent events emerged I, for one, was not aware of the lack of professionalism and the seeming total unconcern with ethical standards on the part of people in the sector. Whenever I reflect on it, I still find it astonishing that apparently decent people behaved like a bunch of crooks, not to put too fine a point on it. They did not mis-sell products by chance; they deliberately mis-sold them.
Clearly, something must be done. My noble friends are right to see the Bill as the ideal vehicle for doing something, and for tabling amendments to it that would actually achieve something. The object is not to damage the sector, as it is a very important one that earns a lot of money for our economy, but to make it fitter for purpose, if I may use a cliché. My noble friend Lady Hayter is entirely right when she says that as a minimum—I underline “minimum”—there must be a code of conduct which is mandatory and enforceable. I was not clear whether she had in mind all sorts of penalties rather than just the most draconian of all of saying, “You cannot work in this sector again”. Perhaps she will clarify that when she sums up.
I hope that the Government understand all this. Certainly the public understand these problems. I also hope that the Government do not play their usual card and tell us that these amendments are not necessary because buried somewhere in some bit of fine print is an inferior version of what they do. In my judgment these amendments are necessary and the sooner we get them on the statute book, the better.
My Lords, I have amendments in the next group and so will keep most of my comments on this aspect of the Bill until then.
I wholeheartedly endorse what the noble Baroness, Lady Hayter, said in moving this amendment and, indeed, what the noble Lord, Lord Peston, has just said. The problem for all of us, most particularly my noble friend the Minister, is to try to contrive a state of affairs for the future which is fundamentally different from that which has prevailed hitherto. I think everybody in the House agrees that we cannot go on as we have done. The City of London, which has been the jewel in our economic crown, is now so tarnished and undermined by its own conduct that its future is far from certain. I have been involved in the City of London since 1964. It has strayed so far from its own mottoes of “My word is my bond” and “May God direct us” as to become almost laughable—indeed, “tragic” is a better word.
If one is to be hard-headed about this—there is no other way than to be extremely hard-headed when dealing with the financial sector—one has to own up to the fact that codes of conduct have not worked very well hitherto. One will find that nearly all the main actors within the City are members of professional, or quasi-professional, bodies that have codes of conduct, but the fact remains that, in the City and in other financial centres, the general level of conduct, particularly of what used to be called morals, has declined to an unsustainable point. We are not on our own but we are better than most. I say that while supporting the sentiment of the amendment because, frankly, even if it were on the face of the statute, it would not be worth a row of beans unless it were enforced.
The great failing in our society, and in our financial sector over the past few decades, has been a lamentable gap between what the law requires and what is enforced on the ground. There is no shortage of criminal law to deal with most of the worst abuses that have occurred and are still occurring; we have a plethora of criminal law and probably more than any democratic society on earth, but the problem is enforceability. I hope that my noble friend will address that issue when he responds to the amendment because it is equally relevant to the next set and to other sets of amendments. Unless we can beef up the authorities that have the hugely difficult task of policing these hugely complicated measures, we cannot pretend that they will work. Some of the most fertile and brilliant brains in lawyering, accounting and so on are available for hire in the City to anyone prepared to pay their generous fees. Unless the measures that we emerge with at the end of this process are clear, you can be sure that they will be got around.
The failure of our tax system, about which we hear more from month to month, is a classic tale of legislation that is unfit for purpose and, above all, an enforcement resource that is grotesquely unfit for purpose. Any one of the large banks can wheel out more lawyers and accountants to defend them from a single thrust from the regulator than the regulator has in its entirety. It is not David and Goliath; it is David, without his sling, and Goliath. This is a very difficult Bill to be leading on and this is perhaps the most difficult aspect of a difficult Bill but I hope my noble friend will have something to say on enforcement.
My Lords, it is difficult to disagree with the objective of appropriate codes of conduct in this industry but I am left wondering what the amendment adds to the state of current regulations. As the noble Baroness will know, there is a regime of approved persons in the industry and to be an approved person, and to hold any position of responsibility in financial services, you are required to behave in accordance with a fairly clear code of conduct which covers many of the things that this amendment seeks to introduce. Before calling for the writing of yet another code, it would be helpful if the noble Baroness could explain what she thinks is omitted from the current code for approved persons, or whether it is an enforcement problem and, if so, how that would lead to better enforcement than currently exists under the approved persons regime. Otherwise, we are in danger of rewriting the same words over and over again.
My Lords, I strongly support my noble friend in her amendment. The noble Lord, Lord Blackwell, seems to be replying for the Minister, telling us why it is not necessary. Is it harmful to have this amendment in the Bill? If so, let him tell us how rather than asking whether it is necessary. As I would have expected, the case has been made very well indeed by my noble friend Lady Hayter and supported elegantly and eloquently by my noble friend Lord Peston. I hope the Minister will not take any notice of the noble Lord, Lord Blackwell, when he replies.
My Lords, I always take a lot of notice of my noble friend Lord Blackwell. However, Amendments 25B and 31A raise a very important issue. The revelations during the summer about the attempts to manipulate LIBOR and Euribor demonstrated, if any demonstration were needed, that perhaps a considerable number of individuals in the banking sector have failed to live up to the most basic standards of professional conduct and that must, of course, be put right. We are tabling our amendments to this Bill to bring the setting of LIBOR within the scope of the regulatory regime and make it a criminal offence to attempt to manipulate benchmark rates, but that is only the first step.
The critical issue here, which I think has been rather forgotten in this debate, is that the Government acted very quickly to establish the Parliamentary Commission on Banking Standards and the noble Baroness, Lady Hayter of Kentish Town, made a passing reference to it. The noble Lord, Lord Peston, suggested that I may fob the House off by saying I have another version—he would say an inferior version—of this in the Bill. I absolutely will not say this. I will say there is a superior answer to this very big problem coming from the Parliamentary Commission on Banking Standards. I entirely accept that there is a serious issue to be dealt with but the commission is established, it is doing its work and it will look at precisely what is needed to deal with the challenge.
I will come on to that if the noble Lord, Lord Peston, will hear me out. Of course it is no good having a commission if its recommendations are not going to be taken seriously or enacted if necessary. We should remind ourselves of how this House is represented on the commission. It is quite striking that I do not see my noble friends Lady Kramer or Lord Lawson of Blaby in their places this afternoon, nor indeed the right reverend Prelate the Bishop of Durham or the noble Lords, Lord McFall of Alcluith and Lord Turnbull. Why are they not here? I believe it is because the commission is at work today looking into these very critical questions. Experience and authority is being brought to bear on these issues in order to identify ways to put the highest standards of ethics and professionalism at the heart of the UK banking system and I believe that we should leave the commission to do its work.
I know, as do other noble Lords, that the commission will examine all possible solutions and of course the introduction of codes of conduct should be one of them. We have heard different views about the effectiveness of codes of conduct, but it is quite right for the commission to look at that. The commission has the membership and the tools it needs to do a very thorough job in this area and I do not think we should pre-empt it. It has the power to interview witnesses under oath and to send for the necessary people and papers. It has already heard evidence from, among others, Paul Volcker, the former chairman of the Federal Reserve, Martin Wheatley the chief executive designate of the FCA and from various members of the Independent Commission on Banking. The commission has already gathered an impressive range of written evidence from stakeholders, including the major banks, regulators and consumer groups, and that evidence was published last Thursday.
So, given that the commission’s work is ongoing, it is not the right time to make decisions on this very important matter. To do so would be to pre-empt and undermine the conclusions of the commission, which is investigating this issue so thoroughly.
I will give way to the noble Lord, Lord Barnett, in a moment but perhaps I may answer specifically the question of the noble Lord, Lord Peston.
The Government look forward to receiving the commission’s report and recommendations and will consider them with great care. It is due to report by the end of the year. As to when we might legislate, as the House knows, the Government will introduce the banking reform Bill, which was published in draft last month, into Parliament in the new year. That Bill may well provide an appropriate vehicle to implement any of the commission’s recommendations that require legislation. So we certainly will not lack a possible legislative vehicle, in the right timeframe, when the recommendations are made by the commission.
My Lords, the noble Lord has not hesitated, quite rightly, to put the LIBOR scandal amendments in this Bill. Now he is saying that he does not want to put in the code of conduct in case the commission comes up with it. In that case, why has he put the LIBOR scandal amendments in the Bill?
My Lords, the Government kicked off a number of inquiries and reviews immediately we became aware of the LIBOR scandal. Martin Wheatley, the managing director of the FSA and the chief executive designate of the FCA, carried out one of the reviews which have led directly to the amendments in this Bill. We have acted on his amendments specifically addressing criminal offences and so on around LIBOR in this Bill. We also set up the commission to look at the wider question of professional standards and the way that banking operates and it will report by the end of the year. We will have a legislative vehicle in the new year, if required, to take up its recommendations, which the Government will take very seriously.
It is not that we are dragging our feet or want to stop these issues being addressed. It would just seem foolish to pre-empt a commission of great eminence which is doing enormously important work as we speak. I hope that, on that basis and the confirmation I have given about what is going on, the noble Baroness will be persuaded to withdraw her amendment. While the Government agree with the need to restore public trust in banking, we should not jump to legislate now but do so once the parliamentary commission has had time to do its work.
I am still a bit lost. As I understand it, the Minister cannot at this point commit the Government to bringing in any specific Bill that they have not brought in yet. However, setting that on one side, the more important point is that all of my remarks, as he will be aware, were addressed to the whole of the financial services sector. Is it possible to have a banking Bill in which amendments will be put down referring to the code of conduct for the whole financial sector? In my view, we will be told that either the short or long Title will not let us do it. That is why I argue that this is the obvious vehicle for this, and nothing the noble Lord has said so far tells me that this is not the obvious vehicle.
My Lords, we have published the Bill in draft already, so it is already on the slipway in that sense. I am not equipped to get into questions about what precisely the scope could be in that Bill. I believe it is wide enough. If it is not, the Government will find other legislative vehicles in which to introduce this. However, I am reminded that although I loosely call it the banking reform Bill, it will actually be titled the Financial Services (Banking Reform) Bill and therefore the scope will be plenty wide enough to bring in a code of conduct right across the piece. I hope that provides further reassurance to the House.
My Lords, I thank noble Lords who have spoken on the amendment. I will give one specific answer to my noble friend Lord Peston: there would be a range of penalties possible under an enforceable code, from working under supervision to requalifying or even paying fines
It is disappointing that the Minister, if I heard him correctly, accepted the problem and—I think—the need for a code but simply said, “Not yet”. I do not think that is the right answer. We need to have stronger regulation. I do not agree that the approved persons regulation system worked—if it had, we would not have had all these problems. We need action now. It was not lack of regulation that led to PPI mis-selling, it was the banks’ lack of concern for their customers. It was not the absence of regulation that led to the LIBOR manipulation, it was, in the words of the noble Lord, Lord Phillips, a lack of morals.
Until we have an enforceable code of conduct across the whole of the financial sector to govern internal behaviours, we will not see the difference between the past and the future, to which I believe the noble Lord, Lord Phillips, also referred. I feel certain that the House will support the inclusion of a code of conduct within this Bill. We do not want to wait for a commission that may not have a unanimous report and whose findings the Government have said they will only consider, not endorse. Therefore, I would like to test the opinion of the House.
25C: Clause 6, page 21, line 8, at end insert—
“( ) As part of upholding the FCA’s consumer protection and integrity objectives, and in order to support a cultural change across the UK financial system, the FCA shall also have a general duty to take into account firms’ professional standards.
( ) This must include—
(a) an assessment of firms’ competencies including the extent to which professional qualifications and continuing professional development are embedded across core functions; and(b) an assessment of firms’ conduct including adherence to a code of conduct or code of ethics, and the extent to which employees are members of a recognised professional body.”
My Lords, historically, bank managers were much trusted to act in the best interest of their clients, especially when I was a child. Sadly, however, today consumers and small businesses no longer retain that trust. Bank staff have been incentivised to sell complex and sometimes worthless financial products, such as interest rate swaps or PPI. Lloyds alone, for example, has had to set aside £5.3 billion to make good those mis-sellings. We need a banking system which is trusted: a return to old-fashioned stewardship banking which serves every region, business and family in the country. This demands professionalism, which this amendment seeks to embed within the Bill.
Ministers and regulators have both spoken about the importance of instituting cultural change within firms. The then FSA Chief Executive Hector Sants argued that regulators should,
“ensure firms have the right culture for their business model—the right ethical framework—to facilitate the right decisions and judgements”.
Earlier this year, in setting out his vision for a “new orthodoxy” in financial services, Martin Wheatley said that he wanted a world,
“where the culture of firms, from product governance to sales, is aligned with the best interests of the customer”.
These amendments seek to promote such a cultural change by ensuring that FCA supervisors judge professional standards when assessing the conduct risk posed by firms.
Professional standards are vital. The higher a practitioner’s commitment to professional standards, the lower the likelihood of customer harm. Likewise, high levels of professional standards are linked to increased consumer trust and confidence. However, the Bill makes no reference to professional standards, despite the recommendation of the Joint Committee and the evidence of incompetence and even dishonesty. This is a significant omission. Were they written into the Bill, the regulator would have greater persuasive powers and there would be a power incentive for firms to embed higher standards at every level. This would enhance consumer protection and underpin the integrity of the UK financial system. I beg to move.
My Lords, I have two amendments in this group, Amendment 26D and Amendment 27A. As I said during debate on the last group of amendments, this part of the Bill is extremely difficult and I make no pretence that what the Government and indeed the parliamentary draftsmen are contending with here is other than the greatest test of their skill.
None the less, I think that they have got the balance wrong. Noble Lords will know by now that there are three objectives that must be satisfied as far as possible under the Bill: the consumer protection objective, the competition objective, and what is called the integrity objective. My two amendments are designed to buttress the last of those three: the integrity objective. I suggest to your Lordships that of those three objectives, integrity must surely come first. It is frankly no use if the competitive aggression of the City of London remains the highest on the planet, bar perhaps Wall Street, if the standards of integrity are wanting. The same is true of consumer protection.
However, the Bill gives priority to competition over consumer protection and integrity. I dare say my noble friend the Minister will deny that, but I leave that to your Lordships to judge. Having set out those three objectives, proposed new Section 1B(4) to the FiSMA on page 20 then says the following:
“The FCA must, so far as is compatible with acting in a way which advances the consumer protection objective or the integrity objective, discharge its general functions in a way which promotes effective competition in the interests of consumers”.
That is either a pointless subsection because it has no meaning whatever, or it is a subsection which gives priority to competition. One does not need to labour the point that the tragic and appalling depths to which the City has sunk over recent decades and which it is not yet out of—let us make no bones about it—have their source in simple, ethical failure, and not in a want of competence, aggression of trades, shrewdness or anything else. We as a Parliament really owe it to the country—and, in a strange way, to the City itself—to make it clear that above, before and after all else it is integrity which must be supreme.
I must confess that I am now sorry that I did not attack proposed new Section 1B(4) head on. With other amendments, however, I have sought to strengthen the arm of the regulators in Amendment 26D, which puts as one of the issues that has to be considered when the regulator construes the integrity objective what I call,
“the fairness and integrity of policy and conduct of those directing or operating in the financial markets”.
It is a bit strange that there is no reference in this huge Bill to the regulator in relation to the individuals who are conducting business in the financial markets. My second amendment is to the proposed new section that defines the competition objective. It requires, among the matters to which the FCA must have regard,
“how far the methods or culture of any competition may undermine the integrity objective”.
I have just one more thing to say. The regulators in the City—as I said earlier, I have been there, mainly, not as a City player but within the City and acting occasionally for City entities and individuals—have an almost impossible task. That is because the law on regulation is now so voluminous and complicated, and those against the regulator are so clever, intensive and overwhelming in the resources that they can bring to resisting when it tries to intervene, that we owe it to what we are trying to achieve and, in aid of that, to the regulators to make it clear beyond peradventure that although this new Section 1B(4) will give competition priority between the three factors, none the less these additional subsections would introduce the conduct of the individuals and the concept of fairness into the equation, because they are notably absent in the wording of this Bill.
I have dealt with some of the regulators over the years and I can only pity them. We need to think what it is like when they are under huge attack and dealing with heaven knows how many cases, all of them complicated and all against businesses which will array against them 10 times the number of professionals that they have to deploy. We really need to make life that bit easier for them so that some cynical and crafty lawyer cannot say, “If you look at that clause and that clause, then that schedule and that schedule, then this Act and that Act and the rest of it, it is not clear. So, old friend, go ahead”. We do not want that.
The noble Lord makes a good point. He should perhaps have talked to some of his friends on the last group of amendments, when they all voted with the Government. I wonder what they might do this time. Has he convinced them, I wonder? We will have to wait and see. I was surprised by the proposed new section to which he referred because I thought I had understood the “may” or “must” argument. Those words are used profusely throughout the Bill. Indeed, the noble Lord, Lord Sassoon, told us that he had asked officials to go through the whole Bill and work out which of them they should keep. What I had not appreciated—this is a point drawn to our attention by the noble Lord, Lord Phillips—is that on page 20 we have, in new Section 1B(4), another method of having “must” or “may”. We have a qualified must:
“must, so far as is compatible”,
with the later words. In practice, it is not “must” at all. The noble Lord wants to strengthen it, and I agree. We need to strengthen the arm of regulators everywhere. That is why I voted for the previous amendment.
We may be told that we should wait for the banking Bill, which we have in draft. We cannot be sure that that Bill will appear in that form. I know that at least one noble Lord on the Opposition Benches wants to insert in it something that the Government do not have in mind to insert; namely, a Glass-Steagall amendment. The Minister will know what I mean. I do not know whether he has committed himself or the Government to the draft Bill appearing in the new year. I think he said that we will have it in the new year. Perhaps he will confirm that. We clearly need a banking Bill.
I understand when the Minister says that the Government will take into careful consideration what the banking commission says, but he has not committed himself on that either. What exactly are the Government committing themselves to? They have set up this very high-powered commission, of which colleagues on all sides of the House are Members, and I understand that they are doing a first-class job, but we have been told only that he may, after serous consideration, introduce what the commission recommends. Will he firm that up this afternoon? Will we definitely have a Bill early in the new year, based to a large extent on the work of this high-powered commission, that will deal with some of the points that have rightly been raised about integrity and care? All these matters could be in a banking Bill as well as in this Bill but, for the moment, we have only this Bill. I support my noble friend Lady Hayter and the noble Lord, Lord Phillips. I will support him when he moves his amendment, and I hope his colleagues on the Liberal Democrat Benches will do the same.
My noble friend Lord Phillips is quite right to draw attention to the importance of integrity. Integrity lies at the heart of confidence in the financial services system, indeed, in any commercial activity. In Amendment 26D, the noble Lord seeks to insert an additional requirement about,
“the fairness and integrity of policy and conduct of those directing or operating in the financial markets”.
He needs to be aware that the significant influence function committee already checks everybody who is undertaking the sorts of roles that he considers important—which are indeed important—and does so very thoroughly. It has done so with increasing pressure and difficulty in recent years, so much so that people are now ceasing to wish to undertake these roles. They are starting to ask whether they need all the hassle, the problems and the dangers of adverse publicity from people like the noble Lord, Lord Phillips. Powers exist to give authorisation to the people who will set the tone and the philosophy that he seeks to achieve, which all of us who work in the City feel are essential and which, as he rightly pointed out, have not always been present in the past. I say to the House, and to the noble Baroness, Lady Hayter, that we must get the philosophy right. The creation of codes and more regulations will not necessarily produce the right people. We are looking for people with judgment. We rely on judgment, not on process, and as we do this we are in danger of moving more and more to a process-driven system that does not allow the exercise of judgment that will lead to the desirable results that my noble friend indicated in his remarks.
My Lords, I intervene reluctantly, but I see a lack of logic in what was said by the noble Lord, Lord Hodgson. If the amendment of the noble Lord, Lord Phillips, is not needed, and nor is that of my noble friend Lady Hayter, can he give us any explanation of how the criminal—I use that word again—activities of so many people in the City went on for year after year? If everything is fine and we do not need to establish standards, why did the City not behave appropriately? I use the words “the City” to indicate not just one or two people in the City but a culture right across it. It was the atmosphere there, that is what happened and that is why, in the last-chance saloon of your Lordships’ House, my noble friend Lord Phillips and others are trying to do something about it—in order, to put it bluntly, to get the reputation of the City back to where it was decades ago, when most of us were young and could look at it with admiration and pride. We cannot do that now.
I was not aware that I said that everything in the City was perfect. I said that integrity lies at the heart of the financial services industry, as indeed it lies at the heart of most commercial endeavour. I said that there were clearly areas where the City had fallen short, but I pointed out to my noble friend and to the noble Lord, Lord Peston, that the significant influence function committee has very considerable powers that it has been exercising with increasing strength in recent years. Therefore, I doubt that we need amendments such as this.
I am a bit confused. If the noble Lord absolutely agrees with me on the primacy of integrity, he cannot have read proposed new Section 1B(4) of FiSMA or he would not be content to oppose these amendments. New Section 1B(4) clearly states that the three objectives are equal but one is more equal than others—namely, competition. If he agrees with me and if one is going to be more equal than others, it should be integrity.
My Lords, I am not on the Front Bench, but as I read it, proposed new Section 1B(4) gives equal weight to these objectives. It states that in,
“so far as is compatible with acting in a way”,
the three are equal. I agree that integrity is extremely important, but we are not in a position where we want to avoid the other objectives, which have a real place in the creation of a dynamic City that is competitive on the world stage.
My Lords, I spoke about the role of the Parliamentary Commission on Banking Standards when discussing the previous group of amendments. I am sorry that the noble Lord, Lord Barnett, doubts the seriousness with which the Government intend to take its recommendations. It is a joint commission of the two Houses—something that any Government would take extremely seriously. We acted to initiate the setting up of the commission so I am disappointed that the noble Lord seeks to tweak my tail on this one. When it comes to a legislative vehicle, I could not have made it plainer that we have already published a draft Bill. The Financial Services (Banking Reform) Bill is on its way. That provides potentially a perfect legislative vehicle if there are things that come out of the commission, as no doubt there will be, that require legislation. The issues raised by Amendments 25C, 25E and 26C are firmly within the remit of the commission and it would be wholly inappropriate for us to jump the gun in a semi-considered way rather than waiting for the magisterial output of the commission in a short time.
Amendment 26D would add a new paragraph (f) to proposed new Section 1D(2) to be inserted in FiSMA 2000 under this Bill. It refers to,
“the fairness and integrity of policy and conduct of those directing or operating in the financial markets”.
That is on the same theme but seeks to place specific emphasis on issues of integrity and fairness by making changes to the FCA’s objectives. As we have heard from my noble friend Lord Phillips of Sudbury, Amendment 27A would specify that, in considering the effectiveness of competition, the FCA may have regard to the extent to which the,
“methods or culture of any competition may undermine the integrity objective”.
I sympathise with the amendment to the extent that it is clear that when the FCA considers taking action, it will need to consider all its objectives. Recent events have demonstrated how important it is that the regulator has a mandate to take action to protect and enhance the integrity of the UK financial system.
The Government have given the FCA the three operational objectives, as we have been reminded, of competition, consumer protection and integrity so that it determines the right balance between them in individual cases. The regulator cannot unduly prioritise any one objective and neglect to consider the others. My noble friend Lord Hodgson of Astley Abbotts has already given another construction, which perhaps is more balanced, of proposed new Section 1B(4) and I am grateful to him for that.
This is a complex interaction of provisions. In one case we are talking about a competition objective but also, in the context of proposed new Section 1B(4), a duty designed to ensure that the FCA considers competition as a means to, and in the context of, delivering other objectives. But that needs to happen only as far as it is compatible with the integrity and protection objectives. I believe that it is a keenly balanced series of interlocking provisions here, of which these are only two. Of course, there are further elaborations of just what the integrity objective and the other objectives involve. Further, it is important to “have regard to” under this new section. I believe that the balance is right and that there is no need to adjust the structure of the competition objective to require the FCA to consider integrity in the way proposed here.
Similarly, the FCA’s integrity objective will come into play when the FCA is exercising its general functions in relation to conduct. While it must think about whether competition is working in the interests of consumers, I do not believe that it is for the FCA to police the markets to establish and enforce what fairness is. I do not believe that fairness should form part of the explanation of the term “integrity”. It is a separate issue.
There are other issues about the interrelationship between the two new authorities. Proposed new Section 3D requires the PRA and FCA to co-ordinate their functions in areas of common regulatory interest where one may have relevant expertise or wherever one may have 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 have to listen to the FCA, which has a strong consumer protection objective.
In summary, I accept the wider point about the importance of these issues. As this short debate has teased out, these issues are very complicated. They are best addressed through the Parliamentary Commission on Banking Standards. In the light of that, I ask the noble Baroness to withdraw her amendment.
I thank noble Lords for their support on the amendment. I actually think that the Minister is wrong. This is not complicated; this is about integrity. The noble Lord, Lord Hodgson, had it right. We are not talking about how to impose rules. We are talking about something within the people who work in this industry. The problem is that the significant influence function has not worked. Sir Fred Goodwin was appointed under it. It was not working, it has not worked, and we need something different. We need it in the Bill.
The Minister talked about the report of the Parliamentary Commission on Banking Standards and what is going to come out of that, but that was not set up when the Bill was written. Would the Minister have accepted the code and the amendment on professional standards if Libor had not happened and if a banking commission had not been set up? The Bill was intended to mean no more failures and no more of that behaviour. We are talking about integrity. I had not planned to divide the House on this. However, as the Government have just voted against a code of conduct, I am so tempted now to put it to them that we should vote on professional standards to see whether they really want to say that they have a Financial Services Bill to make changes to the way we regulate but they do not want professional standards in that. For once in my life I will resist temptation. I beg leave to withdraw the amendment.
Amendment 25C withdrawn.
BBC: Resignation of Director-General
My Lords, I wish to repeat an answer to an Urgent Question tabled in the other place made by the right honourable Secretary of State for Culture, Media and Sport, which is taken as a Statement in your Lordships’ House. The Statement is as follows.
“The BBC is a global British institution, of huge importance and value to millions of licence fee payers and people all over the world who look to it as an exemplar of independent public service broadcasting. In light of the ongoing crisis, it is crucial that the BBC puts the systems in place to ensure it can continue to make the first-class news and current affairs programmes on which its reputation rests.
George Entwistle has taken full responsibility for the failings of “Newsnight” in his role as editor in chief and it was for this reason that he decided to resign yesterday. The circumstances of his departure make it hard to justify the level of severance money that has been agreed. Contractual arrangements are a matter for the BBC Trust but the trust also has clear responsibilities to ensure value for money for the licence fee payer. I know that the noble Lord, Lord Patten, has written to the chair of the Culture, Media and Sport Select Committee outlining why the trust took the decision it did and this letter has been made public.
It is right that the trust should account publicly for that decision. I have repeatedly emphasised the need for full transparency to rebuild public trust. Members will know that there are now in place procedures to scrutinise the BBC’s decisions in terms of delivering value for money—procedures strengthened by the Government. The National Audit Office is empowered to conduct a value-for-money review of any issue. If it decides to review this issue then I expect that the BBC would co-operate fully.
The BBC is in the midst of the most serious of crises. I have made it clear, both publicly and privately, that the trust was slow off the mark in responding to the initial crisis over Savile. It is now acting decisively with three reviews, one of which reported yesterday and the other two ongoing. It is in the long-term interests of the future of the BBC to have a period of stability to see this important work completed.
In my conversations with the noble Lord, Lord Patten, I have been clear that the overall aim of the trust must be to rebuild the public’s trust in the BBC. I know that the noble Lord, Lord Patten, agrees. There are three clear things that the BBC needs to do to achieve that. First, the immediate task for the BBC must be to address whatever failings there have been within the editorial process, particularly in “Newsnight”, to restore public confidence in the BBC. The trust needs to act swiftly to ensure that the management and leadership issues are resolved and that these failings cannot be repeated. It is clear from the interim director-general’s interviews today that the BBC is looking seriously at what went wrong, where responsibility lies and how to address this in the longer term. I welcome this.
Secondly, the trust must get the right director-general in post. I know that the noble Lord, Lord Patten, has indicated that he will do this as soon as possible, but above all the trust must get the right candidate to stabilise the BBC and drive through the change that is necessary. As I have said before, the BBC is a global British institution and needs to function effectively and in an exemplary fashion.
Thirdly, we must not lose sight in all this of the inquiries that are at the heart of these events. None of the developments of recent days should overshadow the investigations into the alleged horrendous abuse of children in institutions around the country. It is vital that that the BBC responds correctly and decisively to both Pollard, looking at the decision to drop the “Newsnight” item on Savile, and the Smith inquiry looking at Savile’s abuses and the culture and practices of the BBC.
The BBC is an independent institution and its independence is not and never will be in question. Ultimately, the only organisation that can restore the public’s trust in the BBC is itself”.
My Lords, that concludes the Statement.
My Lords, I thank the Minister for repeating the Statement this afternoon.
This is, indeed, a serious crisis in an institution which is central to British life and whose output remains much loved and respected both here and abroad. It is vital that we in your Lordships’ House do all that we can to allow the staff and the trust the time they need to rebuild the institution and set it on a forward path. This is why, as parliamentarians, we should tread carefully in how we respond. Although, no doubt, there will be a range of views about the longer term role of the BBC, its internal structures and its governance, I hope that noble Lords will agree that this is not the moment for political point-scoring and micromanagement of the crisis recovery. I would go as far as to argue that we should work towards a cross-party response to the challenges now being confronted.
I hope we will also bear in mind that the real story behind this chain of events is a tragedy of sexual abuse of hundreds of victims by a BBC employee and by sexual predators exploiting vulnerable young children at the north Wales care home. It would be unforgivable if, as a result of this mismanagement, victims felt less able to speak out and be taken seriously. We should also acknowledge the understandable distress which has been inflicted upon Lord McAlpine, a former Member of this House, as a result of the poor journalistic standards displayed by “Newsnight” on this occasion.
We should bear it in mind that this crisis represents a small part of the overall BBC output, estimated to be more than 400,000 hours of TV and radio last year. As we speak, journalists and programme-makers around the country are continuing to deliver a high-quality output of sport, features, light entertainment and award-winning documentaries for which the BBC is rightly famous. The mission to inform, educate and entertain remains at the heart of its identity and purpose. It is vital that its morale and confidence is restored. The problems which the BBC is confronting now are not of the staff’s making; it is a fundamental crisis of management.
While not wanting to prejudge the outcome of the reviews, all the evidence that has appeared so far seems to show an endemic failure of decision-making and leadership. Time and again, there appears to have been a failure to take ownership of editorial issues and a lack of skills to make the important judgment calls. This needs to be addressed urgently, as the leadership reflects upon the lessons of the recent incidents.
In all the circumstances, it was right that George Entwistle should go; I hear what the Minister has said about the action already being taken on the level of his severance. In the mean time, I hope that he would echo our call for George Entwistle himself to reflect upon whether it is appropriate for him to receive that level of severance and to agree to limit the payment to that which is defined in his contract.
Secondly, there needs to be an orderly transition towards the appointment of a new director-general. Does the Minister agree that the new appointment should be made firmly in the context of the lessons learnt from this crisis? In particular, can we be sure, in the light of what we now know, that the job description is the same as before? Does the Minister share my concern about the press reports that the chairman intends to reinterview the failed candidates from the last round of appointments? Is there not a case for a rethink and a wider trawl of potential candidates next time around?
Thirdly, the Secretary of State was quick to take action in the early days of this crisis by writing to the noble Lord, Lord Patten, in what some felt to be inappropriate terms. Can the Minister tell the House what further letters, if any, have been sent by the Secretary of State to the BBC? In the light of the concerns, can he confirm that the details of any contact on this issue between the department and the BBC will be made available? Does he agree that the independence of the BBC is paramount and should not become the next victim of this crisis?
Fourthly, does the Minister agree that one way in which the BBC has demonstrated its independence in the past was its determination to pursue difficult issues through its investigative journalism? Does he agree that it would be regrettable if one outcome of this crisis was for the BBC to retreat from great, well researched, courageous journalism?
Finally, will the Minister make it clear that this Government recognise that the BBC is much-loved institution which plays an important role in the culture of this country? Will he and his colleagues commit to standing up for it in the future? Does he agree that the priority now is to support it in recovering the essential qualities of judgment, taste, decency and impartiality, which have been its unique hallmark?
I thank the noble Baroness, Lady Jones, for her response. I entirely agree with her and appreciate very much the support she has given and the offer of cross-party support in this most difficult of times for the BBC. I entirely agree with her that we must allow for some stability and some calm, both for the trust and for the executive of the BBC, to allow them to see through these very difficult problems. I also agree entirely that we must not forget the precise issue that we are talking about, which is focused on the sexual abuse of vulnerable and young people. These, and the reasons behind them, are the issues which are to be investigated. It is vitally important that we get to the bottom of these, find out what happened and make some decisions accordingly. Clearly, there has been an endemic failure of leadership within the BBC. I have every confidence that my noble friend Lord Patten of Barnes has acted decisively and is making the right decisions to take things forward at this time.
The noble Baroness asked a number of questions. As for the level of severance pay for Mr Entwistle, it is up to him to decide whether he wishes to—how shall I put it?—give any money back that he will be receiving. It is entirely up to him. I agree with the noble Baroness about the job description of the director-general. It is not up to the Government to say what the job description should be and how it should be outlined. That is a matter for the BBC. There could well be a rethink of the job description and a relook at the current candidates. However, I again emphasise that that is a matter for the BBC to decide. We must allow the noble Lord, Lord Patten, to continue to work through these issues. He acted decisively yesterday to put in place a procedure for finding a new permanent director-general. I confirm that details of letters will be made public as and when they arrive.
Finally, I concur with the noble Baroness that the BBC is, indeed, a much loved institution. The priority, in a spirit of cross-party support, is to give every support that we can to the BBC at this time.
My Lords, the Minister is absolutely right to say that this is a matter finally for the BBC to resolve. Certainly, the BBC will survive. That great institution will continue to play an outstanding part in our public life, with the support of all parties in this House. However, Parliament has not served the BBC well in introducing the ludicrous structure of the trust and a separate director-general and his executive board. An all-party Select Committee of this House criticised that proposal at the time. It is now enshrined in a royal charter but it is not impossible to change it. Will the Government give urgent consideration to the mechanics of getting back to a sensible position in which the governors of the BBC are directly involved in issues and the chairman of the BBC has direct responsibility for them, as opposed to this rather remote arm’s-length arrangement? The exact problem about which the committee warned has now occurred.
I take note of what my noble friend said about the structure of the trust and, indeed, of the BBC. However, I believe that now is not the time to review this. As I said earlier, we must have a period of calm and stability to allow the BBC to make the important decisions that it needs to make. The current BBC charter expires on 31 December 2016. As it is a free-standing instrument, changes to the charter cannot be made by Parliament. It is possible to make changes to the charter before that point only with the agreement of the trust itself.
My Lords, the BBC and the trust have a direct responsibility to explore in great detail how sexual abuse could take place in the BBC’s own buildings and under its own culture and aegis. Having said that, let us not forget that the BBC is one of the most outstanding achievements of this country. It is a model to other countries and has a structure that has allowed for balance between different opinions and different views without ever being discouraged from pursuing the truth. It is a great institution and the sooner its management recovers the sense of that, the better for all of us. Having said that, I make one other crucial point. We cannot excuse the BBC Trust completely from the rather unwise judgment it made about the compensation to be paid to a director-general who was in place for two months, or slightly less. For the ordinary citizen in our country that is an extraordinary piece of behaviour and one they cannot begin to understand—and neither can I. I hope that candidates who were unsuccessful in the original competition will, like anybody else of outstanding ability and commitment, be included in the BBC Trust’s current selection process for the new director-general. However, as the noble Lord, Lord King, suggested, the BBC Trust needs to look at itself, not just at everybody else.
I thank my noble friend for her supportive comments about the BBC. Putting aside the awful events that have happened, I wholeheartedly agree that the BBC acts as a role model throughout the world for high-quality journalism and, indeed, high-quality investigative journalism. Your Lordships will know that two inquiries are going on. One is looking into the culture and practices of the BBC, which is more of a long-term investigation. Mr Pollard is looking at editorial matters to find out why the “Newsnight” programme was in the position that it was in. The report will be out at the end of November.
Mr Entwistle’s compensation, to which I alluded earlier and which was mentioned by my noble friend, is a matter for the BBC. I do not wish to go into its precise details.
My Lords, the Government rightly say that the only organisation which can restore the public’s trust in the BBC is itself, but can the BBC do so under its present chairman and trustees? I ask that because in at least two of the most important areas facing this nation, they are marching determinedly in the opposite direction to the views of a growing majority of the British people. First, an analysis of the trustees reveals that a large majority of them are climate change enthusiasts.
Yes, indeed, my Lords, so it is not surprising that the BBC has decided not to allow informed debate on this subject. Secondly, the BBC remains blindly Europhile—I can prove that too—as exemplified by its chairman, who has a large EU pension which he could lose if he went against what the European Commission regards as the interests of the European communities. I need scarcely add that those interests are no longer the interests of this country.
I do not wish to comment on the European matters mentioned by the noble Lord. As I said, although the trust could have acted more quickly with its initial inquiries, I feel that it is now acting decisively to address this crisis. The noble Lord, Lord Patten, has a key role in ensuring that this crisis is handled well. Again, I support him in everything that he is doing to sort out the mess.
My Lords, it seems that the BBC has made two quite bad but very different mistakes over this period. It also seems that the BBC has become virtually ungovernable. I understand why the Government and the Opposition do not want to meddle in the BBC’s affairs, but to do nothing while the BBC deals with these difficulties seems to me to be quite difficult to justify. I wonder whether the Minister could confirm that he will do all that he can to support the noble Lord, Lord Patten, in the radical overhaul of the governance arrangements of the BBC, of which he spoke, so that once again we can have the confident, world-class, thoroughly professional BBC that has been so important for this country and its reputation both in Britain and abroad.
I do not know whether it is true to say that the BBC is actually ungovernable. As I said earlier, some very serious problems need to be addressed within the BBC. I absolutely agree with the noble Lord that we should give the noble Lord, Lord Patten, every support that we can to sort out these issues at this very difficult time.
My Lords, the extent to which the BBC lost the plot is illustrated by its failure in what I hope is an exceptional incident: to put to Lord McAlpine the facts that it was alleging. Why was there such an elementary failure to put these matters to him, contrary to law and natural justice? It is not rocket science.
The noble and learned Lord makes a passionate point. I agree that what happened concerning the naming of Lord McAlpine was completely abhorrent. There are inquiries into the matter and I do not want to comment any further. We are looking to get to the bottom of that through the BBC. It is a matter for the corporation.
My Lords, although I recognise the ghastliness of the events that we are talking about, does the Minister agree that the independence of the BBC is a central phenomenon that we must retain and that it would be a mistake, particularly as none of us knows the true facts, for those in positions such as ours to shoot from the hip? Will the Minister confirm that when the facts are clear and the steps that should be taken have been taken, the matter will come back to the House so that we can have a full debate on exactly what has occurred?
I agree that it is very important indeed to uphold the independence of the BBC, but at this stage I cannot confirm whether there will be a debate. I am certain, however, that discussions are taking place to decide if there will be one in the future.
While everyone is agreed on the seriousness of the crisis that has engulfed the BBC, it is worth reflecting that it was a BBC programme, “Panorama”, which investigated the problems surrounding the Savile issue. One recent aspect of the crisis that has overtaken us is that BBC news bulletins have been leading on this issue hour after hour, day after day. Does the Minister agree that it is difficult to think of any organisation, let alone any news organisation—print or broadcast—which, having acknowledged incredibly serious editorial errors, would be as unremittingly self-critical and as open to public scrutiny?
The noble Lord makes a very good point. Putting aside the very difficult issues that have arisen over these programmes—which I will not go into—the BBC inquiries will look at all the details and I am sure that in due course we will hear precisely what happened.
I certainly associate myself with the important points that the noble Lord, Lord Grocott, made and that the Minister acknowledged. The BBC has obviously sustained a blow to its credibility and to the trust that is widely reposed in it, and I suppose that this may be described as a crisis. However, I hope that the Minister would agree—and I take it from what he said that he would—that these things must be kept in proportion and that it would be absurd to suggest that a feeding frenzy over particular incidents, however serious, constitutes a global threat to the BBC’s brand, which remains strong overall and rightly continues to command widespread trust and respect.
I agree very much with the comments of the noble Lord; we must keep the issues in proportion. He is completely correct. I was alarmed by the feeding frenzy that came out of the press, particularly some of the headlines regarding the resignation of Mr Entwistle. I believe this should be a period of calm; there is a need for stability to allow the BBC to work through these very difficult problems. I appreciate the comments made by the noble Lord.
My Lords, I am very grateful that in the initial Statement the Minister said that we must continue to recognise the needs of those who have been abused. He spoke of the BBC facing a series of crises. Those who were abused face a far more serious series of crises. Will he stress again that the primary concern at this point needs to be the protection of children and young people? Will he also stress the continuing desire of us all to encourage those who have suffered abuse to come forward so we can change the culture of how we deal with such issues?
The right reverend Prelate makes a very important point, with which I concur. I encourage all people who have suffered this horrendous abuse to come forward, as a large number already have. I also agree with him that our thoughts today should be with these people who have suffered so badly. His point is well made.
My Lords, will the Minister confirm that heads have rolled at the BBC as a result of a story written not by a BBC journalist but by a freelancer—a Mr Angus Stickler? He sold his story to a “Newsnight” team which was reeling from the consequences of the fallout of the Savile business. The “Newsnight” team was in chaos as a result of that. I am not trying to excuse what happened but let us be absolutely clear: it was not a “Newsnight” employee. It was someone from outside the organisation who, I hope, will no longer be providing information or stories to the BBC in the future.
The noble Lord makes an interesting point. It is still the case, however, that the BBC remains responsible, despite the fact that, allegedly, there was a freelance journalist involved. Again, these issues will be looked at as part of the ongoing inquiries.
My Lords, perhaps I may echo or follow the comments of my noble friend Lord Grocott and the noble Lord, Lord Low. One of the things that I was always taught when I worked as a BBC journalist many years ago—and I declare that interest—was the priority of balance, and balance in this matter is absolutely essential. I would ask the Minister to observe that, at the same time as this whole firestorm about the various “Newsnight” problems, which are indeed reprehensible, was occurring, the BBC was once again demonstrating its enormous global power in its coverage of the American presidential election and of the events in Beijing while at the same time maintaining its very close watch—as the noble Lord, Lord Grocott, said—on the problems at home which it itself had partly created. I think that we should observe very strongly the question of balance, particularly when we take note, or do not take note, of the comments of some sections of the press.
I agree with the noble Baroness’s comments. I consistently have said that we need a period of calm and stability, and the question of balance crops up as part of that. We need to take a balanced look at the issues, and there needs to be balance generally in looking at these very difficult issues.
My Lords, my noble friend may wish to know that Mr Iain Overton, the editor of the Bureau of Investigative Journalism which produced the offending piece of shoddy journalism for “Newsnight”, has resigned today. Will my noble friend make certain that we and the BBC are fully informed as to how the organisation headed by Mr Overton secured such a trustworthy position with “Newsnight” so that its work on the north Wales child inquiry was not properly investigated and checked?
I thank my noble friend for that information. I was alerted to it just before I came into the Chamber. However, I do not have any further details and I would not wish to comment further about the name mentioned. However, I imagine that this issue and the name mentioned will be taken up as part of the inquiry into these issues.
Does the noble Viscount agree that the selection pool for the BBC Trust is very narrow? Would it not be as well that that pool should be widened so that a perhaps more critical attitude could be taken of the operations of the BBC? Perhaps one of the new candidates could be the noble Lord, Lord Pearson of Rannoch.
I would not wish to comment on any particular candidate. I presume that the noble Lord was referring to the search process that the chairman of the trust has said that he would carry out. I am not able to comment on that particular process at the moment. That is a matter, indeed, for the BBC.
My Lords, the right reverend Prelate has rightly reminded the House that the people we should be most concerned about in all this are those who were the victims of abuse. Can the Minister comment on whether the Government feel that the frenzy around the existential crisis of the BBC is not really a distraction from concerns that there was very real abuse in children’s homes in north Wales and elsewhere; that there was an individual who, because of his celebrity, was able to abuse children all over the country; and that we are in danger of being deflected, which of course plays into the hands of those who would rather cover up what happened and the names of those who were ultimately responsible?
The noble Lord makes a very important point—that we must not lose sight of the awful events that have taken place and of why the BBC is in the position it is in at the moment. However, given a bit of calm and stability the immediate issues will, one hopes, blow over, and those who are now taking the right decisions will make those decisions and follow them through. I am sure that there will be a number of days of continued press reports but I absolutely take the noble Lord’s point that we must not forget the real issue behind these terrible reports.
Financial Services Bill
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.
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.
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 Debe