Monday, 2 March 2015.
Arrangement of Business
My Lords, I remind the Committee that if there is a Division in the Chamber, the Committee will adjourn for 10 minutes from the sound of the Division Bell.
National Minimum Wage Regulations 2015
Motion to Consider
My Lords, before turning to the reason for this debate, I will focus on the success of the national minimum wage. Recognition must be given to the Labour Party for introducing the national minimum wage, which last year was voted the most successful government policy of the preceding 30 years.
The key reason for its success is its simplicity. An independent Low Pay Commission provides balanced advice to the Government about minimum wage rates. But setting the rate is just the start. The Government have taken action to create the conditions for economic growth and higher living standards. Since the election, an extra 1.88 million people are now in work, and wages are now growing faster than inflation.
The Government also have a major role to play in ensuring that the minimum wage is enforced. That is why we have increased enforcement budgets by 50% over this year and next. There are now tougher penalties. We have increased the financial penalty percentage from 50% to 100% of unpaid wages owed, and the maximum penalty from £5,000 to £20,000. Provisions in the Small Business, Enterprise and Employment Bill will change the scope of the maximum penalty from a per business basis to a per worker basis.
There are also reputational consequences. The Government have already named 162 employers who have not complied with the national minimum wage. Such bad publicity will be an additional deterrent to employers who might otherwise be tempted not to pay the national minimum wage.
I turn to the reason for this debate. An important element of ensuring compliance is the clarity and accessibility of information. Since their introduction 17 years ago, the regulations have been amended numerous times, resulting in 27 separate sets of regulations. For such important legislation that is directly relevant to so many workers and their employers, lack of clarity could result in people not being paid what they are legally entitled to. This draft instrument consolidates the 27 sets of regulations into one in order to make the rules clearer and more workable for employers and workers alike.
In response to an eight-week consultation last summer, most of the 22 respondents told us that, while they welcomed the consolidation, even greater clarity would be welcome, particularly in the guidance. We agree. Once these regulations take legal effect, we will review the guidance during 2015 in order to improve the information available to individuals and employers. I commend the draft regulations to the Committee.
My Lords, these proposals seem to be eminently sensible and are to be welcomed—and it is very good to have cross-party agreement on the success of the national minimum wage. As the Minister will know, I served as one of the first members of the Low Pay Commission; we established the first figure for the minimum wage. More importantly, we established the framework for what was included—and what was not—in the minimum wage, such as overtime, London weighting and all the other important details that have led to the continuing success and recognition of the minimum wage.
I do not think that it is remembered now what pressures there were before the minimum wage was established—political pressures and also pressures on the Low Pay Commission—for absolute secrecy, because any leaks would have undermined the whole venture. I remember one of the away weekends that the Low Pay Commission had in its first few months. It was in the days before everybody had a mobile phone. We were incommunicado in this particular place. Relatives could get through only by ringing the residential place we were staying in and using the code word “chrysanthemum”. Has the world not changed in 17 years? It seems laughable that so few people had mobiles. I am not sure how many relatives of mine could even have said the word “chrysanthemum”.
Nowadays, we underplay—not deliberately, because it is so well established on a cross-party basis—the importance of the minimum wage. I very much hope that it will remain a cross-party venture and that we do not play politics too much with this issue. The Low Pay Commission does a very important job representing, on a tripartite basis, all the interests involved in the world of employment—and long may that continue.
My Lords, I, too, welcome this particular statutory instrument and the introduction by the Minister. I thank my noble friend for her historical assessment. I am sure that her relatives could have said “chrysanthemum”. They might have had trouble spelling it, but that is another matter.
I thank the Minister for recognising that we introduced the minimum wage—though, I have to say, that was against the wishes of some and with dire predictions about the millions of jobs that would be lost. I am glad that we have put that behind us and I welcome the enthusiasm now.
Obviously, anything that simplifies and clarifies is to be welcomed. I welcome the point about the enforcement budgets being increased. I am interested in whether the statistic of 162 employers being named is, as I presume, for 2013-14. Maybe I missed the precise date. I just wonder whether the number of employers being reported is going up. Is the number of queries to workers’ rights helplines increasing?
I note from the Explanatory Memorandum that the Minister is due to clarify the guidance this year. It is really important that we get that right. As a matter of interest, are we keeping any statistics on the fact that, over the recent past few years, we have now had introduced the concept of a living wage? I do not expect the Minister to have any information on that, but I wonder if we are keeping any statistical evidence on it. If he has something on it, better still. Other than those questions and comments, I am happy to support this.
I thank the noble Lord, Lord Young, and the noble Baroness, Lady Donaghy, for their contributions to this debate. As I said in opening, this was the best legislation we have had in 30 years. I hope the noble Lord will believe that when I got the Motion from the officials, I insisted on putting the point that this was Labour Party policy and the best legislation we have had in some years. I thank the noble Lord for his approval of this Motion.
I commend the noble Baroness, Lady Donaghy, for her work on the national minimum wage and the work that she did with the Low Pay Commission. What a success story. I am glad that it is cross-party issue and that as a Government we are doing something for the people in this country who are at the bottom end of the market in terms of the wages that they are on. I am glad that my Government have raised the allowance for people to have that extra money. The personal allowance has gone up from £6,000 to roughly £10,000 in the past five years.
The noble Lord, Lord Young, made a point about the employers named in 2013 and 2014. We are naming more employers. The revised naming and shaming scheme came in in October 2013. The new rules are part of the Government’s efforts to toughen up the enforcement of the national minimum wage and increase compliance. The 162 employers were mentioned earlier. Between them they owed substantial sums in arrears to their workers, and by naming and shaming employers it is hoped that bad publicity will be an additional deterrent to employers who would otherwise be tempted not to pay the national minimum wage. We received more complaints about the national minimum wage through the helpline during 2014-15 and we continue to increase awareness of the national minimum wage among employers and employees. I commend the regulations to the Committee.
Groceries Code Adjudicator (Permitted Maximum Financial Penalty) Order 2015
Motion to Consider
My Lords, the order sets the maximum financial penalty that may be imposed by the Groceries Code Adjudicator, and completes the set of regulatory powers available to the adjudicator to ensure that the large supermarkets deal fairly with their suppliers.
Before moving on to the purpose and effect of the order, it might be helpful if I talked a little about how the adjudicator came to be created. The genesis of the Groceries Code Adjudicator regime is to be found in the market investigation into the supermarkets conducted by the then Competition Commission between 2006 and 2008. The commission found that the problems in the sector were concentrated in the commercial dealings between the largest supermarkets and their direct suppliers. It therefore used its powers under the Enterprise Act 2002 to introduce the Groceries Supply Code of Practice in 2009.
The scope of the code is precisely defined. It governs the commercial relationships between the 10 largest UK supermarkets—those with a turnover of more than £1 billion a year—and their direct suppliers of food, drink and household products. The code requires the supermarkets to deal fairly with their suppliers and it includes specific provisions, among other things, governing terms of supply agreements; the timing of payments; marketing and promotional costs; and payments as a condition of being a supplier. It does not cover indirect suppliers further down the supply chain. Nor does it govern questions relating to pricing, which are the responsibility of the Competition and Markets Authority under general competition rules.
The Competition Commission required the appointment of code compliance officers by the supermarkets. It discussed the possibility of a regulator to enforce the code, but did not go so far as to recommend one at that time. I appreciate that many felt that the absence of a regulator was an unsatisfactory arrangement from the start. The Commons Select Committee on the Environment, Farming and Rural Affairs, for example, described it as akin to setting the rules of the game but then failing to appoint a referee.
Ministers shared that view. That is why they legislated for the creation of the adjudicator to enforce the code. Christine Tacon took up her post as the first adjudicator in June 2013. Ministers were also determined that the adjudicator should have the enforcement powers necessary to ensure compliance with the code. Those powers are extensive. The adjudicator has a duty to arbitrate any dispute that is referred to her by a supplier, and she has the discretion to arbitrate if the referral is by a supermarket. The adjudicator may also launch an investigation where she judges that there are reasonable grounds to suspect that a supermarket has breached the code, or has failed to comply with earlier statutory recommendations made by the adjudicator.
I shall take a moment here to clarify some of the confusion that has grown up around the adjudicator’s powers of investigation. This was highlighted most recently by the EFRA Select Committee, which recommended in its report on dairy prices that the GCA be given the power to launch proactive investigations. The Government will respond in detail to the committee shortly. But to be absolutely clear, there is nothing in either the legislation governing the adjudicator or her statutory guidance that means that the GCA must simply sit and wait for evidence to be brought to it. Far from it—the adjudicator has wide powers to investigate, and the Government expect her to rely on them to be an active and visible guardian of the code.
I know that Ministers are pleased that Christine Tacon has quickly established her profile and authority through her extensive engagement with the sector, not least by requiring the various internal and external investigations in the Tesco case to include the groceries code in the terms of reference. This is surely proof of the adjudicator making good use of the proactive powers of investigation that the legislation already grants her.
Where the adjudicator conducts an investigation and finds that there has been a breach of the code, currently she may take one of two forms of enforcement action. She may issue the supermarket with recommendations as to its future conduct to ensure compliance with the code, or she may “name and shame” the supermarket by requiring it to publish information about the adjudicator’s investigation. However, it was the will of Parliament that the adjudicator should also have the power to impose a financial penalty. Provisions to introduce a fining power by secondary legislation were therefore added to the Groceries Code Adjudicator Bill during its parliamentary passage. These required the adjudicator to consult on the method for determining the maximum penalty, which she did between July and December 2013, and to make a recommendation to the Secretary of State. This recommendation was for a maximum penalty of up to 1% of UK turnover, which Ministers accepted. These regulations implement that recommendation.
I should put on record that these regulations cannot have retrospective effect. That means that the adjudicator will not have the power to impose a penalty in respect of any breach of the code that predates the making of the regulations. I know that some of the supermarkets have expressed concern about the level of the maximum. They have pointed out that, for the largest retailers, 1% equates to hundreds of millions of pounds. On the other hand, suppliers who responded to the GCA’s consultation tended to favour a much higher maximum, in some cases up to 5% of turnover.
On balance, Ministers consider the recommended 1% to represent an appropriate and proportionate maximum. It is modest compared to the figures of 10% and more in the competition regime—and it is a maximum. The adjudicator’s published guidance makes it clear that the GCA will adopt a proportionate approach to its enforcement powers and will seek voluntary compliance wherever possible. The agreement that she has secured from most of the supermarkets to limit their forensic accounting exercises to the previous two years, when six had been common, is an excellent example of her ability to get results without the need to pursue formal proceedings.
Where the adjudicator relies on her formal enforcement powers, her guidance makes it clear that she will do so by applying the well established Macrory principles on regulatory penalties. These state that a sanction must be proportionate, must deter further non-compliance and must aim to eliminate any financial benefit from non-compliance.
On the latter point, we have seen recently that, by manipulating the timing of payments to and from suppliers, supermarkets can very quickly accrue huge sums. That makes the 1% maximum in this order essential if a full and proportionate range of sanctions is to be available to the adjudicator. The Government appreciate that some noble Lords may still have concerns about the level of the maximum. I hope that they will be reassured to know that there must be a statutory review of the GCA’s performance next year, during which this order may be looked at again.
I have said that the order is about giving the adjudicator all the tools that she needs to do her job—but powers are only half of the picture. The adjudicator must also have the necessary resources and the capacity to be an effective regulator. That is why Ministers were pleased to approve an increase of almost 40% in the GCA’s levy funding—from £800,000 this year to £1.1 million next year.
In closing, I repeat that in debating this order today we are reflecting Parliament’s will to give the Groceries Code Adjudicator access to the full range of enforcement options that she needs to do her important job as effectively as possible. I am confident that granting the adjudicator this additional power will strengthen her ability to deliver fairness in the commercial relationships between the supermarkets and their suppliers. A fair and transparent market is good news not just for suppliers but for the sector as a whole and for consumers. It will promote competition and foster innovation. I hope therefore that noble Lords will support the order.
My Lords, we do support it. I welcome the introduction by the Minister but I have a couple of points to make. I welcome the Government’s decision to reject the retailers’ view that somehow the maximum penalty should be much more complex, and to keep it simple at 1% of turnover. The question of whether this is absolutely the right figure is something that we can look at in the review next year.
I also welcome the point about the wide powers of investigation and the increase in resources. It must have been a coincidence but, as I was flicking through the pages of the Sunday Times business section, I happened to notice a little article about a German supplier to a company complaining that the company had a four-month payment regime, whereas, interestingly, Germany has a one-month regime. I have not been able to verify that but the Groceries Code Adjudicator commented that she did not propose to launch an investigation into this. I was a bit surprised at that, as I thought the area would be worth some investigation. Four months seems a significant period of time for a company to withhold payment to its direct suppliers. I would welcome the Minister’s response to that.
I am grateful to the noble Lord, Lord Young, for his contribution and for accepting this SI. He mentioned the penalty of 1%. In many ways, he is right; I think it is best to keep it simple. One per cent is a maximum. Bearing in mind that the turnover of large supermarkets can exceed £1 billion, 1% can be a substantial sum of money. Again, if we find that this is not the correct amount, we can always review the legislation.
The noble Lord mentioned the article in the Sunday Times. I have a copy of it attached to my file. Lidl was the supermarket in question. I am sure that this matter will be investigated by Christine Tacon. The payment period is longer in the UK than in Germany, but there has been no Grocery Code Adjudicator investigation. The Grocery Code Adjudicator is independent. The Small Business, Enterprise and Employment Bill, which is having its Report stage tomorrow, is looking at prompt payment and will probably incorporate what Lidl has done to its suppliers by delaying payment for as long as four months. It might come under that jurisdiction rather than the Grocery Code Adjudicator.
That might be the case, but the Grocery Code Adjudicator made a public statement that she did not intend to investigate it—so it is an important decision. There ought to be some dialogue with the Grocery Code Adjudicator to find out why this does not merit at least something, even if it is not a formal investigation. It is quite an important issue, and I would have thought that it merited some investigation. I cannot say that I am completely satisfied with the reply. I am not expecting the Minister to respond now, but when he has had further opportunity to reflect, perhaps he will.
My briefing states that the GCA is independent and the small business Bill will look into it. I will certainly write to the noble Lord. The article states that the company pays its suppliers in Germany in 30 days but takes four months to pay in the UK—so it is something that we must look at.
The GCA’s published guidance commits her to a stepped approach to enforcement. The adjudicator has said that wherever possible, she will rely on informal regulatory actions to secure compliance with the code. For example, the adjudicator has secured the agreement of most of the supermarkets to limit forensic audits of transactions with suppliers to the previous two years, rather than six years. The GCA meets Ministers regularly and its performance will be reviewed by Ministers in 2016, so I think it is best if I write to the noble Lord on this matter. I read the article in the Sunday Times and have a copy with me. I will refer it to officials and write to the noble Lord.
Electronic Commerce Directive (Financial Services and Markets) (Amendment) Order 2015
Motion to Consider
My Lords, I shall speak also to the draft Financial Services and Markets Act 2000 (Miscellaneous Provisions) Order 2015. I am pleased to introduce these statutory instruments.
The Government have fundamentally reformed regulation of the consumer credit market, transferring regulatory responsibility from the Office of Fair Trading to the Financial Conduct Authority on 1 April last year. The FCA is better resourced and more empowered than its predecessor and has been equipped with flexible rule-making powers to ensure that it keeps pace with developments in the market. The FCA regime is already having a significant positive impact and is helping to deliver the Government’s vision for an effective and sustainable consumer credit market that is able to meet consumers’ needs.
The raising of standards will improve further as the FCA undertakes authorisation assessments to assess firms’ fitness to trade—a process that has already begun for those industries regarded as the riskiest, including payday lending—and these instruments to be debated today help to support the effectiveness of the FCA’s regulatory regime.
First, the e-commerce order provides the FCA with powers to tackle credit firms, including payday lenders, which abuse their rights under the e-commerce directive to evade FCA rules. As noble Lords will be aware, the Government have taken robust action significantly to improve protections for consumers in the payday lending market. The Government transferred regulatory responsibility to the FCA’s powerful new regime and legislated to require the FCA to introduce a cap on the cost of payday loans.
The Government strongly welcome the payday lending rules introduced last year by the FCA, including limits on rollovers and the use of continuous payment authorities, and tougher requirements around affordability assessments. On 2 January, the FCA’s cap on the cost of payday loans came into force, as required by the Government. Consumers are far better protected under the FCA regime. The FCA has a wide-ranging enforcement toolkit to take action where wrongdoing is found, and the rigorous authorisation process for payday lenders is under way.
FCA regulation is already having a dramatic impact on the payday market—indeed, the FCA found that the volume of payday loans fell by 35% in the first six months since it took over regulation. These data are from before the cost cap took effect in January.
The Government are committed to preventing the gaming of the FCA’s regulatory regime, including the risk that lenders seek to relocate abroad and lend back into the UK. The important powers in this order will protect UK consumers by giving the FCA powers to take action against credit firms that abuse their rights under the e-commerce directive to establish themselves in another EEA member state but lend primarily to the UK. The powers will enable the FCA to require credit firms to comply with FCA rules—including, in the case of payday lenders, the price cap—or require them to seek full authorisation to continue carrying out their activities. The order therefore represents an important reinforcement of the FCA regulatory regime, helping to protect UK consumers from unfair costs and harmful practices.
I turn now to the miscellaneous order. This order will address a number of technical issues to ensure that consumer credit regulation strikes the right balance between proportionate burdens on business and providing robust protections for consumers. In particular, the order makes several provisions to minimise unnecessary regulatory burdens on firms.
For example, the order adjusts the working definition of a “domestic premises supplier”. This definition is important because it requires firms selling goods in a customer’s home to comply with the higher regulatory standards in the FCA’s “full permission” regime, thereby helping to protect consumers from the pressure-selling of goods or services on credit. However, it is important that this definition is drawn correctly to minimise unnecessary regulatory burdens on businesses and support the provision of goods and services to consumers.
The order ensures that firms providing goods or services in a home where no attempt is made to sell other goods or services, or anything extra provided is free of charge, are not regarded as “domestic premises suppliers”—for example, where a mobility aid supplier simply visits the customer’s home to measure up before a contract is signed, or where a kitchen supplier delivers and installs an item after it has been ordered. These firms can therefore benefit from the FCA’s lower-cost “limited permission” regime.
The order also makes a number of other technical adjustments to ensure proportionate regulatory burdens. For example, it ensures that solicitors—who are already subject to their professional regulatory regime—will not require FCA regulation when undertaking credit activities incidental to the firm’s professional services. I beg to move.
My Lords, I will speak only to the first of the two orders before us. This order has the usual eye-catching name for such things: the Electronic Commerce Directive (Financial Services and Markets) (Amendment) Order 2015. A better and clearer name for the SI would be: “Closing a Gigantic Payday Lending Loophole”, because, as the Minister said, that is exactly what the SI does.
On 9 December 2013, in response to amendments put down by the noble Lord, Lord Mitchell, and by me, the Government finally accepted the need for strict control of payday lending. The FCA rules that followed capped the cost of payday loans and limited the number of permitted rollovers. They also created the conditions for real-time data-sharing by lenders in order to reduce the incidence of multiple simultaneous loans. The Treasury and the FCA are to be congratulated on that. Together, with some prompting from your Lordships’ House, they have entirely changed the nature of the payday loan sector in the United Kingdom. What started out as outrageous and cruel usury has been reduced to more or less sensible costs and more or less sensible limits. The capacity of payday lenders to inflict terrible damage, as they were doing, on the most disadvantaged has been severely reduced, and I am pleased to be able to say that many payday lenders have simply shut up shop in the UK as a consequence of the new regime.
I do not think that the situation is ideal yet because, for many of us, the number of rollovers is too high, there is not yet a proper real-time database of loans outstanding and there is no mechanism for automatically preventing multiple simultaneous loans. Of course, as we speak, payday lenders are busy changing their business models in ways that will require continued vigilance on our part. We will have to see how all that works out.
In the debate of 9 December 2013, I raised for the first time the question of what seemed to me a gigantic loophole in the proposed new regulations. This was the loophole to do with the e-commerce directive, which we are discussing. As the Minister said, this directive would allow any payday lender to avoid our regulation if they were based elsewhere in the EEA and were trading in the UK only electronically. This would mean that any payday loan company could continue to operate in the UK but entirely outside our rules, caps and limits if it were based in the EEA and had no bricks and mortar presence here in the UK.
I asked the Treasury at the time what it intended to do about this. I had subsequent conversations with the Minister and officials about the problem. This order is, as the Minister correctly said, the solution to that problem. It closes the gigantic loophole in the regulations. If payday loan companies based abroad now try to use the e-commerce directive to avoid UK regulation, they can now be stopped from operating in the UK or forced to comply with our rules if they want to continue to operate in the UK. This is a very good and very necessary step forward, and I am delighted that the Government and the FCA have acted.
As the Minister said, this new order adds to the protection against the immoral and unscrupulous exploitation of the most vulnerable people in our society. However, it is a Treasury order and it is written in the Treasury’s normal, deathless—meaning, obvious-on-the-face-of-it—prose, which means that there are just a couple of questions that I would like to ask the Minister.
New Regulation 11A lists the kinds of activities that the order will apply to. Can the Minister say whether this list includes debt management companies? I know that he is aware of the wholly unacceptable charges and practices of some companies operating in this sector.
New Regulation 11B (2)(a) seems a little ambiguous. It says that the authority must be satisfied that the incoming provider,
“directs all or most of its activity to the United Kingdom”.
The question is: how is “most” to be interpreted here? Does it mean “most” by weight of advertising, “most” by number of customers or “most” by the value of lending to those UK customers? How will the authority arrive at a measure of whichever interpretation of “most” it wants to use? I very much hope that my noble friend the Minister will be able to say that the FCA will be able to use all or any of the above interpretations and that it will be able to use, as a conclusive determination, whatever measures it considers reasonable.
Those are details but, in this area, detail is often absolutely critical. However, I do not want the detail to overshadow my congratulations to my noble friend the Minister and the FCA. They have closed a potentially very damaging loophole in the payday regulations.
My Lords, I start by welcoming the noble Lord, Lord Sharkey, to our debates. The noble Lord, Lord Newby, and I feel flattered that we are now three instead of our usual two on these instruments. The noble Lord, Lord Sharkey, and colleagues on my Benches are to be congratulated on the campaign they have waged on this issue. The noble Lord’s description of the e-commerce directive and a gigantic loophole is absolutely valid, and I join him commending the Government on closing that hole. However, we believe that this is only part of the way forward. The payday scandal has been attacked in the sense that many unscrupulous operators have been driven out of the market, and that will go further, but we wish to promote safer and more ethical forms of lending. We will try to ensure that co-operatives and mutual ownership models are able to compete on a level playing field. We will look to give greater power to local authorities to eliminate the spread of payday lending shops in town centres, and we will want to investigate ways in which to support mutuals—for example, by improving the regulatory structure in which they operate and making available support from the British investment bank. The sad fact is that we have problems in our society that mean that short-term loans are needed. It is not just about driving out the bad guys; it is about creating opportunities for a new breed of good guys. We already have credit unions to turn to as an example.
On the second order—and I thank the Minister for showing us how the two orders fit together—the Explanatory Memorandum makes perfect sense, except for the part of it that he explained, which I am left having trouble understanding. Paragraph 7.1 says:
“To extend the scope of the limited permission regime in relation to ‘domestic premises suppliers’”.
I see the importance of extending the scope to domestic premises suppliers. I went to the order—and you know that you are driven to your limit when you actually read the order—and I found that,
“domestic premises supplier” means a supplier who … sells, offers to sell or agrees to sell goods, or … offers to supply services or contracts to supply services … to customers who are individuals while the supplier, or the supplier’s representative, is physically present at the dwelling of the individual”.
I am gripped of the importance of the regulations applying in those circumstances. The key issue is the caveat in sub-paragraph (3B), which says:
“A supplier who acts as described in sub-paragraph (3A) on an occasional basis only will not be a domestic premises supplier unless the supplier indicates to the public at large, or any section of the public, the supplier’s willingness to attend”,
and so on. It seems that the differentiation is on whether they advertise or not. If I have got that wrong, I would be grateful to the Minister for writing to me. I cannot see how the words of the provision translate to the picture that he has just described, with what I would have thought was almost peripheral to suppliers not being covered rather than this specific thing, whereby,
“unless the supplier indicates to the public at large”.
I do not know what that means other than that they are in the advertising business.
Finally, does the Minister know of any specific instances where the issues that the order remedies have manifested themselves, or is this anticipatory and intended to stop a problem before it arises? Is he satisfied with the FCA’s performance as a regulator so far, since it took up those responsibilities from the OFT?
My Lords, I thank both noble Lords who have participated in this debate. I, too, congratulate the noble Lord, Lord Sharkey, on his persistence in this area and on drawing this issue to the attention of the Government for the first time, I think. When he first did so, it was by no means clear that there was a legal route which enabled us to deal adequately with payday loan companies which just moved offshore. He spurred the creative minds in the Treasury to come up with a legal route, so we are extremely grateful to him for that.
He asked a couple of very specific questions, including whether the provisions include debt management companies. The answer to that is yes, they do. He asked how one defines “most” and gave a number of contributory definitions of “most”. It is for the FCA to determine that definition on a case-by-case basis. It will take into account all the factors in deciding how to do it.
The noble Lord, Lord Tunnicliffe, spoke of the Labour Party’s wish to promote a safer and more ethical lending environment. I think we all share that wish. That is why we have taken action on payday lending and have taken a range of actions to promote mutuals and credit unions, including giving £38 million to the credit union expansion project and undertaking a review of how we can promote credit unions further. Credit unions are, in the medium term, probably the best bet we have for many people having easy access to proper financial services and small loans. A key thing now will be to get credit unions up to the ease-of-use level that the payday loan providers have. To be critical of the payday loan sector, its great strength and weakness is that it is so easy to use. It is not so easy to get access electronically to your credit union account or to loans via credit unions. One of the key things that the credit union expansion project is doing is improving back-office infrastructure to enable credit unions’ systems to be more user-friendly, particularly for young people who are used to electronic methods of banking. I do not think we disagree on that.
The noble Lord, Lord Tunnicliffe, asked about the definition of “domestic premises supplier”. The key is to ensure that firms selling in the home, where there is a risk of pressure selling, are subject to greater regulatory scrutiny. We are clarifying that this includes where firms promote themselves as being willing to visit consumers in their homes. That makes them a domestic premises supplier, irrespective of the number of visits they make. This will make it easier for firms and the regulator to judge on which side of the line they fall. I think—and I will write to the noble Lord if I am wrong on this—that there is a big difference between a company that sells in its shop or online and then just delivers stuff to your house and a company which comes and gives a quote in your house. That is the sort of distinction we are trying to make. If I can expand on that further in any helpful way, I will do so.
I thank the noble Lord for that promise. I find the description that he just gave entirely understandable and reasonable but then I look at the draft legislation. It takes a heroic understanding of words to move from those in the order to the explanation I have just heard. If nothing else, I shall value the letter that explains how you move in such a way.
It will be a great pleasure to give the noble Lord something of such value. We will attempt to do that.
Finally, the noble Lord asked whether we were satisfied with the performance of the FCA in taking over the reins of the OFT. The short answer is yes. Looking at the payday loans element alone, the impact of the FCA, combined with the legislative procedures that have been put in place, has been very dramatic in a direction that most people would welcome. The relative speed with which it was able to get the cap agreed and implemented is an example of that. The short answer to that question is yes, but of course both the Government and Parliament will scrutinise carefully what it does in future.
Financial Services and Markets Act 2000 (Miscellaneous Provisions) Order 2015
Motion to Consider
Financial Services and Markets Act 2000 (Banking Reform) (Pensions) Regulations 2015
Motion to Consider
My Lords, these regulations ensure that a ring-fenced retail bank cannot be liable for pensions obligations arising from other parts of its wider banking group. These regulations are the final piece of secondary legislation necessary to bring about the ring-fencing of retail banking from investment banking. In completing this process, these regulations represent the final piece of legislation needed to complete the biggest ever overhaul of Britain’s banking system.
On election, the Government set themselves the task of fixing the banking system following the worst banking crisis in the entirety of British history. In 2010 we set up the Independent Commission on Banking—the ICB—led by Sir John Vickers to consider the options for structural reform of the banking sector. The ICB recommended ring-fencing core retail banking services from investment banking and trading.
Ring-fencing will insulate crucial core retail banking services, such as the taking of personal deposits, from shocks originating elsewhere in the financial system, and will make banks simpler and easier to resolve. This will help curtail the implicit government guarantee enjoyed by banks that are seen as too big to fail, and will protect taxpayer money from ever again being used to provide solvency support for failing banks.
One of the recommendations of the Independent Commission on Banking was that ring-fenced banks should not have any liabilities to group-wide pension schemes. The Financial Services (Banking Reform) Act 2013 gave the Government the power to ensure this, and these regulations exercise that power. They require ring-fenced banks to make arrangements to ensure that they do not have any shared pension liabilities with other group members or outside companies—with the exception of other ring-fenced bodies within the same group, and wholly owned subsidiaries. The regulations also give powers to the banks and to the trustees of banks’ pension schemes to ensure that the necessary changes can be made, and set out the role of the regulators, the PRA and the pension regulator for monitoring and assessing the changes.
The regulations are a necessary part of ensuring that there is a robust ring-fence in place protecting core banking services. Any shared pension liabilities could pose a huge risk to the viability of the overall ring-fence and could threaten the ability of the ring-fenced bank to maintain the provision of vital services. Collectively, the large banks run their pension schemes at a deficit that reaches the multiple billions of pounds. This means that were a non-ring-fenced investment bank to fail, the ring-fenced bank could suddenly be left with a large pension liability in the many millions, or even billions, of pounds that it might be unable to pay.
Although implementing these regulations will have some transitional cost to the banks, the measure is clearly good value for money. The cost to the banks is hard to estimate, but the Treasury expects it to be in the tens or low hundreds of millions of pounds. This is relatively small in comparison to the cost of the broad ring-fencing package.
Furthermore, ring-fencing itself is the best strategy for structural reform of UK banks. The plan to ring-fence UK banks is based on the comprehensive work of the Independent Commission on Banking. The mechanisms by which ring-fencing will help financial stability are clear. The ring-fenced retail banks will be insulated from shocks elsewhere in the financial system. They will have higher capital requirements, which will improve their resilience. Ring-fencing will make banks’ structures simpler and will provide additional options to the regulator for a bank to be restructured, which will help resolution in the case of failure. By ensuring economic and operational independence, ring-fencing will achieve the objective of complete separation of retail banking from investment banking while still allowing the bank to benefit from its relationship with the wider banking group.
We firmly believe that this is the most cost-effective and proportionate option, and one that will ensure the long-term stability of the sector. The regulations play a key part in building a robust ring-fence and a stable banking sector, and I commend them to the Committee.
My Lords, I sat through the creation of the Act to which these regulations relate. Broadly speaking, it had cross-party support. This is, as the Minister pointed out, a key element in completing the picture and therefore I welcome it. However, having spent several years serving on the Merits of Statutory Instruments Committee of your Lordships’ House, I can only join in its complaint—it is now called the House of Lords Secondary Legislation Scrutiny Committee—from its 26th report, published on 10 February. The committee said:
“In the EM, HMT gives limited information about the consultation process which was held from July to October 2014, referring only to a number of technical changes made in the light of consultation responses, as well as to two substantial changes in order to limit the burden on the banks and regulators. Though the draft Regulations were laid on 21 January, HMT had not published the summary of responses by 10 February. We are clear that Departments should publish their consultation summaries no later than the time of laying the instruments concerned before Parliament, as we set out in the report of our inquiry into Government consultation practice. In our view, Parliament should be asked to consider secondary legislation only when Government have provided adequate information, including about consultation, to support such consideration”.
I agree with the comments in that report. I believe that that general principle should be kept to and I am disappointed that the Treasury, in this particular case, has failed.
Also, what progress is being made in this whole ring-fencing process? As the Minister will recall, there was a degree of scepticism from our Benches and other places that the timescales that the banks had to create their ring-fence structures were extended. Can the Minister give the Committee some indication of what progress the banks are making in that extended timescale and what processes the Government and presumably the PRA, the FCA or whatever is the appropriate combination are putting in place to ensure that the banks are progressing towards their ring-fenced state and that we do not once again end up in a situation where too-big-to-fail institutions land us with a fait accompli and say, “We haven’t done it yet: we’ll do it later”. With those comments, I have no objection to the regulations in principle because, as the Minister said, they complete the picture to create ring-fenced entities.
My Lords, I thank the noble Lord for his comments. On the consultation and the publication of the consultation response document, I am sorry that it was not published earlier. It has now been published. Compared with most SIs that we take through your Lordships’ House, this is actually—though important—quite short, and has a single purpose.
I also take the point that compared with the importance of the SI this is a modest point, but to a poor opposition spokesman like myself, without a wonderful array of staff behind me, if a document is not signalled in the EM I have great trouble actually finding it. While I am sure that the statement has been published and is right, surely it should be a matter of discipline that it should be published before it is laid, and every effort should be made to make sure that any documents referenced are referenced in the Explanatory Memorandum.
I agree with the noble Lord. It is very difficult from the document itself to gain any sense of where pressure points or disagreements might be, and things should be published promptly, as the rules suggest.
The noble Lord asked how the ring-fence process is going. This is the final piece of secondary legislation required to implement ring-fencing. By passing it now, we have fulfilled our commitment to legislate for ring-fencing by the end of the Parliament. Further ring-fencing rules, which do not require legislation, are now being consulted on in two consultation papers and being put in place by the PRA. The PRA’s first ring-fencing consultation closed in January, and it is on course to publish its second consultation paper later this year. The big banks that have to implement ring-fencing are fully engaged with the PRA and, in January, gave their initial plans for ring-fencing to the PRA. So there is a bit of an iterative process going on between the drafting of rules and the banks’ own thoughts about how best they might do it. The other thing that has been happening is that Lloyds and RBS have been making changes to their business by winding down certain of their activities, both in terms of geographical spread and contracting some of their investment banking activities in anticipation of ring-fencing coming into effect. As far as we are aware and can see, both the regulators and the banks appear to be on track to have the ring-fencing successfully implemented in due time by 2018.
Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2015
Motion to Consider
That the Grand Committee do consider the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2015.
Relevant document: 23rd Report from the Joint Committee on Statutory Instruments (Special attention drawn to the instrument)
My Lords, this instrument creates a new regulated activity in the Financial Conduct Authority’s regulated activities order. The new activity concerns the giving of advice on the conversion or transfer of a class of pension benefits known as safeguarded benefits, which are defined in the Pension Schemes Bill 2014-15, but are best understood as benefits that the Government have taken a decision to safeguard, because they offer a guaranteed income in retirement that is assessed to be particularly valuable. They include benefits commonly referred to as defined benefit, but also include benefits that offer other guarantees or promises. This new activity relates to a safeguard being created by the Pension Schemes Bill 2014-15 in the context of the new pensions freedoms announced at Budget 2014. The advice safeguard requires scheme trustees and managers to check that members have received appropriate independent advice before transferring or converting safeguarded rights into rights which can be accessed flexibly, and before paying an uncrystallised funds pension lump sum in respect of safeguarded benefits. This safeguard will ensure that members have fully considered the implications of giving up rights that provide a valuable guaranteed income in retirement. It is important that this safeguard is operational from 6 April 2015, when the new pension freedoms come into force.
In July 2015, the Government’s response to the consultation on freedom and choice in pensions committed that advice required under the safeguard would be provided by an FCA-authorised adviser. This instrument helps deliver on that commitment. This instrument provides for advice on the conversion and transfer of safeguarded benefits into flexible benefits to be regulated by the FCA in accordance with the regulatory framework established by the Financial Services and Markets Act 2000.
Without this order, the FCA would regulate only advice on transfers of safeguarded rights to contract-based schemes. The new regulated activity created by the instrument allows the FCA to regulate advice on all transfers of safeguarded rights and interests to trust-based schemes that can be accessed flexibly. The Government want to ensure that the consumer interest is prudently accounted for in the context of the new pensions freedom, and therefore this instrument has been brought forward to ensure the proper operation and consistent regulation of advice provided under the safeguard.
The approach of defining the appropriate independent advice required under the advice safeguard by reference to a new FCA-regulated activity was indicated during the Lords Committee stage of the Pensions Schemes Bill on 12 January this year. Amendments to the Bill were the made at Lords Report stage on 27 January to provide that the appropriate independent advice required by the Bill should be provided by a person who,
“has permission under Part 4A of the Financial Services and Markets Act 2000 … to carry on a regulated activity specified in regulations made by the Secretary of State”.
The House was informed in early January that the Treasury would lay an instrument to create the relevant regulatory activity. This is the order we are now debating.
The Financial Conduct Authority will set out in a forthcoming consultation paper the precise standards of advice it will require. This paper, which will be published very shortly, taken together with the Pension Schemes Bill, its regulations and this order, will ensure that the advice safeguard is robust, effective and fully operational when the pension freedoms come into force in April 2015.
I commend the order to the Committee and beg to move.
My Lords, I thank the Minister for presenting this order. He has clarified my only concern of understanding. I wish I had had the conversation with him four or five working hours ago. As I understand it, the order does all sorts of bits and bobs, but its essence is in Article 7.8 which fills a hole in the FCA applying these standards to the transfer to trust-based schemes. It took me a great deal of time to find out the difference between a contract-based scheme and a trust-based scheme. I shall not repeat my understanding lest I have it wrong, but that seems to be the essence of the order.
The “Regulatory Triage Assessment – final stage” document offers three alternatives. Option 2 is:
“Amend the FCA’s Regulated Activities Order via statutory instrument such that advice on occupational transfers is fully regulated”.
It does not give a very convincing reason why it should not do this. It is not that we are not supporting this Bill. The Opposition have not opposed the general essence of what the Chancellor is trying to do, but the size of what is happening and the importance of quality advice cannot be overstated.
I believe it has been estimated that perhaps some 500,000 defined benefit scheme holders may seek transfers almost straightaway. I think that a firm called Hargreaves Lansdown has done that. Given the very sudden discontinuity that will occur in April, is the Minister confident that the advice industry has the capacity to meet people’s needs? Does the pensions industry have the ability to meet the apparently thousands of transfer requests that it will face? Is the Minister happy that the mechanisms are available to protect the public from fraudulent operators? Does the Minister think that the Government have done enough to educate the public on the size and challenge of the changes they face? I happened to come across an article in the Observer this weekend which was rather less than reassuring. It said:
“Figures from insurance company Zurich show that, while the average length of retirement is 25 years, over half the population believe they will be retired for 20 years or less. Most people also predict they will not live beyond 85. But figures suggest half of people retiring now could live to 90 or beyond”.
That does not show an appropriate level of public understanding in facing this significant change. The noble Lord’s colleague, Steve Webb, the Minister in the other place, did not exactly use resoundingly assuring language in the article. He said:
“We wouldn’t be doing it if we thought it was a disaster, but you do take a risk when you trust people with their own money”.
I wish that his tone had been slightly more reassuring—I hope that the Government have a rather greater aspiration than the avoidance of disaster. I hope that in the short time left before April they will do their best to improve the level of education among the general public so that not too many people make decisions that they subsequently regret.
The noble Lord is quite right to describe the order as filling a hole in the regulatory structure. That is exactly what it does. He talked about two separate changes that are taking place from 1 April. The relatively narrow one in terms of the number of people we think are likely to take advantage of it is the flexibility for people with a defined benefit scheme or other safeguarded scheme to move to a more flexible scheme. That is what the order covers. People in that category are required to take advice via a regulated adviser. We think that the majority of people with safeguarded pensions will find, on taking that advice, that it is in their best interests to retain them. However, it is for them, in discussion with the IFA community, to decide on a case-by-case basis.
I was asked whether there are enough properly qualified people to do the work. There are about 20,000 registered IFAs and around 7,000 of those are pension transfer specialists so it is quite a body of people. Given all the other changes that have taken place in the financial services sector, the concern of the IFAs in recent years has been that there was not enough work to go around—or would not be in future—on their old model of operating. I suspect that for this category of people, there will be adequate advice.
The article to which the noble Lord referred and many of his later comments were about the more general freedoms under which, from April, people will no longer have to take an annuity. There is a different and larger challenge there in terms of providing support for people in that category. As the noble Lord knows, we are setting up a completely new guidance service to advise people in that category. That service will have three strands—web-based, telephone and face-to-face—and is being developed by my colleagues in the Treasury. When I talked to them about this earlier, they assured me that they feel they are on track to have enough people and adequate systems in place to deal with the very large number of requests they will get.
One other thing that my colleague, Steve Webb, said about the change on 1 April was that he suggested people spend the day in bed rather than worry about changing their pensions literally on day one. It is important that people take time to get not just the guidance but also to think about how they want to dispose of the funding they have in their pension pot.
I completely share the concern of the noble Lord and several commentators that many people do not understand pensions at all. They have a pension but that is about all they know about it. One of the great potential benefits of this change and the fact that everybody will get free guidance is that it will help people to understand how a pension works. I think there is a view in a lot of people’s minds that a pot of money called a pension is somehow different in some mysterious way from any other pot of money. The truth is that it is a pot of money available for them to dispose of, now pretty flexibly. People will need to confront their own mortality, possibly in a way that they did not feel they needed to in the past. That is undoubtedly a challenge to people but one that they should face up to, and not just because of how they deal with their pensions. It also affects a whole raft of ways in which they think about their later years. For many people on the normal retirement age, that period will be 30 years or more—a third of their life.
It is a challenge. We are putting in place robust, we hope, measures through the guidance systems in terms of these safeguarded pensions—the subject of this order. That advice will ensure that people get the level of support they need to take the correct decisions and enable them to get the very best out of their pension savings. Of course, at this stage we do not know whether our systems will be as robust as we hope they will be. We do not know quite how people will respond to this. However, I think we have behaved responsibly in not only opening up the freedoms but also putting in place a system to ensure that people can exercise those freedoms in a responsible manner for their own benefit.
Committee adjourned at 4.49 pm.