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Bank of England and Financial Services Bill [HL]

Volume 765: debated on Wednesday 11 November 2015

Committee (2nd Day) (Continued)

Clause 20: Administration of senior managers regime

Amendment 22

Tabled by

22: Clause 20, page 17, line 18, leave out paragraph (d)

My Lords, Clause 20 makes a number of technical amendments to the provisions governing the administration of the senior managers regime, including those relating to the provision of updated statements of responsibilities.

On government Amendments 22 and 23, Clause 20(3)(f) imposes a restriction that prevents firms using an application to vary a condition or time limit as a device to appeal against enforcement action taken by the regulators. This is appropriate because the regulators can take enforcement action only after following the procedure laid down in the Financial Services and Markets Act 2000. That procedure naturally includes proper provision for appeals. It would not be right to allow a further quasi-appeal route by means of application to vary conditions or time limits when those had been imposed as part of enforcement action.

However, Clause 20 goes a bit further than we intended. Subsection (4)(d) would impose a similar restriction preventing the regulators from varying conditions or time limits imposed as a result of enforcement action on their own initiative. That would clearly be unnecessary and could prevent regulators from responding appropriately when circumstances have genuinely changed. Government Amendment 22 corrects this oversight.

Government Amendment 23 makes some consequential changes to Section 204A of the Financial Services and Markets Act 2000. That section ensures that each regulator has the power to take enforcement action when regulatory obligations owed, in effect, to it are breached. This amendment simply makes sure that the section will work correctly where the regulators wish to take enforcement action in relation to breach of a requirement to provide a revised statement of responsibilities.

Amendment 22 agreed.

Amendment 23

Moved by

23: Clause 20, page 17, line 22, at end insert—

“( ) In section 204A (meaning of appropriate regulator)—

(a) in subsection (3)(d) for the words from “the authorised person” to the end substitute “the revised statement of responsibilities is to be provided to the PRA only;”;(b) in subsection (3A), after paragraph (b) insert—“(ba) a requirement under section 62A(2) where the revised statement of responsibilities is to be provided to the FCA and the PRA;”.”

Amendment 23 agreed.

Clause 20, as amended, agreed.

Clause 21: Rules of conduct

Amendment 24

Moved by

24: Clause 21, page 17, line 45, leave out paragraph (c)

My Lords, this is essentially a probing amendment and I shall be brief. Clause 21(3)(c) amends Section 64B of FSMA 2000—the responsibilities of authorised persons in relation to rules of conduct—by omitting subsection (5). The subsection to be omitted says:

“If a relevant authorised person knows or suspects that a relevant person has failed to comply with any conduct rules, the authorised person must notify the regulator of that fact”.

This seems a perfectly straightforward, reasonable and clear duty to impose on the relevant authorised persons. Who could imagine or want a regime in which misconduct was known or suspected and there was no obligation to report the fact?

I asked the Minister at Second Reading why this obligation to report to the regulator was being abolished, and I wondered, of course, whose interest was being served by its abolition. The impact assessment helps here, in that it notes that,

“the removal of the SM & CR obligation to report breaches of rules of conduct should result in savings (mainly for larger banks and building societies) … This cost reduction should mainly benefit larger firms because of the large numbers of staff they employ”.

There is no mention of any other impact as to conduct or misconduct. The only impact listed is a financial benefit, mainly for larger banks and building societies. The Minister addressed the question in his letter to me of last week. He said that,

“the requirement for firms to report all suspected or confirmed breaches of the rules of conduct has proved to potentially be a very costly obligation for firms, especially the larger firms which employ large numbers of staff, as they have to put in place detailed systems and controls to ensure compliance …The regulators can ensure that they are notified of any information about employee misconduct in a more proportionate way in their rules”.

This raises more questions than it answers. How does the Minister know that the obligation to report misconduct is, “proving potentially very costly”? Who has told him so? What evidence have they provided? How was this evidence assessed? How did he guard against the obvious danger of special pleading? What independent views were solicited? Critically, how did he assess the cost benefit of removal of the obligation to report misconduct against the cost of unreported misconduct? Can the Committee see the evidence base for all this?

I note that the Minister defends the removal of the obligation to report misconduct by saying that there are other non-statutory ways the regulators can assure they are notified of misconduct. Does he mean the FCA general notification rules, SUP 15.3.1(3)? Do not these rules impose a non-statutory burden equal to that imposed by the statutory obligation that the Bill removes? If they do not, does that not suggest they are weaker, or has the Minister in mind new rules?

What all this means is that we are being asked to repeal a statutory safeguard without knowing what its non-statutory replacement may be. That seems an unsatisfactory situation. In addition to answering the questions that I have just asked, could the Minister at least postpone activation of this measure until Parliament has had a chance to assess whether the current FCA rules are likely to be as effective as the current statutory obligation—or, if there are to be new rules, could he introduce them via statutory instrument to give Parliament a chance to scrutinise them? I beg to move.

My Lords, I shall also speak briefly and, largely, to endorse the arguments put forward by the noble Lord, Lord Sharkey. The impact assessment does not give a rationale for why the Government have made this decision, which we seek at this point. It would be useful to understand the reasons for the decision having been taken; without such information, we are not quite clear as to the advantages. Who was consulted on this, and what are the benefits to consumers and regulators? Surely it would put more pressure on the regulators to identify wrongdoing. Have the Government conducted investigations that take any of this into account? The Minister has a chance to reassure both of us who have spoken in this short debate on the reasons for the Government’s position.

My Lords, I shall say a brief word. My noble friend Lord Sharkey and the noble Lord, Lord Davies of Oldham, have both been very calm on this issue, but I shall admit that, frankly, I am outraged. The obligations that exist for so many people in the public sector to report misconduct—on teachers, police officers and members of the NHS—are taken as absolute requirements. There is no question of whether they are costly; it is understood that the importance of propriety and integrity in all those activities is crucial. I suggest that, after the years that we have been through following the financial crisis, no one should doubt that integrity in this sector is absolutely vital.

When we sat on the Parliamentary Commission on Banking Standards, we discussed whistleblowing extensively. Every single institution that we talked to and everyone we could identify had in place mechanisms for whistleblowing; the problem is that none of them was effective. The kind of issues that were reported through whistleblowing systems were situations such as when someone had noticed someone sliding a £5 note out of a cashier’s desk—they were on that kind of scale. So none of the major abuses, whether it was PPI, the LIBOR scandal, the mishandling of credit issues or money-laundering, came to the surface through any kind of whistleblowing system. This measure—the statutory requirement to report a breach when someone sees or recognises that it is happening—is one of the few mechanisms that we could conceive of to try to counter that particular set of problems. Without exception, everybody who gave evidence to the parliamentary commission talked about the importance of making whistleblowing much more effective. So far as I can see, there is no replacement to this requirement that is effective, that has been proposed—and, frankly, if there is a burden, surely any burden is significantly smaller than living with the consequences of sustained and ongoing abuse.

My Lords, I thank the noble Lord, Lord Sharkey, for provoking this short debate. I heed what the noble Baroness, Lady Kramer, and the noble Lord, Lord Davies, have said. I shall try to explain the Government's position. I need to examine the very insightful comments made by the noble Lord, Lord Sharkey, and may want to return to some of them in writing. If I do not address them here, I shall endeavour to do so in writing.

At first glance, this seems an obvious and straightforward requirement to impose on authorised persons. As the noble Lord will be aware, this requirement was introduced by the coalition Government through the Financial Services (Banking Reform) Act 2013. It is through that planned implementation of this provision that we have learnt that it is simply disproportionate.

Before I go into more detail, I reassure noble Lords that this does not mean that firms will be under no obligation to report wrongdoing to the regulators. First, a separate proviso in the 2013 Act will still apply: the requirement for firms to notify regulators that they have taken disciplinary action against an individual subject to the conduct rules, be it through dismissal, a reduction in pay or a written warning. Secondly, this requirement builds on the regulators’ existing principle for business that firms must tell them of anything that may be of interest to them. If a significant issue arose with the conduct of a member of staff that for some reason did not lead to disciplinary action, the firm would still need to consider whether it would be appropriate to alert the regulators.

In this context, the Government believe that a blanket requirement to report all known or suspected breaches of the conduct rules is disproportionate. In particular, an obligation to report suspected breaches is potentially open-ended and wide ranging for it forces firms to work out the point at which possible indications of breaches of rules of conduct would amount to a genuine suspicion. Then the firm would have to train staff to spot and assess those indications, and finally firms would need systems—

The argument the Minister has made suggests that he does not believe that whistleblowing is a justified process. Almost every whistleblower who raises a suspicion is very unlikely to be able to present a signed and sealed case. It is surely the responsibility of the organisation where the whistleblowing has taken place to explore that. In fact, they constantly guarantee that that is exactly what they will do. The Minister is now saying that that is far too onerous. I find that incredible.

I am not saying that. I am saying that the process as a whole is potentially too onerous. I heed what the noble Baroness says, and of course whistleblowing is important. I shall continue, and we can continue to have this debate.

Finally, firms would need systems to ensure that the information is captured and transmitted to regulators, but it does not stop there. Having been notified of a suspicion, the regulators would have to decide whether to investigate and then, if appropriate, to consider what action to take. No doubt there would be many cases where there was only suspicion and nothing more and no action would be taken, but all cases would have to be investigated to some extent, and it would be difficult for regulators to do nothing at all once they had been notified.

Noble Lords should also note that, although the Government believe that an inflexible requirement to report all known and suspected breaches of conduct rules by all employees subject to them is inappropriate, the regulators can impose more targeted proportionate rules in this area if it supports the pursuit of their objectives.

The noble Lord, Lord Sharkey, raised costs. The costs in the impact assessment are based on the detailed cost-benefit analysis published by the regulators when they set out how they would implement the regime. I understand it is available on the FCA website, but I will write to the noble Lord and all interested Peers on this point. On that basis, I ask the noble Lord to withdraw the amendment.

I thank the Minister for that answer and those clarifications. I cannot help feeling that removing the statutory obligation and replacing it with something that is still not yet entirely clear is perhaps not the best way of proceeding. However, under the circumstances, I beg leave to withdraw the amendment.

Amendment 24 withdrawn.

Clause 21 agreed.

Amendment 25

Moved by

25: After Clause 21, insert the following new Clause—

“Unsolicited marketing of debt management services

The Treasury shall require that the FCA amend the rules in its handbook governing unsolicited marketing so that they apply to debt management services.”

My Lords, I will be very brief. I know that the Committee is keen to move on to the simple and straightforward government amendments. This amendment is designed to do just one thing, which is to persuade the Government to ban cold calling in the service of debt management providers.

Cold calling lead generation and cold calling directly is banned for mortgages and has been for a long time. It was banned because it was felt that it generated high risk for consumers. Cold calling lead generation for debt management providers is a much higher risk for consumers. The FCA published its thematic review of debt management advice in June of this year. It makes extremely worrying reading.

The FCA acknowledged that debt management is one of the highest-risk activities in consumer credit. Its review found that: customers are not sufficiently made aware of the nature of the service being offered, including any fees they may be required to pay; customers are not being made aware, as is compulsory, that help in managing debt is available free of charge; the debt advice provided may not be in the customer’s best interests and debt solutions that are not suitable, affordable or sustainable are offered; customers are recommended or sold additional products that may not be in their best interests; the nature and level of fees charged by some fee-charging debt management firms is such that they affect the customer’s ability to make significant repayment towards their debt; and firms do not market themselves in a manner that is clear, fair and not misleading.

There is other stuff, too, about the lack of protection of client money. It is all extremely damning. I know that the Minister and the FCA are fully aware of this problem and of its scale. For example, StepChange, a free debt management advice company, had more than 500,000 people contacting it for advice in 2014 alone, which was a 56% increase on the number for 2012.

Cold calling to generate leads for fee-charging debt management firms is a key aspect of the business. The FCA rules require cold callers to make customers aware of the existence of free debt management advice. The FCA found that information about the availability of free advice was either not provided, not sufficiently prominent or biased. Quite who regulates these cold callers is not entirely clear; there is a kind of regulatory Bermuda triangle, with the FCA, the ICO and Ofcom all having some responsibility. As a result, cold callers are not properly regulated at all. I know that the Minister and the FCA have this under review, but it will take a year or so for that review to appear and longer for anything to actually happen. In that year or longer, hundreds of thousands, perhaps even millions, will have been exposed to unscrupulous cold calling lead generators.

We know what the problem is. We banned cold calling for mortgages. Cold calling lead generation for debt management companies affects the most financially vulnerable people in our society. The people affected are much more vulnerable than people looking for a mortgage. Why delay? Why not apply right now the same rules to cold calling for debt management as to cold calling for mortgages? That is what the amendment proposes; I beg to move.

My Lords, I support the amendment from the noble Lord, Lord Sharkey. One of the main concerns of the Financial Services Consumer Panel has been the uneven playing field between paid-for and not-for-profit debt management services. People are being exposed to poor debt advice, as the noble Lord said, and this needs to be addressed both directly and in the round.

The central concern is this curse of our modern time: cold calling. Something could be done quickly. A Labour amendment was voted through in this House during the passage of the Consumer Rights Act on caller identification, but it has not yet been commenced. In response to my noble friend Lady Hayter, the noble Baroness, Lady Neville-Rolfe, stated that the Government were about to begin a consultation on caller ID. Can the Minister say now, or in writing at a later date, what the timetable is for this consultation? When can we expect to see some action on this issue?

Are the Government considering any other measures that could help tackle unsolicited market practices? They include the automated reporting of nuisance calls; the collation of nuisance calls—for example, more than 100 complaints and the calling number’s owner could be automatically referred to Ofcom, the Information Commissioner’s Office and perhaps the police; and appropriate victim redress for persistent cold calls from the same organisation.

The concern highlighted by the noble Lord, Lord Sharkey, is important in its own right, and so is the whole issue of cold calling. The two come together in this amendment, which we support.

My Lords, the Government share the concern of the noble Lord, Lord Sharkey, about long-standing problems in the debt management market. Indeed, I have had the pleasure of answering questions from the noble Lord on this subject, and had a subsequent meeting with him and officials from the Treasury. We agree that it is imperative that vulnerable consumers in this market are treated fairly by firms and provided with the services that meet their needs.

As the Committee will be aware, responsibility for consumer credit regulation, including debt management firms, transferred from the Office of Fair Trading to the Financial Conduct Authority on 1 April 2014. The ensuing, more robust regime is dramatically improving consumer protections. The Government have ensured that the FCA has wide enforcement powers to take action where its rules are breached. There is no limit to the fines that it can levy and, crucially, it can force firms to provide redress to consumers.

Debt management firms are in the first group of firms to require full authorisation, with the FCA thoroughly scrutinising firms’ business models and practices. Every debt management firm will have to demonstrate compliance with the FCA’s rules and principles, including the requirement to treat customers fairly. Firms which do not meet the FCA’s threshold conditions will not be able to continue in the market. Decisions on those authorisations are due to take place—the first ones by the end of this year.

The FCA has also introduced tough new rules to protect consumers in the debt management sector, and the FCA actively monitors that market. It has flexible rule-making powers and, if it finds further problems, it will not hesitate to take action. The FCA requires that all advertisements and other promotions must be clear, fair and not misleading, and it is able to impose tough sanctions where wrongdoing is found.

Regarding the noble Lord’s specific points about unsolicited marketing, the financial promotions regime applies to those providing debt management services. The FCA requires that unsolicited marketing by phone, text or email makes clear both the identity of the firm and the purpose of the communication so that the consumer can decide whether to proceed. This was highlighted by the noble Lord, Lord Sharkey.

The FCA also requires regulated debt management firms that accept leads from lead generators to satisfy themselves that business has been procured fairly and in accordance with data protection and privacy in electronic communications law. More broadly, in 2014 the Department for Culture, Media and Sport published its Nuisance Calls Action Plan. This set out the actions being taken by government, regulators, consumer groups and industry to tackle nuisance calls.

Importantly, the FCA has already committed to undertake a review of unsolicited marketing calls, emails and text messages from consumer credit firms, which will begin early next year. The Government believe that requiring the FCA to take a particular course of action before this review has taken place would limit the FCA’s ability to exercise its powers independently and would not necessarily achieve the desired result.

In answer to the question, “Why not act now?”, asked by the noble Lord, Lord Tunnicliffe—and I think that the noble Lord, Lord Sharkey, implied that even if he did not say it directly—it is worth noting that, if additional requirements for debt management firms were introduced at present, those firms would be required to alter their internal processes. That would cause disruption to the FCA’s ongoing authorisation process, which is due to begin producing results within the next couple of months.

I shall take advantage of the offer from the noble Lord, Lord Tunnicliffe, to write to him on the caller ID review timetable, because I do not have that to hand.

In summary, the authorisation process is well under way and will not take a year, and the FCA review of unsolicited marketing calls will begin early next year, so I submit that the noble Lord’s amendment is not appropriate at this time. I therefore ask him to withdraw it, confident in the knowledge that he will continue to hold the Government to account on this subject.

I thank the Minister for that answer, a lot of which was, as I knew it would be, very encouraging. There remains just one issue. This is going to take some time, during which a substantial number of people will be exposed to risk. I think that that is unnecessary. The mortgages example suggests that we can, without interfering with the FCA’s processes, do something simple and quick now to stop this abuse. Having said that, I beg leave to withdraw the amendment.

Amendment 25 withdrawn.

Clause 22 agreed.

Amendment 26

Moved by

26: After Clause 22, insert the following new Clause—

“Extending a duty of care to the financial sector

In every contract to supply a service, traders who are ring-fenced bodies providing financial services as defined under section 142A of the Financial Services and Markets Act 2000 (ring-fenced body) shall be subject to—(a) a fiduciary duty to their consumers and small businesses with respect to provision of—with reasonable care and skill, and(i) the operation of care services, and(ii) the management of any individual contract to provide services,with reasonable care and skill, and(b) a duty of care towards consumers and small businesses across the financial services sector.”

My Lords, in this amendment I return to an argument that I have articulated in this House before. Culture and conduct in the banking sector were integral to the explanation for the financial crisis in 2008 and there is no compelling evidence that the culture has changed sufficiently. As the Financial Services Consumer Panel commented:

“The financial services industry has a long and ignoble history of poor treatment of consumers”.

The recent foreign exchange riggings saw banks fined £4 billion for deliberately misleading customers. Fixing the market was still happening a full five years after the financial crisis. Now we read in the CMA report on the £16 billion current account markets that millions of customers who regularly use their overdraft get a poor deal. In effect, the law still does not protect customers sufficiently.

The purpose of this amendment is to ensure that providers must put the consumers’ interests first and resolve conflicts of interest in the interest of the customer when providing core services and in the management of any contract to provide services. Profit should not be made at the expense of the customer through their lack of knowledge and consent.

A fiduciary duty of care, as contained in this amendment, is needed for two reasons: first, to force the pace of cultural change in the banking sector, and, secondly, because regulation still enshrines too weak a duty to the consumer. Massive fines are simply not delivering the desired behavioural change, but they add to the cost for consumers and raise concerns about sustainability. A regulatory focus on sufficient providers in the market and a reliance on the power of the disclosure of information are simply not delivering the required consumer outcomes.

The markets are becoming more complex. Governments will continue to react to rather than prevent problems unless a step change is taken in defining the duties expected of providers towards consumers.

The FCA’s Treating Customers Fairly initiative enshrines a weaker duty to the consumer, arguably rendered weaker by the Financial Services and Markets Act, which requires the FCA to have regard to,

“the general principle that consumers should take responsibility for their decisions”.

Indeed, the Financial Services Consumer Panel September 2015 briefing provides a well-argued presentation on that very point.

The complexity of many financial services, combined with weak standards of governance, conflicts of interest, inappropriate remuneration structures, asymmetries of information, knowledge and understanding between the provider and consumer, behavioural biases, and unequal power between consumers and providers, has resulted in an extremely unbalanced relationship. Given that imbalance of power, consumers can reasonably be expected to take responsibility for their decisions only where provider firms exercise a fiduciary duty of care. Regulation does not explicitly create a requirement for firms to act in their customers’ interests or to eliminate conflicts of interest in the consumers’ interests.

The need to balance consumers’ responsibility with greater firm responsibility is not new. The Joint Committee on the draft Financial Services Bill commented in 2011 that,

“a statutory duty should be placed on firms to treat their customers ‘honestly, fairly and professionally’”,

allowing the FCA to ensure that,

“companies address conflicts of interest”.

The then FCA said that it supported a general principle that a regulated firm should act honestly, fairly and professionally, in accordance with the best interests of the consumer.

The Financial Services and Markets Act as amended by the Financial Services Act 2012 requires the FCA to,

“have regard to … the general principle that those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate”.

The Government argued at the time that this provision would ensure fairness, honesty and professionalism. This intended effect is clearly not being achieved in many instances in practice.

Some argue that a fiduciary duty requiring providers to put customers first would impose an obligation to act in the best interests of customers to the exclusion of the firm and its shareholders’ interests. My response to that is that no financial organisation or its share- holders should have the right to a profit where, integral to the design of a product or service and the manner of managing that product or service, is a disregard or neglect of the consumer’s interest. Without this principle asserted as the bedrock to regulatory rules we continue to lock dysfunctionality into the financial and banking sector which will continue to manifest itself. That is not good for the UK when we have such a high dependency on the sector, providing as it does £65.6 billion, or 11% of total government receipts, and nearly £127 billion in gross value added to the UK economy.

The duty in the amendment would also assist prudential concerns of sustainability, as the cultural shift will protect capital reserves from being depleted by future fines or compensation. Compensation for the PPI scandal now totals over £24 billion; penalties for foreign exchange rigging exceeds £6 billion; and small firms have received nearly £2 billion in compensation for mis-sold interest rate hedging products, to name but a few. The list is longer.

My argument is not that the Government are not addressing culture and conduct; rather that they are not addressing it sufficiently. Sometimes it is difficult to separate prudential and conduct issues or to understand if the sustainability of a financial organisation is placed ahead of fairness to the customer. If pursuing the customers’ interests when they have been treated unfairly means that a financial organisation becomes unsustainable, then prudential considerations may trump that. On legacy issues that may be a reality in order not to create a bigger problem, but for a future long-term sustainability we cannot go on like that; we need a more fundamental amendment.

Some observers are concerned that 2008 is fading from memory. The reference to a new settlement in the Chancellor’s 2015 Mansion House speech has been followed by changes to the bank levy; the non-retention of Martin Wheatley as chair of the FCA; the weakening of the ring-fence between retail and investment banking by relaxing restrictions on banks making loans and paying dividends from their retail to their investment arms; and the removal of the reverse burden of proof on executives who preside over misconduct, which was debated at some length on Amendment 21.

The senior managers and certification regime is being introduced, requiring that senior managers should be subject to a duty of responsibility to take reasonable steps to prevent a regulatory breach from occurring. Protecting financial system resilience is a mandate of the PRA which is often equated with enhancing banks’ ability to absorb external shocks. However, that is inseparable from the need to reduce the banks’ tendencies to generate those shocks in the first place—and that comes from the nature of the conduct and the culture in many instances.

At the heart of sustainability must be changing culture, conduct and responsibility to the customer. That requires that the duty of responsibility that senior managers bear under the senior managers and certification regime be underpinned by a judiciary duty of care.

To the public, debates about the banks appear dense and overtechnical. When I say to colleagues, “I am in the Bank of England debate today”, they look as though I am some strange monster who is obsessed with technical details because, although the banking system is so important to them and the economy, it is so complex and ununderstandable that they feel that they cannot participate. But for ordinary people, the intent of this amendment is straightforward. It means that providers must answer two questions when selling and managing products and services: not only “Can you do it?”, but also “Should you do it?” when looked at from the point of view of the interests of the consumer. I beg to move.

My Lords, I do not think that I can improve on anything that has been said by the noble Baroness, Lady Drake, because she understands these issues with such clarity and works so extensively in this field. In a strange way, the noble Lord, Lord Hunt, made the argument for how a duty of care should be at the heart of everything that banking institutions and financial institutions do. I hope very much that the Government will take on board the importance of embedding these kinds of responsibilities deeply within the requirements for the financial services industry.

My Lords, what became evident both during and after the crash was that financial providers had failed to exercise any duty of care towards consumers across the sector that the industry is supposed to serve. The amendment before us was previously moved by my noble friend Lady Hayter, and I draw largely on her experiences as a member of the Financial Services Consumer Panel. The cases she worked on during her time at the FSCP were, among others, high loan-to-value mortgages and high loan-to-income mortgages. This was plainly about selling products to people who could not afford them with no consideration of their interests. This was done in spite of the fact that should circumstances change, those people would have no way of repaying their loans. As time went on and the number of loans increased, each one as reckless as the last, no account was taken of the hurt to individual borrowers or of the far wider group of consumers whose house prices fell in the subsequent crash, while future loans dried up and repayment terms became unsustainable.

The amendment would ensure that financial services had a duty of care to their consumers collectively as well as on a one-to-one basis with their clients. Case law provides for a duty of care across the financial services sector, but it is clear that that is not enough. Despite this, the Government have continued to resist writing it into legislation and have relied only on case law. The first part of the amendment would establish a fiduciary duty that would demand a higher standard of care for direct consumers, and the second part would extend that general duty to all consumers across the sector. This would fill a gap which currently exists in the financial services sector. If it were to be introduced alongside the new extended senior managers and certification regime, it could bring about a cultural change in the financial services sector that the Government, the Treasury Select Committee and the Bank of England have all said is necessary.

The experience of many of us of the financial sector has moved from a position where as a generality we expected that we could trust the industry with our money and for appropriate advice. The crash has completely destroyed that trust, so an amendment like this, if accepted, could help to bring it back. Confidence in the sector remains dangerously low and something has to be done to restore it. Perhaps this duty of care would provide a route back to public trust.

My Lords, I thank the noble Baroness, Lady Drake, for prompting this short debate and for her thoughtful and thorough speech on the subject. As she rightly says, we need to improve the way the financial services industry treats its customers. We all want to see better standards in the banking and financial services industries, and to ensure that the customer always comes first. The question before us, however, is whether this amendment would achieve that. I am sorry to say that I am not at all convinced that it would—and I am conscious that your Lordships have been around this issue before, not least in 2013. I read the Hansard report of that debate yesterday. None the less, let me clarify the Government’s position.

The Government do not consider that introducing a fiduciary duty or a duty of care in legislation would help to drive up standards within ring-fenced banks because, as noble Lords know, banks are already subject to a wide range of legal duties. First, a bank is subject to obligations under the Financial Services and Markets Act 2000 and the regulators’ rulebooks. Under the latter—the principles for business—a firm is required to act with due skill, care and diligence, and to pay due regard to the interests of its customers and treat them fairly The enforceable rules of conduct that will apply to banks under the SM&CR, to which the noble Baroness referred, will put the same requirements on the vast majority of bank employees, complementing the obligations on the firm, requiring them to give due regard to customers’ interests and to treat them fairly.

In addition, ring-fenced banks are subject to obligations under their contracts with their customers. These include implied terms—under Section 13 of the Supply of Goods and Services Act 1982 or Section 49 of the Consumer Rights Act 2015, where the consumer is not an SME—that the ring-fenced body will perform the service with “reasonable care and skill”. So, it is not clear that imposing a fiduciary obligation on a bank to its customers or small businesses would add any value. I would argue that a fiduciary obligation is not appropriate in the relationship that a bank has with the majority of its customers. It is a specific kind of obligation that a director owes to a company, or a trustee owes to a beneficiary under a trust.

It would be appropriate for a bank to have such an obligation when it was acting as a custodian, and such obligations can and do arise quite naturally in such circumstances. But, and this is the point, deposits with a bank are not property held on trust, so a fiduciary obligation simply would have no place in the contractual relationship between a bank and its customer—for instance, in a sales relationship. Clearly, it would be meaningless where the bank has lent the customer money.

Some time ago—noble Lords may not remember this, as it was in 1848—the case of Foley v Hill held that the relationship between a bank and its customer was that between a debtor and a creditor: a contractual, not a fiduciary, relationship. It was therefore not within the jurisdiction of the court of equity.

Furthermore, a fiduciary duty, even if it were to be imposed, could only deliver change if it was enforceable. Only the beneficiaries—the consumers and small businesses—could enforce it. This would obviously be expensive, requiring court proceedings, and would only produce financial compensation. The Government firmly believe, therefore, that the amendment would not add anything to the duties that already apply to ring-fenced bodies. Rather, it would add confusion where there is clarity. Banks can comply more easily with specific requirements, and customers and regulators can more effectively hold the bank to account when they do not comply.

I declare an interest here. I spent much of the last few years trying to ensure that one of the country’s largest high-street banks treats its customers fairly and earns their loyalty. In the light of that experience, I point out that the high level of competition and choice that now exists, and the increasing ease with which consumers can switch accounts, makes it even more imperative for banks to treat their customers not just fairly but personally and with real integrity.

This amendment would not improve on the regulations that already govern banks’ relationships with their customers. It would not give banks or their senior managers a clear understanding of what is expected of them, or provide a viable and effective means of holding banks to account. I therefore ask the noble Baroness to withdraw it.

I thank the Minister for his reply, and I will not enter into iterative debate on a fiduciary duty, other than to say that I will persistently argue from these Benches that the UK’s regulatory framework is inadequate for the consumer. Slowly but surely, in certain areas such as the introduction of independent governance committees in the insurance sector which embrace a fiduciary responsibility, there is a growing recognition that the current regulatory framework is not delivering the right response to behaviours in the banking and financial sector. Yet more layers of sedimentary rock in the regulatory system will not deliver that. None the less, I beg leave to withdraw my amendment.

Amendment 26 withdrawn.

Clause 23 agreed.

Amendment 27

Moved by

27: After Clause 23, insert the following new Clause—

“Enforceability of agreements relating to credit

(1) Section 26A of the Financial Services and Markets Act 2000 (agreements relating to credit) is amended as follows.

(2) In subsection (4)—

(a) the words from “has” to the end become paragraph (a);(b) after that paragraph insert—“(b) is an appointed representative in relation to that activity,“(c) is an exempt person in relation to that activity, or(d) is a person to whom, as a result of Part 20, the general prohibition does not apply in relation to that activity.” (3) In subsection (5)—

(a) the words from “the agreement” (in the third place they occur) to the end become paragraph (a) (and the existing paragraphs (a) and (b) become sub-paragraphs (i) and (ii) of that paragraph);(b) after that paragraph insert—“(b) that person is an appointed representative in relation to that activity,“(c) that person is an exempt person in relation to that activity, or(d) that person is a person to whom, as a result of Part 20, the general prohibition does not apply in relation to that activity.””

My Lords, government Amendments 27 and 28 make some minor and technical changes to the Financial Services and Markets Act 2000 in relation to the regulation of consumer credit. The Government fundamentally reformed consumer credit regulation, transferring responsibility from the Office of Fair Trading to the Financial Conduct Authority on 1 April 2014.

The FCA regime is already having a substantial positive impact and is helping to deliver the Government’s vision for an effective and sustainable consumer credit market which is able to meet consumers’ needs. The amendments considered today are, as I have already said, technical in nature. They concern the application of provisions relating to the enforceability of agreements.

Amendment 27 amends subsections (4) and (5) of Section 26A of the Financial Services and Markets Act 2000, which concern the enforcement of credit agreements by persons acting on behalf of the lender, either by administering the agreement or by collecting debts under the agreement. This amendment makes it clear that a consumer credit agreement may be enforced by anyone who is able to carry on a credit-related regulated activity lawfully under the Financial Services and Markets Act 2000. This includes firms that are exempt from the need to have FCA authorisation to carry out these activities either because the firm has an individual exemption or because it is entitled to an exemption as a member of a designated professional body. It also includes appointed representatives of authorised persons.

The current provision requires the person to have a relevant permission under the Act. The amendment clarifies that this is not limited to persons who are directly authorised by the FCA but also includes persons who are exempt from needing authorisation either by virtue of a specific exemption or because they are appointed representatives or members of a designated professional body. In such cases, the person does not need FCA authorisation, provided that, in the case of an appointed representative, another firm with the relevant debt collecting or debt administration permission takes responsibility, as principal, for their activities and compliance with FCA regulations. In the case of designated professional bodies, if the FCA has approved the professional body’s rules under Part 20 of FISMA, and these cover debt collecting or debt administration, then members of the body can carry on those activities without needing direct authorisation from the FCA, provided that they do not engage in regulated activities which are outside the scope of the Part 20 permission. It was always the Government’s intention that subsections (4) and (5) of Section 26A should cover such persons, but the amendment puts this beyond doubt.

Government Amendment 28 amends Section 27 of FSMA, which deals with agreements made through unauthorised persons. Subsection (1) of Section 27 provides that an agreement made by an authorised person carrying on a regulated activity is unenforceable where it is made in consequence of something said or done by a third party in circumstances where that third party should have had, but did not have, permission. In the case of consumer credit and hire agreements, this could potentially cover any credit broker in what could be a long chain of multiple brokers, even if the provider is not aware of the particular third party or their involvement in the transaction.

This is in contrast to the position under the Consumer Credit Act 1974 prior to the transfer of regulation from the OFT to the FCA. Section 149 of that Act, which was repealed as part of the transfer, limited unenforceability to situations where the introducing broker was unlicensed and it was immaterial whether any other broker in the chain was unlicensed. The amendment would ensure that Section 27 is proportionate for consumer credit lenders and consumer hire providers in the context of the consumer credit market, where chains of credit brokers are often involved in bringing together the consumer and the lender.

Specifically, the amendment would ensure that this applies only if the provider knows—before the agreement is made—that the third party, such as a credit broker, had some involvement in the making of the agreement or in matters preparatory to its making. In such cases, if the broker is acting in breach of the general prohibition, the agreement will be unenforceable against the consumer, as is currently the case. However, if the provider is unaware of the broker’s involvement, the fact that it did not have permission when it should have done would not in itself make the agreement unenforceable.

The Government believe that this strikes the right balance between protecting consumers and ensuring that burdens on firms are reasonable and proportionate. I beg to move.

My Lords, we consulted the Financial Services Consumer Panel on these amendments, and it confirmed that they were entirely technical. As I always take the panel’s advice, I think they are technical and agree with the Minister.

Amendment 27 agreed.

Amendment 28

Moved by

28: After Clause 23, insert the following new Clause—

“Enforceability of credit agreements made through unauthorised persons

(1) Section 27 of the Financial Services and Markets Act 2000 (agreements made through unauthorised persons) is amended as follows.

(2) After subsection (1) insert—

“(1ZA) But this section does not apply to a regulated credit agreement or a regulated consumer hire agreement unless the provider knows before the agreement is made that the third party had some involvement in the making of the agreement or matters preparatory to its making.”

(3) In subsection (1A) for “The agreement” substitute “An agreement to which this section applies”.

(4) After subsection (4) insert—

“(5) For the purposes of subsection (1ZA)—

“regulated consumer hire agreement” has the meaning given by article 60N of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001;“regulated credit agreement” has the meaning given by article 60B of that Order.””

Amendment 28 agreed.

Amendment 29

Moved by

29: After Clause 23, insert the following new Clause—

“Transformer vehicles

(1) The Financial Services and Markets Act 2000 is amended as follows.

(2) After Part 17 insert—

“Part 17ATransformer Vehicles284A Transformer vehicles

(1) In this section “transformer vehicle” means an undertaking (“A”) which—

(a) is established for the purposes of carrying on the activities mentioned in subsection (2), or(b) carries on those activities.(2) The activities referred to in subsection (1) are—

(a) assuming risk from another undertaking (“B”), and(b) fully funding A’s exposure to that risk by issuing investments where the repayment rights of the investors are subordinated to A’s obligations to B in respect of the risk.(3) The Treasury may by regulations make provision for facilitating, and provision for regulating—

(a) the establishment and operation of transformer vehicles;(b) the activities mentioned in subsection (2);(c) the trading of investments issued by transformer vehicles.(4) Regulations under subsection (3) may (amongst other things) make provision—

(a) for the incorporation and registration in the United Kingdom of bodies corporate;(b) for a body incorporated by virtue of the regulations to take such form and name as may be determined in accordance with the regulations;(c) as to the purposes for which such a body may exist and the investments which it may issue;(d) as to the constitution, ownership, management and operation of such a body;(e) for such a body to comprise different parts;(f) for such parts to have legal personality distinct from that of the body;(g) as to the holding and management of the assets and liabilities of such a body, including provision for the segregation of assets and liabilities relating to different risks; (h) as to the powers, duties, rights and liabilities of such a body and of other persons, including—(i) its directors and other officers;(ii) its shareholders, and persons who hold the beneficial title to shares in it without holding the legal title;(iii) its auditor;(iv) any persons holding assets for it;(v) any persons who act or purport to act on its behalf;(i) as to the merger of one or more such bodies and the division of such a body;(j) for the appointment and removal of an auditor for such a body;(k) as to the winding up and dissolution of such a body;(l) enabling the FCA or the PRA to apply to a court for an order removing or replacing any director of, or person holding assets for, such a body;(m) for the carrying out of investigations by persons appointed by the FCA or the PRA.(5) If regulations under subsection (3) make the provision mentioned in subsection (4)(e) references in subsection (4) to a body include its constituent parts.

(6) Regulations under subsection (3) may—

(a) impose criminal liability;(b) confer functions on the FCA or the PRA (including the functions of making rules and giving directions);(c) authorise the FCA or the PRA to require the Council of Lloyd’s to exercise functions on its behalf (including functions conferred otherwise than by the regulations);(d) confer jurisdiction on any court or on the Tribunal;(e) provide for fees to be charged by the FCA or the PRA in connection with the carrying out of any of their functions under the regulations (including fees payable on a periodical basis);(f) modify, exclude or apply (with or without modifications) any primary or subordinate legislation (including any provision of, or made under, this Act);(g) make consequential amendments, repeals and revocations of any such legislation;(h) modify or exclude any rule of law.(7) The provision that may be made by virtue of subsection (6)(f) includes provision extending or adapting any power to make subordinate legislation.

(8) Regulations under subsection (3) may provide that a reference in the regulations to, or to any provision of, legislation (including an EU instrument and legislation of a country or territory outside the United Kingdom), is to be construed as a reference to that legislation or that provision as amended from time to time.

(9) In this section—

“investment” includes any asset, right or interest;“primary legislation” means an Act, an Act of the Scottish Parliament, a Measure or Act of the National Assembly for Wales, or Northern Ireland legislation;“subordinate legislation” means an instrument made under primary legislation.(10) If a statutory instrument containing regulations under this section would, apart from this subsection, be treated as a hybrid instrument for the purposes of the Standing Orders of either House of Parliament, it is to proceed in that House as if it were not a hybrid instrument.”

(3) In section 429(2) (regulations subject to the affirmative procedure), after “262,” insert “284A,”.”

My Lords, Amendment 29 introduces a power into the Financial Services and Markets Act 2000 for the Treasury to make regulations relating to transformer vehicles. Transformer vehicles are used for risk-mitigation purposes, particularly in the insurance and reinsurance industry. The Government plan to use this power to implement a new framework for insurance-linked securities business.

In an insurance-linked securities transaction, an insurer contracts with an entity specifically established to take on insurance risk. These entities come within the definition of “transformer vehicles” in the amendment. The insurer transfers risk to the transformer vehicle and the vehicle raises collateral to cover that risk by issuing securities to capital market investors. The vehicles exist solely to transform risk into capital market instruments and to compensate the insurer should the insured event take place. Investors receive a return from the premiums paid by the insurer and the collateral is returned to investors if the insured event does not take place. Unlike conventional reinsurers, ILS transactions do not pool risk. The transformer vehicle takes on a specific risk and typically holds collateral that is at least equal to the risk transferred. This key safeguard will be a firm requirement in the UK framework. The framework will ensure that insurers can rely on the protection they arrange through ILS deals.

Insurance-linked securities are now an important and growing part of the global specialist reinsurance market. By enabling insurers to access the capital markets as an alternative way of reinsuring risk, this business has brought additional capacity to parts of the reinsurance market. But despite the importance of London as a global insurance hub, that growth has taken place elsewhere. In London Matters, a report by the London Market Group on the competitiveness of the London insurance market, the UK’s out-of-date regulatory framework for insurance-linked securities was highlighted as inhibiting London’s ability to compete as a reinsurance hub.

Therefore, the March 2015 Budget announced that the Treasury, the PRA and the FCA would work closely with the London market to develop a more effective framework for insurance-linked securities business. The London market established the insurance-linked securities task force, which is working with the Treasury and the financial regulators to design a fit-for-purpose regime. Work is ongoing, but it is clear that the Financial Services and Markets Act needs to be amended to provide for the introduction of detailed regulations which will implement the new framework. In particular, the Government intend to use the power to create a bespoke corporate structure for transformer vehicles which assume risk from insurers and reinsurers. This will ensure that these vehicles are robust and managed in a way so that they can meet their obligations to insurers and investors. Given that this is a rapidly evolving market, the power will enable the Treasury and financial regulators to keep the regulatory framework up to date.

The clause enables the regulatory arrangements of Lloyd’s of London to be updated, should that be needed to facilitate the Lloyd’s market adapting to ILS business or the use of transformer vehicles. If this requires amendments to the Lloyd’s Acts then the regulations concerned will be dehybridised, so that the amendments are not delayed in Parliament by the hybrid procedure. I am grateful to the Delegated Powers Committee for its report on this clause, which recommends that the clause be amended to ensure that the consent of the council of Lloyd’s is needed before the FCA or PRA can be enabled to require the council to carry out functions on their behalf. I fully understand that the committee would want to be reassured that those affected by the use of a dehybridising provision are afforded an alternative protection. The Government will therefore give careful consideration to the committee’s report.

Although the Government’s current plan is to introduce a framework focused on the insurance industry, it is possible that the use of transformer vehicles by non-insurance entities, for example a company seeking to mitigate the longevity risk associated with an employee pension scheme, may become more common in the future. The power provides the flexibility for regulation to keep pace with such market developments, should that be required.

Finally, I am pleased to say that the London Market Group, which represents London’s insurers and reinsurers, has welcomed this first step in implementing a new framework for ILS business. I beg to move.

My Lords, it is third time unlucky for the Government because we do not consider these amendments to be entirely technical and they contain some aspects on which we seek clarification. The Minister has already recognised the significance of the report by the Delegated Powers and Regulatory Reform Committee, which I know will be studied with care. I make the assumption that the Government will come back before or on Report with a clear response to the committee’s conclusions. If the Government do not act on them then I can assure the Minister that we will, as the committee was quite clear that it thought there should be an amendment to the legislation.

The noble Lord, Lord Ashton, has already indicated the extent to which the Government have looked at the issue in relation to the council of Lloyd’s. I therefore hope that we will have clarity on this matter on Report. We will of course look at his remarks today with the greatest care. I give the obvious indication that while we will not object to these amendments at this stage, we will be coming back to this issue and, more accurately, we hope that the Government will be coming back to it as well.

My Lords, I note what the noble Lord has said and, as I said before, we are considering this carefully. As I think I indicated, we accept what the Delegated Powers and Regulatory Reform Committee has said. We are looking carefully at this and a response will be forthcoming before Report.

Amendment 29 agreed.

Amendment 29A

Moved by

29A: After Clause 23, insert the following new Clause—

“Listings rules sustainability report

(1) Within one year of the coming into force of this Act, and annually thereafter, the Financial Conduct Authority shall prepare and publish an assessment of how listings rules contribute to the UK’s sustainable economic growth.

(2) In this section, “listings rules” means rules deriving from Part 6 of the Financial Services and Markets Act 2000, and rules governing markets designated as recognised growth markets by HMRC.”

My Lords, I rise to move the amendment in the name of my noble friend Lady Worthington who, unfortunately, cannot be with us today. Amendments 29A and 29B seek to introduce two new clauses, “Listing rules sustainability report” and “Power to require long-term sustainability reporting”.

In a Bill that deals with financial services, we would be remiss if we did not debate how we can best promote the long-term sustainability of an industry that contributed almost £127 billion of gross value added to the UK economy and supported 1.1 million jobs directly and indirectly in 2014.

Both these amendments are probing amendments. Amendment 29B would require the specification of accounting standards for the disclosure of exposure to the financial risks associated with climate change—an issue that Governor Carney has spoken about very recently. Amendment 29A sets out a requirement for the listings authorities to report on how the rules arrangements governing our financial markets relate to sustainable growth.

The need for the effective disclosure of the carbon intensity of assets is widely supported, and according to the Bank of England there are already 400 such schemes internationally. The problem is that each initiative varies in status, scope and ambition, and as Governor Carney has said recently,

“The existing surfeit of schemes and fragmented disclosures means a risk of getting ‘lost in the right direction’”.

Amendment 29B calls for uniformity and clarity of reporting standards so that our financial services industry has the right information to make the right decisions when investing clients’ money.

The UK is uniquely placed to lead on this issue, given the size and importance of our financial services industry. That is why it is important that we look at all means to ensure its long-term sustainability. Amendment 29A does this by asking the FCA to prepare a report into the effect of listings rules on sustainable growth. In particular, it would shine a light on to our “recognised growth markets”, such as the Alternative Investment Market.

The AIM is designed to support new, high-growth and innovative enterprises which would otherwise struggle to meet the requirements to list on the main market, and it encourages investment with income tax, capital gains tax, stamp duty and inheritance tax reliefs. However, this market also allows well-established extractives to list their shares here, avoiding tougher regulation and allowing companies such as Coal of Africa—an Australian mining firm with a history of sacking striking workers—to list its securities on that market. In a time of austerity, we should be looking at the regulation of our financial services industry and markets to ensure that they are encouraging the sustainable growth that we need. I ask the Minister to consider these amendments.

My Lords, I hope that the Government will think carefully about these proposals. I declare an interest, and therefore perhaps some knowledge of this, in the sense that I am chairman of the Association of Independent Professional Financial Advisers, am on the board of Castle Trust and also look after the Association of Mortgage Intermediaries, so this is an area in which I have a particular interest.

First, I say to the Committee that proper reporting is a crucial part of ensuring that we get changes in the world in which we live. Transparency has been brought to us partially because of the internet—we now expect to know and to be able to judge on what we know. I hope that the Government recognise that this is not an additional burden, because any financial business ought to be thinking about these things. It is not acceptable that people should carry on business without asking themselves, “Is what I do sustainable?”. If they do carry on business without thinking about that, it seems to me that it is not very good for the business. In other words, this is not a burden in the sense that we are asking business to do something that would not contribute to its own success; we are asking it to do something that is essential for its own success, and I am sorry that the industry itself has not come to the Government with its own scheme about how it should do that, because it is crucial for the future.

Secondly, when you talk to people in the financial world about these issues, they recognise them. Many of them are increasingly concerned that they should use their financial strength to promote and protect the future not only of their own businesses but of Britain, Europe and the whole globe. I think that there is a readiness to accept such a measure.

Thirdly, there is nothing that is as damaging in this area as a whole series of different ways of reporting different bits of information, so that people—sometimes without very good reason or sometimes with another agenda—can make false comparisons, because the comparisons are so difficult. It is in the interests of the industry that there should be some basic, simple and clear way of comparing one business with another.

The fourth thing that seems to me to be important is that we should recognise what a crucial role the financial services industries play in the promotion of sustainability. Choices that they make today will make a huge difference tomorrow; the choices that they make today will make an even bigger difference the day after tomorrow. We need thinking which is long term. I have been asked to speak at a whole series of meetings recently, put on not by those who are concerned with sustainable investment or socially responsible investment but by straightforward, ordinary investment businesses which believe that this is the route down which they have to go. We are not pushing people to do things that they do not want to do; we are making sure that what they do is comparable, usable and helpful. So this is an important measure for that purpose.

The last reason why I want to ask the Government to think seriously about this proposal is very simple: we need to think about these matters in every aspect of our lives. We cannot deal with the issues of climate change in particular or of environment more generally if we think that they are the perquisite of the Department of Energy and Climate Change, of Defra or even of the Department for Transport; this has to be part of what we do naturally, inevitably, all the time when we make decisions. We have to get into that mode and that mood. Therefore, I would hope that we were thinking of doing these things in a lot of other areas when we come to them.

However, we must make sure that people are not misled. I do not want to rub salt into the wounds, but the recent Volkswagen debacle reminds us how dangerous it is if we mismeasure. Measurement is a crucial part of making sure that people do things. If it is not measured, it is not done—we know that; if it is mismeasured, then it is done badly. We are trying here to suggest to the Government that ensuring that there is a sensible way of reporting what people are doing is a vital part of this legislation.

I commend to my noble friend the action of the Government on modern slavery. I do not think that there is any doubt that on all sides of the Chamber we have welcomed the Modern Slavery Act. What that Act does is tell people that they have to report what they have done to avoid modern slavery in their supply chain. That is very similar and parallel to what we are asking for here: to give the public, the campaigners and the people who care information which they deserve and ought to have.

I end by reminding my noble friend that a recent study done on behalf of the Navy discovered that there was very little difference in the way that people got information, and what they expected to get, between officers and men, men and women, and people based here in Britain and those based abroad. The one difference was between those under 30 and those over 30. Those who were under 30 expected to be able to know. This was done some years ago, so I suspect it is now those under 35, but the fact is that the internet generation does not understand why anybody does not understand that they want to know. If you ask people of that age, they do not understand why you—referring to me rather than my noble friend—do not expect information to be available. This is the world we live in.

I hope the Government will take these propositions very seriously. It may not be the right amendment and there are some bits of it that I think I would rewrite—all sorts of things might be improved, and the noble Lord who moved it on behalf of the noble Baroness would probably agree that we should settle for a different phraseology. However, we want to make sure that everybody making decisions in the financial services area recognises that they are making them in this context and reports them so that others can see that they have taken those decisions not lightly or for short-term reasons but in the context in which we all live—a world which is threatened by the most catastrophic danger that we have knowingly faced in our history.

My Lords, I support the amendment in the name of the noble Baroness, Lady Worthington, and the comments of the noble Lords, Lord McFall and Lord Deben. The amendment addresses an issue which the Government now have to take seriously. The speech of the noble Lord, Lord Deben, reminded me of the old adage: “What you measure, you manage”. By measuring and reporting, which surely is not beyond any corporation of any size, we change the whole culture of short-termism which dominates at the moment throughout the financial services industry, and create the potential for many more players to start to look at the longer term and at issues of sustainability. Surely, when we have been doing so much to try to ensure financial stability, which is a long-term issue, backing that up with the kind of tools that are proposed in this amendment makes a great deal of sense.

I am very much a believer that one of the greatest risks that we face, if not the greatest risk, is climate change. However, we are also looking at a time when new technologies are disrupting the whole established structure, and we have to take that on board in some way. We are also looking at great population changes—migration and demographic changes—and this amendment seems to me to be rather good at highlighting that all those big, disruptive changes need to be captured to some extent in this reporting system.

I hope that the Government will take this seriously. I agree that no one takes particular pride in authorship of the language on these occasions, but this is about getting the principle properly embedded so that the Bank and the regulators can carry out their tasks in a way that deals not just with immediate risk but with the long term and encourage the financial services industry to play over that long-term arena as well. We have financial services businesses which are recognising the importance of long-term sustainability and are doing it exceedingly well, but it is very hard for them to communicate with potential investors when differences in reporting strategies and language make that communication so confused. Providing a level playing field in terms of reporting means that those who focus on this can get their message out and that investors to whom this is important can then shape their decisions based on that comparable information.

My Lords, I endorse the remarks of my noble friend Lord McFall in introducing the debate on the amendments. My remarks are necessarily cut short because the noble Lord, Lord Deben, provided a great deal of the supportive evidence and arguments the Government ought to take seriously; we hope that they will.

There was a time, not so very long ago, when we prided ourselves on the extent to which this country was to the fore in being aware of the problems of climate change and taking the necessary action to reduce the frightening possibility of the rise in temperatures and general climate change, which would make such great difficulty for the whole world. I know that my noble friend Lady Worthington, who is, unhappily, not with us today, is very concerned that the French this year have taken steps that are somewhat in advance of what we have made so far. They passed a law requiring listed companies to disclose in their annual reports how exposed they are to the financial risks related to the effects of climate change, and what measures have been adopted by the company to reduce those risks. The law also requires pension funds, insurance companies and other institutional investors in France to disclose how they are managing climate change risk. This law makes France the first country in the world to introduce a carbon-reporting obligation on financial institutions.

Amendment 29B gives an indication of the road we could tread. I therefore hope that the Minister will at least commit the Government to creating a standardised set of questions that financial services providers must ask to gather and present information on companies and asset owners. The aim would be to make it easier to compare and assess risks to which companies may be exposed because of the impact of climate change. That is not asking too much of the Minister, in his more constructive mood, and I hope I will establish that point very shortly.

I always try to be constructive with the noble Lord, Lord Davies. I thank the noble Lord, Lord McFall, for introducing this amendment. It is a shame that the noble Baroness, Lady Worthington, is not with us. What strikes me from this interesting and useful discussion is that at issue is not whether we disclose more but how we do it in a meaningful way that people can understand and that is consistent.

Just taking a step back, as I outlined in my response to the noble Baroness, Lady Worthington, on Monday, I fully recognise that climate change, as well as demographic change and technological change, which she referred to, are important structural issues that could have a significant impact on not just financial stability but society more broadly. As my noble friend Lord Deben, who has a lot of experience in this field, said, climate change cannot be put into a silo and seen as the responsibility of one government department, nor, in a business, one part of the business. It needs to be seen as a common endeavour to tackle.

It is right, therefore, that the UK’s macroprudential authority should be alert to climate change as well as to the other long-term systemic risks that I mentioned and that it, and other parties, should have access to clear and sufficient information to make an educated assessment of those risks. As the noble Lord, Lord McFall, and others, are well aware, the Government have put in place legally binding, long-term commitments to reduce our greenhouse gas emissions in the Climate Change Act 2008, and we will be pushing strongly for an ambitious and global agreement on climate change at this December’s United Nations conference of parties in Paris, involving commitment by all countries to act. The steps that will be taken to meet these commitments will involve a range of adjustments to production and consumption across the global economy, and the Government fully recognise the importance of ensuring that this transition is as orderly as possible.

As the noble Lord, Lord McFall, said, the Governor of the Bank, in his capacity as the chairman of the Financial Stability Board, has already highlighted the risks that climate change could pose to financial stability—and, more pertinently to the amendment, the role that consistent, clear and comparable disclosure at international level could play in responding to those risks. As your Lordships will know, the Financial Stability Board has been actively considering these issues and recently, at the end of September, convened a workshop of public and private sector participants to consider how the financial sector should take account of climate-related issues.

Following that workshop, the FSB published for this month’s G20 summit a proposal for an industry-led task force on climate-related risks. The G20 will then recommend principles for climate-related disclosure. I do not want to prejudice that discussion but agree with the noble Lord that obviously more could be done with disclosure practices. As he rightly said, so many disclosures—ironically and perversely in an age where we want more information—could add to confusion and not add clarity. We look for added clarity and consistency.

In the light of the need for comparable information across countries, I would argue that this issue is rightly considered at that international level. That said, one may well ask what the Government are doing at a UK level. I point your Lordships to what happened last week when the Treasury concluded a written consultation on reform to the UK’s business energy efficiency tax landscape. This included questions related to greenhouse gas reporting, including a requirement under the Companies Act 2006 for quoted companies to report their greenhouse gas emissions as part of their annual directors’ report. As I said, that is out for consultation.

Could my noble friend explain the logic that says that Britain moves on modern slavery to set an example by enforcing it at home before we have international agreement, but refuses to move on this because there is to be a discussion about international agreement? Would it not be better for us just to move on it and set the example? That would help guide the discussions that might take place thereafter.

As always, my noble friend makes a perceptive point. As I said, I do not want to prejudice the outcome of the discussions that will likely take place. Obviously, my noble friend makes a good point. I simply make the point in return that, in the case of disclosure, we want to try to make sure that this is as internationally recognised as possible. I heed what he said and will no doubt make that point to those who will be present at that discussion.

On primary issuances, the relevant regime is the prospectus directive—which is currently under review. We are working closely with the European Commission and other European partners to achieve a positive outcome on that. We look forward to hearing any suggestions on how to improve this regime. I thank the noble Lord—and the noble Baroness who sadly is not with us—for this amendment. I hope what I said gives some reassurance that the Government take this issue seriously, but I ask the noble Lord to withdraw the amendment.

Amendment 29A withdrawn.

Amendment 29B not moved.

Clause 24 agreed.

Amendment 30

Moved by

30: After Clause 24, insert the following new Clause—

“Pensions guidance: review

The Secretary of State shall, before any regulations under section 333A(2A) of the Financial Services and Markets Act 2000, as inserted by section 24(3) of this Act, come into force—(a) undertake and publish a review of—(i) the progress of provisions enabling a person to access a cash balance or other money purchase benefits, and (ii) the extent to which pension guidance has in practice empowered consumers to make informed and confident choices about their pension arrangements;(b) introduce arrangements for establishing a research programme to track consumer outcome with respect to the pensions guidance;(c) review the adequacy of reporting requirements for pension providers;(d) strengthen safeguards against pension scams through the provision of misleading guidance or advice;(e) clarify the distinction between pensions guidance and pensions advice;(f) identify—(i) the specific risks which consumers may face in the secondary annuity market, and (ii) any improvements, additional safeguards and resourcing which are required for an extended pensions guidance service to help individuals make decisions in connection with transferring or dealing with the right to payments under an annuity.”

My Lords, I should explain that this is a probing amendment at this stage. Indeed, it was prompted by Clause 24, which of course is an enabling provision to allow Pension Wise to be expanded in due course to cover guidance for a secondary annuity market. It also enables us to pursue issues that arise from the House of Commons Work and Pensions Committee report covering guidance and advice. This is not to revisit our support for the changes to the pension regime introduced from April 2015, although we previously expressed our concerns about the speed with which such a dramatic policy shift was introduced and the lack of consultation that would normally characterise such a change. I thank the Minister for his letter of 4 November that followed up on some matters raised at Second Reading and which, to an extent, overlaps with this amendment.

We welcome the announced delay to the introduction of the secondary annuity market until 2017, given the reported responses to the Treasury consultation, in particular because of expressed concerns about the potential costs of operating a scheme and the challenges of enabling an in-depth package of support for consumers making their decision—I will say more on this in a moment. The Bill makes reference to enabling guidance for “relevant interests” for “relevant annuities”. Perhaps the Minister can give us news of what these terms may cover or, at least, when we might expect some news.

The House of Commons Select Committee raised a number of concerns about the current arrangements. A key concern was the lack of data and, indeed, a reticence to publish statistics, which inhibits proper scrutiny of how the reforms are progressing. It recommended that the Government should publish, or cause to be published on a quarterly basis, customer characteristics, including pension pot size and other sources of retirement income; take-up of each channel of guidance and advice; reasons for not taking up guidance and advice; subsequent decisions taken; and reasons given for those decisions. It will also be important to have a breakdown of the customer characteristic by gender and ethnicity so that there is a greater understanding of the differing impact of these changes.

The Minister’s letter suggests that Government will make “core” Pension Wise data available on the government performance platform “this autumn”. Can the Minister expand for us on what is to be covered by “core data” and whether they will satisfy the recommendations of the Select Committee that I have just outlined? The committee rightly concluded that the long-term effects of the new freedoms are uncertain and recommended that the Government initiate a rolling research programme to track the long-term consequences of consumer decisions. It is to be welcomed that research is to be undertaken on the immediate impact of a Pension Wise appointment on customers, but where does this leave the concept of a rolling research programme? Does the Minister agree that one is appropriate?

From what data there are, there seems to be a legitimate cause for concern about the take-up rates of the guaranteed guidance and suggestions that fewer than one in 10 individuals accessing their pension pot availed themselves of face-to-face or telephone advice. Given that the guidance guarantee was recognised as a fundamental component of the reforms and vital to help individuals make informed choices about their lifetime savings, is the Minister satisfied about the current state of play? Particular concern was recorded by Age UK and the Financial Services Consumer Panel about whether the system of pension providers giving risk warnings and signposting consumers to Pension Wise was operating as it should. There are suggestions that providers are following the letter rather than the spirit of their obligation—hence the recommendation that there should be a review of the obligations with a view to their being strengthened, particularly in the prominence given to communications. Will the Government encourage the FCA to strengthen its rules and guidance for pension providers concerning Pension Wise?

The Minister will be aware of the ongoing debate around the adequacy of just one session with Pension Wise and whether it really is sufficient to support people through their retirement. The expectation is that those with complex needs should pay for advice. For others, it seems they could dip in and out of engagement with the specialist services of TPAS, the Money Advice Service and Citizens Advice. Is this viewed by Government as a sustainable model? Confusion abounds, seemingly not just among consumers, about the distinction between advice and guidance, and we are reminded that the FCA January 2015 guidance seeking to clarify the boundaries of advice runs to 47 pages. Evidence suggests that individuals are very reluctant to pay the typical sums required for a session with an independent financial adviser, hence the need and hope for some middle ground between regulated advice and guidance. Progress on this will presumably have to await the outcome of the Financial Advice Market Review.

It is hard to read a newspaper or indeed watch a consumer TV programme these days without some reference to the rise of pension scams. Whether there has been an actual increase is, according to the Select Committee, a matter of some uncertainty, although the ability to access the whole of one’s pension pot has certainly created scope for the increase of such activity, given the ingenuity of unregulated businesses often based overseas.

The Minister has written reassuringly about the focus of the Government and the regulators on this scourge, but the Select Committee recommended that a greater onus could be placed on providers when their customers are at the point of transferring funds away as well as on enhancing the publicity effort. Do the Government support this approach?

Finally, returning to annuities and the policy to enable those in receipt of them to sell the benefit in exchange for a cash sum or some income draw-down product, the consultation document issued in March highlighted a multiplicity of factors which need to be considered and why the Government, post the election, deferred its introduction. Issues for potential investors include the management of longevity risk, but for consumers there are also issues concerning the pricing of the annuity and the position of dependants, who will typically be women, and equality considerations.

There are also a host of practical issues concerning the administration of the policies and tracking the lives of annuitants, and the impact on benefits and social care arrangements of potentially swapping an income flow for a capital sum. The Bill enables the extension of Pension Wise so that guidance can be available, and we support that, but it will also be important to understand how advice will form part of the equation. All in all, given the ongoing challenges of managing the 2015 pension freedoms, not to mention the new state pension, we wonder why this should be such a priority, especially as, in the Government’s judgment, for most people retaining their annuity is likely to be the best option. I beg to move.

I shall make one relatively small point. This is an area where I do not pretend expertise. At Second Reading, I referred to the importance of both guidance and advice and the significance of distinguishing between the two. At the moment, many people who are retiring will have spent a large part of their careers accruing pension benefits through a defined benefits plan and a relatively small proportion of their career in defined contributions, so for many people now the discretionary pot is probably quite small and many of them may feel that they can therefore make decisions without advice. That picture will rapidly change as a generation comes forward for whom defined contributions have essentially been the framework within which they have provided for most of their pension. We are moving into a situation where advice will become more significant, so this problem needs resolution. I ask that any measure the Government take recognises that this is not a front-loaded problem but a back-loaded problem, so they need to be sure that they are constantly expanding the relevant resources.

My Lords, I shall speak to paragraph (f)(i) and (ii) in the amendment which refer to the secondary annuity market, and I draw the attention of the Committee to my registered interests, in particular my membership of the board of the Pensions Advisory Service, which is a delivery body for the current Pension Wise.

In the summer Budget Statement, the Chancellor confirmed that he wishes existing annuity owners to have the freedom to sell their annuity income but announced that plans for a secondary annuities market would be delayed until 2017 to ensure that there is an in-depth package to support consumers. The Pensions Minister, the noble Baroness, Lady Altmann, confirmed that the delay was to ensure consumer protection adding:

“We can’t launch without safeguards”.

It is important, as paragraph f(i) in the amendment provides, first to identify very clearly the risks in this market and the potential advantages and disadvantages to the consumer of converting an income for life into a cash sum before agreeing the regulations with regard to guidance to be provided to individuals considering trading their annuities. If the infrastructure of such a secondary annuity market were to be put in place, it is not yet clear who would be the buyers of the annuities. There are still lots of unknowns about how that market would operate. Until we understand more about how that secondary market will operate and what regulatory restrictions will be imposed, it will be difficult to assess whether customers are able to get a good deal. If an individual got a poor deal in the first place, selling the annuity on would not necessarily reverse that; indeed, it could make it worse. If, as the Chancellor argues, the pensioner freedom reforms were needed in part because the annuity market was not working in the best interests of all consumers for the simpler proposition of selling someone an annuity, why would it be expected that the reverse secondary market, where someone would resell an existing annuity, would work any better?

Some people will certainly be tempted to cash in their annuity for what looks like a large sum but their annuity may be bought at a heavily discounted price. Selling their guaranteed income could prove expensive because of the cost of individually underwriting each transaction. There will be costs to trading, complex pricing systems and consumer vulnerability to poor behaviour by some firms. So many pensioners may not be better off as a result, and it may be difficult to assess whether the lump sum that they have been offered is a fair swap for what they would be giving up. Actually, though, once they have given that up, the decision is irreversible.

The Bill refers to protecting the interests of those who have an interest in a particular annuity, and that certainly needs to be considered. What is the situation in a joint life annuity? What is the definition of those who have an interest? How will their interest be protected? What if a person is not named on a joint life annuity contract? These may seem irritating points of detail, but they will be matters of significant substance for some people who may be the beneficiaries of an income stream from an annuity.

The Government have also advised, as my noble friend Lord McKenzie said, that they want to consider how to explain the interaction between annuity income, capital and deprivation laws in the welfare, social care and council tax reduction system—something that we rather tripped over when implementing pension freedoms. In making that clear to people who are considering selling their annuity, the guidance would need to explain clearly the implications of that interaction.

In the secondary annuity market, the appropriate form of consumer protection has to be an integral part of any proposals to allow people to resell annuities, and therefore a clear identification and consideration of the safeguards and guidance that are appropriate is required before regulations come into force. It is important to be assured that they are actually fit for purpose. Creating a secondary annuity market is certainly not a simple proposition, which presumably is why the Chancellor has delayed his plans until 2017, although I accept that the proposed expansion of pension guidance to those considering selling their annuity is to be welcomed. However, it will be important for Parliament to understand what guidance will be delivered, and how, to people looking to trade in a secondary annuity market, because such a market will come with risk and complexity and that has to be reflected in the quality and comprehensiveness of the guidance provided. This is not going to be a proposition without problems. Some people have suggested introducing a requirement to take independent advice but even that is not a simple proposition, not least if a requirement to take advice significantly reduces the value of the transaction to the seller.

Lastly, the complexity of a secondary annuity market means it is essential that the pension guidance that is provided is of a high quality, delivered by people with the necessary skills and expertise. This is not going to be a straightforward set of guidance. Reflecting on experience to date, it is very important that those who bear responsibility for signposting to the guidance those who want to trade in the annuity market are not organisations with conflicts of interest in whether that guidance is followed. Sometimes, being better informed and better guided does not make people such good customers. Given that this is even more complex than the pension freedoms market, it is really important to get this proposition right.

My Lords, once again, I thank noble Lords for their very useful and constructive comments and speeches. I thank the noble Lord, Lord McKenzie, in particular.

As your Lordships know, the Government want to ensure that those who will be able to sell their annuities on the secondary market have access to high-quality information and guidance that enables them to make informed choices. That was endorsed by many responses to the recent consultation. We want to build on the success of the existing Pension Wise service, for which the satisfaction levels remain high. The Government are committed to using the lessons learned from the implementation of existing freedoms and the Pension Wise service to help consumers in both this market and the new secondary market for annuities.

I draw your Lordships’ attention to the work that the Government are already doing—in both what is happening now and what is planned—through the prism of the amendment that the noble Lord, Lord McKenzie, has brought before the Committee. First, the amendment would commit the Government to undertake and publish a review of the new pension freedoms and pensions guidance. On this point, the Government have already set up a working group of representatives from industry, regulators and government to review the pension freedoms. This group will collect and analyse information on the choices that people are making when accessing the new pension freedoms and related guidance and advice. It will also identify key information gaps and seek to address them.

In addition, early information from HMRC and the regulators has been published, and key data from the Pension Wise service will soon be available on the Government’s performance platform. Pension Wise is also in the early stages of procuring external research, which will cover the extent to which the pensions guidance has enabled customers to make informed and confident choices about their pension arrangements.

Secondly, the amendment would commit the Government to tracking consumer outcomes from pensions guidance. The Pension Wise research that I have just mentioned will aim to do just that. It will help the Government to understand what customers do following their Pension Wise appointment.

I am conscious that the noble Lord asked me some very specific questions about uptake. If he does not mind, I would like to write to him once I have the appropriate information on those points.

Thirdly, the amendment would require the Government to review pension providers’ reporting requirements. In line with its remit to protect consumers and ensure that markets function in consumers’ interests, the Financial Conduct Authority has specifically committed to monitor developments in the retirement income market and to take action where the market is not operating as intended. The first of these mandatory data requests was sent to firms in September. It includes information on both the stock and the flow of pensions savings held by firms, as well as on sales of retirement income products by providers and cash withdrawals.

The amendment also calls for safeguards against pension scams to be strengthened. A priority of this Government is to protect people from scams. A number of cross-cutting initiatives are already in place, but we will continue to look at ways to strengthen messages for consumers and to arm them with the information they need to protect themselves against scams. For example, the Government are already co-ordinating action to raise awareness of, and tackle, scams through Project Bloom, a National Crime Agency-led task force. It includes the regulators, anti-fraud groups, such as Action Fraud, and police forces. In addition, both the Financial Conduct Authority and the Pensions Regulator have their own pension scam awareness campaigns.

Finally, the Government have put a number of protections in place through the directly provided pensions guidance service, Pension Wise. Pension Wise alerts customers to the risks of scams in guidance sessions, and the website and output document contain warnings and guidance.

The amendment would also require the Government to clarify the distinction between pensions guidance and pensions advice, which the noble Lord, Lord McKenzie, and the noble Baroness, Lady Kramer, echoed. The noble Baroness’s point about how important that advice is for some pensioners was very valid and well made.

The Government are already conducting the financial advice market review. As your Lordships will know, this is exploring what more can be done to make sure that all consumers can access high-quality, affordable and tailored advice so they can make informed decisions with their hard-earned money. As part of this, the review is looking at what constitutes “advice” and “guidance” in both pensions and other markets, and will seek to clarify that distinction for consumers. As your Lordships know, this consultation is open until 22 December and the review will report by the Budget next year.

The amendment also asks that the Government identify specific risks for consumers in the secondary market for annuities and what additional safeguards are required for the extended pensions guidance service. The noble Baroness, Lady Drake, rightly made the point that it is a very complex area. The Government are committed to taking steps to build on the guidance service that is currently being delivered by Pension Wise to create an appropriate and high-quality service for the secondary market in annuities. The key consumer risks in the secondary market for annuities have already been considered and are outlined in the Government’s consultation document, published in March. Some will be similar to those around the existing flexibilities, but we fully understand, as the noble Baroness rightly pointed out, that there will be additional challenges for consumers in this market. We will need to ensure that consumers are adequately equipped with the information, tools and protection they need to help them avoid scams and, more importantly, to make decisions that best suit their personal circumstances and risk appetite, which brings me back to the point made by the noble Baroness, Lady Kramer.

The Government are also conducting further analysis to identify the needs of those who will be accessing the expanded Pension Wise service. This will ensure that the content and service delivery are appropriate for those thinking of assigning their annuities on the secondary market.

Pension Wise will form a core part of the support package. However, next month, the Government will set out further their intentions for supporting consumers in their response to the consultation on creating a secondary market for annuities. Following that, we expect the Financial Conduct Authority to consult in 2016 on the consumer protection measures it plans to place on regulated entities participating in the market.

Once again, I thank the noble Lord, Lord McKenzie, for raising these issues, and thank the noble Baronesses, Lady Drake and Lady Kramer, for their contributions. I take on board their concerns and reassure them that the Government are committed to taking action in the areas that have been highlighted in the proposed amendment.

In the light of this, the Government’s view is that the amendment proposed is not necessary to achieve the desired results, and I ask the noble Lord to withdraw it.

My Lords, I thank the Minister for a very comprehensive reply to the issues raised in the debate. I think there may be one or two specifics that he will follow up on in correspondence, and that would be helpful.

I think the Minister said that the response to the consultation on the secondary annuity market would be published next month—I hope I caught that correctly; if it is not next month, perhaps he might write to me and say when that will take place.

I thank my noble friend Lady Drake for her, as ever, wise words on pensions, focusing on the risks and complexity of the secondary market system. She made the telling point that if the problem with the annuity market was the creation of those annuities in the first place and whether people were getting value for money, the situation could be compounded by overlaying a secondary market. That is a key issue to address.

The noble Baroness, Lady Kramer, made the point about the growth of DC schemes and the lapse of DB schemes, and that is right. I think we are now in the position where there are more members of DC schemes than there are of DB schemes. Of course auto-enrolment and the benefits of that will accelerate that as well.

Having said all that, and given the hour—I have been here for only one amendment but am conscious that noble Lords have sat through a very busy day— I beg leave to withdraw the amendment.

Amendment 30 withdrawn.

Clause 25 agreed.

Amendment 31

Moved by

31: After Clause 25, insert the following new Clause—

“Duty on Financial Conduct Authority and Prudential Regulation Authority to consider ownership models and size of firms

(1) After section 1E(2)(e) of the Financial Services and Markets Act 2000, insert—

“(f) the importance to consumers of a diverse financial services sector that includes both firms of different ownership models (including mutual societies) and firms of different sizes.”(2) After section 2H(2) of the Financial Services and Markets Act 2000, insert—

“(3) In discharging its general functions, the PRA must also have regard to the importance to consumers of a diverse financial services sector that includes both firms of different ownership models (including mutual societies) and firms of different sizes.””

My Lords, I thank my noble friend for taking seriously the issue of diversity as it affects the mutual movement. I also thank him for the good working session that we had last week when I was able to highlight in a little more depth the problems that have arisen for the mutual movement and how, I hope, the proposed new clause seeks to provide the answers. I shall not repeat what I said on Second Reading but merely highlight the depth of the problem. I remind your Lordships that we are talking about the mutual movement—in other words, building societies, mutual insurers, friendly societies and credit unions.

I acknowledge that the present Government have made a welcome and broad commitment to diversity, which is greatly welcomed across the nation. This is not a party-political issue. That is self-evident from the fact that the Official Opposition have generously attached their name to my amendment, as have the Liberal Democrats. Both parties have a rich history in mutuality.

The issue, basically, is whether it is sufficient for the Prudential Regulation Authority to make a commitment in its annual remit letter. I do not deny that that is clearly helpful but enshrining it in legislation makes it totally emphatic to the Bank of England, including the PRA and the FCA, to consider diversity of provider. As well as helping competition, if executed, that would deliver a lasting commitment to the benefit of both the consumer and the wider economy.

I suspect the question that my noble friend is wrestling with is: is it really necessary? I would say yes because life is full of good intentions. However, in my 40-plus years as a representative of the people—25 years in your Lordships’ House—I like to see something in the Bill and not be dependent on good intentions. The reality is that the mutual financial institutions keep being forgotten about and left out. Frankly, that would not happen in Canada, Holland and certain other European countries where the mutual movement is that much stronger.

I gave two examples on Second Reading which helped to highlight the issue. I have now got three different examples. They are all short but at least they will re-emphasise the extent of the problem. Overall, there is still a problem in the mutual movement. The Building Societies Association commissioned a report on whether or not the movement was growing. Sectors of it are growing but other sectors are not. The report noted that one of the contributory factors for the areas that are not growing is the tendency for regulation to push for what I call uniformity and called at the time for a statutory corrective.

Both regulators can point out—I readily acknowledge this—that they have on occasions been proportionate and differentiated approaches in terms of need. However, there are also instances, which I will highlight in a minute, where this is not the case. It is important for regulators to get things right first time every time to support diversity.

In the past, a one-size-fits-all approach to regulation, often designed for large companies with a plc ownership model, has given rise to problems for both smaller and customer-owned financial institutions. The impact can be magnified for organisations which belong to both categories, and that is not an issue we have discussed before. These issues do not occur just in the UK; they arise when one is dealing with the EU. I submit that adopting this proposed new clause, requiring the PRA and FCA to consider the size and ownership model during policy formulation, would be a first step towards stopping the channelling towards uniformity and would help to prevent some of the problems encountered by financial mutuals in recent years.

I shall give three short examples. First, in 2015 during the summer that has just gone, the PRA implemented the bank recovery and resolution directive, as it was charged to do. In the directive it is permitted to reduce the reporting requirements and frequency for smaller institutions. In practice, this would have allowed smaller institutions not to submit annual updates, but instead to do so every other year, saving significant resources. But the PRA decided not to allow this, in spite of the fact that it was spelled out in plain words in the directive. I do not think that that was a sensible decision on its part or a sensible analysis of that sector of the mutual movement.

Secondly, let us look at the credit unions. Again, in June this year the PRA proposed to reform the prudential regime for credit unions, and once more it is absolutely right that it should do that. The PRA proposed a substantial increase, however, in the capital requirements for large credit unions, taking them to a leverage ratio of 10%. By contrast, the leverage ratios expected to be applicable to banks range from 3% to 5%, depending on their systemic impact. Frankly, I find it difficult to see the justification for a large, established credit union to hold more than twice as much capital in relation to its assets as a bank. I hope that this issue will be amended so that the big credit unions can be brought in line with the banks. But had the PRA paid attention to the size diversity across the board from the start, I do not think that we would be in this situation today.

Lastly, I turn to mortgages, which are an absolutely key dimension of our society at the moment and something on which the whole of Parliament is regularly focused. In 2014, there was speculation about interest rate rises, as a result sparking a significant increase in consumers’ interest in taking out fixed-rate mortgages, which is sensible. Following the mortgage market review regulatory changes overseen by the FCA, the authority required lenders to provide full mortgage advice and test against affordability criteria. This involves stress testing against rising interest rates, with many consumers choosing a fixed-rate mortgage product.

The building societies themselves have a specialist sourcebook, issued by the PRA, which places restrictions on the proportion of fixed-rate mortgage lending that a number of societies can carry out. Some societies were close to reaching the limit of their permitted fixed-rate lending, meaning that they were likely to withdraw fixed-rate products from their portfolios. This combination of regulation by both the FCA and the PRA could still have a detrimental effect on the amount of lending that societies can advance. Building societies may need to advise customers to go elsewhere rather than expand their businesses, thereby concentrating consumer choice on fewer organisations, which will in fact reduce competition in the market. This is quite important when we think about who is providing mortgages today because, between 2012 and June this year, the building society movement provided £52 billion- worth of net new mortgage lending while the rest of the mortgage market produced a rather miserly £7 billion. Therefore, it can be seen how important it is that the building society movement is treated properly and with understanding.

To conclude, we are asking for an environment where all types of firms are able to operate on a fair basis, with regulations that are appropriate and proportionate to them, rather than one size fitting all. Enshrining this commitment in legislation will require regulators to give the diversity of financial provider due consideration, looking at the different business models and the sizes of the providers side by side. We believe that this will lead to a more appropriate and proportionate regulatory regime, which in turn will lead to a more competitive financial environment in the future. I beg to move.

First, I thank the noble Lord, Lord Naseby, for allowing me to put my name to his very fine amendment, and also for drafting it in such a way that I could arrange the conversation beyond just the matter of mutuals. I very much support his comments on mutuals. They are important to our past, our present and our future.

The noble Lord commented on the regulatory scope available to the PRA in dealing with the sector, which I believe is governed by CRD IV, the relevant European directive. He will know that there is a great deal of scope for flexibility under that directive precisely to recognise the various needs of mutual—and similar and smaller—institutions across quite a wide range of facets. It is a flexibility of which the PRA has essentially not availed itself. Since those flexibilities were largely negotiated by the UK with the domestic variety in mind, it seems a little extraordinary that we have not taken advantage of them. I recommend to the Government that they might want to have an appropriate conversation with my soon-to-be noble friend Lady Bowles, who will shortly be coming to this House. She was a member—in effect, chair—of ECON, the Committee on Economic and Monetary Affairs within the EU. She can provide some helpful advice and direction on this issue.

I have said many times in this House, and I shall repeat it again today, that in the UK we are missing a layer of banking. In Germany, regional government—the Länder and municipalities—are able to sponsor banking institutions. The financial institutions provide the backbone to Germany’s small and medium-sized businesses, the Mittelstand. During times of recession that banking layer provided ongoing support to those companies because they understood them and their remit was such that they had to find their routes to profit from within that scope of geography and companies. It has been a very successful model and we have no equivalent here in the UK.

In the United States, which we also very much recognise as a competitor, local community and regional banks also play a much more significant role in supporting both individuals and small businesses. The community development movement in the US, which is very much local, has something in excess of $30 billion of assets under management. It is highly significant. It comes out of the US history of local banking, strengthened by the Community Reinvestment Act which was introduced in the late 1970s, largely as a civil rights measure, to deal with the red lines that major banks had drawn around ethnic minority communities, as they were not lending into those communities. That has been balanced out by the Community Reinvestment Act. It provided the Obama Administration with a very significant route to channel funds to small businesses during the recession in the US and again played a very significant role in making sure that those small businesses could be resilient.

By contrast, following the financial crisis, the major mainstream banks in the UK largely withdrew from SME funding. The Government tried to support various programmes and schemes, including the growing but still small P2P industry, to fill something of that gap and vacuum. However, that does not overcome the fact that we still do not have the appropriate layer of banking to provide the community and local perspective which enables companies to rely on ongoing support from financial institutions in both good times and bad.

I think that if you spoke today to the Federation of Small Businesses, it would say that even though we are in recovery, most of the mainstream banks have not returned to lending to SMEs and, where they do, it is frequently property lending, or at least property is required to provide collateral for what should be cash-flow loans, and that the banks are still fairly slow to come to decisions. Having been on this House’s sub-committee on SMEs and export finance, I know that it was evident that small businesses found it extremely difficult to source any kind of financing for exports. Even when they had a long history of exports and were well established, it was still very difficult and very expensive to find that kind of financing in the UK. Therefore, it is reasonably self-evident that we are missing a layer of banking. Frankly, the regulator has never addressed that issue but has always waited passively for the market to come forward rather than taking positive action itself.

A combined report from Newcastle and Coventry universities was recently published and states:

“In 2013, the unmet demand of individuals and businesses excluded from mainstream finance (‘the finance gap’) was estimated at around £6 billion per annum”.

That is a huge figure and it seems to me that the regulator must begin to pay attention to it.

During the passage of the Financial Services Act 2012, the noble Lord, Lord Sharkey, and I proposed a measure to require the banks to disclose their lending practices in detail and by postcode. That led to a voluntary framework for the disclosure of bank lending which came into effect in December 2013 and was supported by HM Treasury and BIS. According to a recent letter sent to the Treasury from the Community Investment Coalition, it is starting to have a real impact. The letter states that in 2014,

“Coventry University and Newcastle University were commissioned by Big Society Capital, Citi, the Community Investment Coalition and Unity Trust Bank to analyse the data and assess its value in supporting increased market competition and interventions to overcome financial inclusion”.

That is a very interesting report. It is supported by a sibling report, as it were, from the University of Sheffield, which looked at mortgages.

The only conclusions one can come to from reading those reports is that lending across the UK is incredibly haphazard. The data do not yet allow sufficient fineness of analysis, if you like. I hope very much that the Government will look at whether or not more measures are necessary to provide appropriate data to the degree required to enable proper analysis to take place. However, it is very clear that different parts of the country have very different experiences as regards access to lending. Strangely enough, in the London area, for example, access to lending for small businesses seems to be very much less than one would expect compared with other parts of the country. It will be very helpful when we finally have those data because they will expose where the system continues to fail. Regardless of that, I hope the Government will see that there is a role that must be played by the regulator as well as by the Government in ensuring that the patchiness and inadequacy of banking facilities for small businesses and individuals is countered. I ask the Government to look seriously at the amendment moved by the noble Lord, Lord Naseby, because it begins to tackle that particular set of issues.

My Lords, I congratulate the noble Lord, Lord Naseby, both on his amendment, for which he has secured widespread support, including from this Bench, and on the way in which he detailed the key arguments behind it, which I know the Government will take seriously. It is somewhat unnecessary for me to fill in any of the interstices that the noble Lord, Lord Naseby, may have left—which were not many—because the noble Baroness, Lady Kramer, has certainly emphasised the significant point, which is that British banking needs to be a good deal more diverse than it is at present.

After all, the Competition and Markets Authority disclosed its findings last month from its review of competition in the retail banking market and found—predictably—that the four largest banks had long dominated the British scene, stifling competition that would give consumers and businesses a better deal. We all know the limited success that has been obtained by the various reforms to make the switching of accounts easier. The British people, I am afraid, are somewhat inured to minor blandishments when it comes to their bank accounts, so there is a need for much more imaginary thought at the centre on how we can make our financial provision more diverse.

We have support from the Treasury Select Committee. The chair, Andrew Tyrie, has written to the CMA to ask it to report back before the Budget in March next year regarding the 8% surcharge on bank profits. He wants to know what impact that has had on the big four and what implications it has for the wider banking sector. It is clearly the case, he believes, that one size does not fit all. That phrase has obtained throughout this short debate and is one to which I entirely subscribe. The Minister will be all too well aware that the Building Societies Association has made it clear that the problems encountered by financial mutuals in recent years almost certainly would have been fewer if there had been greater diversity in the sector.

I think that the case for this amendment has been made strongly. No doubt the noble Lord will be withdrawing it on this occasion but the purpose of this debate is to give the Government the chance to show a constructive response to what we all recognise is a real issue with regard to British banking. The noble Baroness, Lady Kramer, cited the German position. Is it not somewhat extraordinary that even under the so-called northern powerhouse, our great cities do not have individual banks? They no longer have individual building societies, either. That says something about the structure of finance in this country, which surely the Government should address in the context of a Bill about the most significant banking structure of them all—the Bank of England.

My Lords, I am grateful to noble Lords who contributed to the debate. I have listened carefully to the interesting points, particularly on banking diversity and availability, especially for SMEs, made by the noble Baroness, Lady Kramer, and the noble Lord, Lord Davies, but I will concentrate on the amendment in hand.

I am glad to say that noble Lords are pushing at an open door—or, at least, one that is slightly ajar. This amendment would add a duty to the PRA to consider diversity of ownership model and size alongside its competition objectives. For the FCA, the amendment would add diversity of ownership model and size to the list of factors to which it may have regard as part of its competition objective.

I am grateful to my noble friend Lord Naseby for raising this issue, and particularly for waiting patiently for the last group of the entire Committee stage to move his amendment. I pay tribute to the work that he has undertaken in advancing the cause of mutuality, such as the Mutuals’ Deferred Shares Act 2015. As I think my noble friend said, the Minister had a constructive meeting with him recently and the Government have been actively considering his proposal, which makes a number of excellent points. I reassure the Committee that the Government strongly support a diverse financial services sector and, as has been acknowledged, the regulators’ objectives go some way to providing a mandate in this regard.

The regulators already have competition objectives: the FCA is required to,

“promote effective competition in the interests of consumers”,

of regulated financial services, and the PRA is required to facilitate,

“effective competition in the markets for”,

financial services provided by PRA-authorised firms. In advancing this objective, the regulators may take account of various factors, including barriers to entry for new providers of financial services, the needs of different consumers and the differences of businesses. I would expect their considerations around the intensity of competition to involve not just the number of competitors but diversity of approach, including corporate form.

The statute is also clear that the regulators should recognise the different features of a range of diverse business models when pursuing objectives. This is achieved by the principle of good regulation, whereby the regulators must have regard to,

“the desirability where appropriate of each regulator exercising its functions in a way that recognises differences in the nature of, and objectives of, businesses carried on by different persons subject to requirements imposed by or under this Act”.

Having said that, and taking on board my noble friend Lord Naseby’s point about things that are in regulations, there could be more clarity on our expectations around regulatory regard for mutuals, which might help to avoid some of the problems that he raised.

My noble friend’s amendment raises some interesting and useful points and, given this, we will actively consider how these proposals might clarify the existing competition objectives. We look forward to discussing this subject with my noble friend again before Report. I will of course take note as well of the suggestion of the noble Baroness, Lady Kramer, on consultation. In the light of that commitment, I would be grateful if my noble friend would withdraw his amendment this afternoon.

My Lords, I first give my sincere thanks, in particular to the noble Baroness for putting further emphasis on the European situation, about which she is much more knowledgeable than I am, and for the one or two other points that she made. I also thank the Official Opposition, where it is a great pleasure to see my noble friend opposite—I can say that, as he is quite good as my golf partner.

Leaving that aside, I am deeply appreciative of the way in which the whole ministerial team has listened carefully. As I understand it, the team in the department will now look in considerable detail at how the points I have raised, which my colleagues have agreed with, can be addressed. I hope very much that, when we come back on Report, we will have found a solution that will meet the requirements of this very important sector of the United Kingdom—certainly I am available at any hour to discuss this further. With that, I seek leave to withdraw the amendment.

Amendment 31 withdrawn.

Clauses 26 to 28 agreed.

Clause 29: Commencement

Amendments 32 and 33

Moved by

32: Clause 29, page 26, line 15, leave out “Sections 27 to 30” and insert “The following provisions”

33: Clause 29, page 26, line 15, at end insert—

“(a) section (Transformer vehicles);(b) sections 27 to 30.”

Amendments 32 and 33 agreed.

Clause 29, as amended, agreed.

Clause 30 agreed.

House resumed.

Bill reported with amendments.

House adjourned at 5.36 pm.