Committee (1st Day)
My Lords, the hybrid Grand Committee will now begin. Some Members are here in person, respecting social distancing, and others are participating remotely, but all Members will be treated equally. I must ask Members in the Room to wear a face covering except when seated at their desk, to speak sitting down and to wipe down their desk, chair and any other touch points before and after use. If the capacity of the Committee Room is exceeded, or other safety requirements are breached, I will immediately adjourn the Committee. If there is a Division in the House, the Committee will adjourn for five minutes.
I will call Members to speak in the order listed. During the debate on each group, I invite Members, including Members in the Grand Committee Room, to email the clerk if they wish to speak after the Minister, using the Grand Committee address. I will call Members to speak in order of request. The groupings are binding. Leave should be given to withdraw amendments. When putting the Question, I will collect voices in the Grand Committee Room only.
I remind Members that Divisions cannot take place in Grand Committee. It takes unanimity to amend the Bill, so if a single voice says “Not Content”, an amendment is negatived; if a single voice says “Content”, a clause stands part. If a Member taking part remotely wants their voice accounted for if the Question is put, they must make this clear when speaking on the group. We will now begin. I call the noble Lord, Lord Sharkey.
We cannot hear the noble Lord, Lord Sharkey, so I will have to adjourn the Committee for a few minutes while we sort this out technically.
I call the noble Lord, Lord Sharkey, again.
1: Before Clause 1, insert the following new Clause—
“Duty of the FCA to make rules introducing a duty of care
(1) The Financial Services and Markets Act 2000 is amended as follows.(2) After section 137C, insert the following new section—137CA FCA general rules: duty of care (1) The power of the FCA to make general rules includes the power to introduce a duty of care owed by authorised persons to consumers in carrying out regulated activities under this Act. (2) “Duty of care” means an obligation to exercise reasonable care and skill when providing a product or service.(3) “Consumer” has the meaning given in section 2(3) of the Consumer Rights Act 2015.”(3) The FCA must make rules in accordance with section 137CA (FCA general rules: duty of care) of the Financial Services and Markets Act 2000 which come into force no later than six months after the day on which this Act is passed.”Member’s explanatory statement
This amendment would impose on financial services providers a general duty of care to their clients.
Amendment 1 would require the FCA to
“make rules introducing a duty of care … owed by authorised persons to consumers in carrying out regulated activities”
under FSMA 2000. The Government understand the value of a duty of care; they are about to introduce exactly that in the forthcoming online harms Bill. They understand the immense harm that can be done to consumers without this duty, especially in complex and asymmetric environments.
We have already seen too many examples of the immense harm inflicted by our financial services industry on ordinary consumers—I am thinking here of PPI, which was a product sold to consumers at an 87% commission rate. The scandal ended up costing £53.8 billion in redress and administration costs. I am also thinking of mis-sold interest-rate hedging products and the general and widespread unfair treatment of small businesses in financial difficulty. There was also the long-running saga of overcharging for overdrafts and of leaving loyal customers languishing in poor-value products.
The existing rules did not prevent any of these things, which is not a surprise. There is no explicit requirement in FSMA or in the FCA’s principles for business for firms to prevent harms to customers. The FCA’s “treating customers fairly” business principle is substantially weakened by the legal principle in FSMA that consumers should
“take responsibility for their decisions”.
This fails to take into account the imbalance in power and information between firms and their customers.
Things are not getting any better. Recent examples of misbehaviour include the banks’ response to the authorised push payment fraud, inadequate assessment of affordability by payday lenders, the scandal in Woodford Investment Management, sales of risky investment products on the boundary of the FCA’s perimeter and the outrageous behaviour of some insurers during the pandemic trying to welsh on their business interruption policies.
The Minister will be aware of the Banking Standards Board’s annual survey of 29 member banks’ behaviour and competence. There was some welcome improvement in these areas between 2016 and 2017 but none since. In 2019, 13% of employees of these banks said that they had seen instances of unethical behaviour being rewarded and 14% felt that it was difficult to make career progression without flexing their ethical standards.
The FCA knows all this, of course, and has occasionally acted. However, within the existing legal framework it often takes many years for the FCA to respond to firms’ harmful practices. An example of this is the treatment of loyal general insurance customers, which the FCA is only just beginning to tackle.
Then there is the question of the high-cost short-term credit sector. Wonga may have gone, thanks largely to pressure from this House, and after intense pressure from Parliament there is now a price cap on rent to own. But problems persist with, for example, doorstep lending, guarantor loans and new, automated overdraft products.
The FCA tackles unacceptable practices slowly and piecemeal, allowing harm to persist for many years. It was particularly late in spotting the rapid growth of buy now pay later and its potential for harm. I believe that the Government have said that they intend to address this problem and I hope that they will use this Bill as an opportunity to do that. I would be pleased if that were to be the case, but the slow and cumbersome engine of primary legislation would not have been necessary had a duty of care extended over the sector.
The FCA has published eight papers in the last five years dealing wholly or in part with the question of duty of care, but it still has not developed a clear view or a recommendation. In its consultation feedback paper of April 2019, the FCA noted:
“Most respondents consider that levels of harm to consumers are high and there needs to be change to better protect them.”
It then sat on the fence about what this change should be, reporting that none of the financial service providers favoured a duty of care. Mandy Rice-Davies would have known what to say to that.
In any case, as the FCA’s consumer panel noted,
“Much of the debate on a duty of care has centred on legalistic arguments about whether there is a ‘gap’ in protection. What matters is whether consumers get the treatment they want and expect from their financial services providers.”
The consumer panel commissioned Populus to ask individual and small business customers about their experiences. The research showed that the customer is not at the heart of business decisions and that 92% of respondents were in favour of a duty of care in financial services.
While sitting on the fence, the FCA has also managed to hit the ball into the long grass. It promised to initiate yet another consultation on the issue, initially due last year but now postponed. In the meantime, levels of financial vulnerability grow. The FCA’s latest Financial Lives survey, published 11 days ago, makes grim reading. It notes that Covid-19 has reversed the previous positive trend in vulnerability. Between March and October last year, the number of adults with characteristics of vulnerability increased by 3.7 million to 27.7 million. That means that over half of all adults are financially vulnerable—a truly alarming figure.
The same survey also notes that unsolicited approaches have increased during the pandemic, increasing the risk of fraud and scams. Over a third of adults say that they have received at least one such approach and 1.4 million say that they have paid out money as a result of a possible Covid scam. Unsurprisingly but regrettably, people with characteristics of vulnerability have been the more susceptible: 12% paid out money, compared with 1% of the non-vulnerable. None of this will get any better when the furlough and business support arrangements come to an end. Financial pressures and desperation will inevitably increase; vulnerable people will be disadvantaged, treated unfairly and scammed.
Dealing with all this would be made significantly easier if the FCA were to impose a duty of care on service providers. The idea has widespread support. In May 2019, the Treasury Select Committee published its report on the inquiry into consumers’ access to financial services. Paragraph 210 of the report says:
“All retail financial services, no matter which sector of the industry they operate in, should be acting in their customers’ best interests at all times. If the FCA is unable to enforce such behaviour in firms under its current rule book and principles, the Committee would support a legal duty of care, analogous to that in the legal industry, creating a legal obligation for firms to act in their customers’ best interests.”
The FCA’s own financial services consumer panel, responding to the FCA’s discussion paper, said:
“A new duty is required to improve the position of all consumers … including those who need more support.”
The Money and Pensions Service said:
“MaPS remains convinced that a formal ‘duty of care’ on financial firms could provide a better balance between firm and consumer responsibilities and help deliver extra protection and better treatment to vulnerable consumers.”
StepChange is in favour, as is Fair by Design, and so are many organisations with direct and in-depth experience of the financial catastrophes that can be visited on the poor and the vulnerable. I am grateful for the explicit support and encouragement in pressing for a duty of care from Age UK and the Alzheimer’s Society and I am especially grateful to Macmillan Cancer Support for its unfailing help and advice. I am also indebted to the former chair of the FCA’s consumer panel, Sue Lewis, for her support.
Despite all this support, the Government will no doubt resist the idea of introducing a formal duty of care. When this issue was raised at Report in the Commons, John Glen addressed it by saying simply:
“As the FCA is already taking steps to ensure that financial services firms exercise due care and regard when offering products, services and advice, a statutory duty of care, as proposed by new clause 21, is not necessary.”—[Official Report, Commons, 13/1/21; col. 366.]
He did not say what these steps were or make any assessment of their actual or likely effectiveness. Today the Government may add to John Glen’s reasons for rejecting a duty of care and may advance the argument that they need to wait to give the SMCR time to work. Surely five years is long enough—five years in which there has been just one successful conviction. The FCA’s consumer panel points out that this is essentially a category error and notes:
“The SMCR is primarily a supervision tool—it will be a valuable mechanism to ensure that firms are complying with a new duty.”
The Minister may also pray in aid the reinforced, better-resourced and more active FOS. It is true that FOS dealt with around 250,000 cases in 2019-20. In these cases overall, one-third of judgments were in the consumers’ favour. This is evidence enough of large-scale misbehaviour, but the figures are much worse for products aimed at the financially vulnerable: 89% for guarantor loans, 84% for doorstep loans and 78% for logbook loans.
This is not—absolutely not—evidence of successful regulation. Every one of these judgments is evidence of a failure to sell the right product to the right individual or small business, to explain it clearly or to handle a complaint properly. The FCA’s current rules and principles are failing to stop this tidal wave of mis-selling, malfeasance and malpractice. We need a new approach that focuses on prevention of harm and delivers extra protection and better treatment for vulnerable customers. We need a duty of care and I beg to move.
My Lords, I declare my interests as in the register. I support all the amendments in this group and what has already been expertly said by my noble friend Lord Sharkey. I will comment on the duty of care later, but first I will introduce my Amendment 72, which calls for warnings relating to non-regulated activity.
The issue here is one where firms that are authorised in respect of regulated activity also conduct unregulated activity, and customers are misled by the fact that the firm is authorised for some activity into thinking that the authorisation is some kind of guarantee of quality. It is what Dame Elizabeth Gloster called in her report “the halo effect”, and about which she said again to the Treasury Select Committee a couple of weeks ago that something should be done.
One thing that is done by the Bill is enabling unused authorisations to be more easily cancelled, but that does not solve the problem when there are still used authorisations. This is a problem that has long been known about and does not affect only unscrupulous businesses. Therefore, the amendment aims to make it quite clear to consumers what the situation is in three ways.
First, authorisation must not be referenced in any communication, including on letterheads or websites, as a reputational guarantee regarding non-regulated activity. In practice that should mean the ending of straplines. Secondly, when non-regulated activity is being conducted, that must be made clear, together with an explanation that it means that access to the Financial Ombudsman Service and/or Financial Services Compensation Scheme is not available. Thirdly, it would be an offence to imply that a non-regulated activity is covered by an authorisation.
The first two provisions relate to authorised firms aiming to stop the halo effect in as far as that is possible. I do not expect firms to write to clients saying, “This is the rogue side of our business”, but I hope that clients will be more aware that that might be so. The third point is a general point and would apply beyond regulated firms, but my aim is to catch passive implications, so that active steps to inform have to be taken.
The amendment has been drafted to make the point clear, rather than as a perfect draft to weave in among other regulatory provisions, and I hope that the Minister will take up the idea and recognise that reducing a problem by eliminating surplus authorisations does not reduce the problem to its smallest possibilities.
Turning now to the duty of care, I want to add that a duty of care should apply to the regulators as well. Of course, they say that they act in the public interest, but they are every bit as aggressive about protecting themselves—of all things from the public and from liability—as the firms that they supervise. My view of this is simple: “If you don’t live by it, you don’t really understand it”.
If one examines the responses to the FCA’s discussion paper in July 2019, the majority were in favour, two of the main reasons being that it was critical to triggering a fundamental culture change away from asking “Is this within the regulations?” and into “Is this right?” Secondly, it would give a duty to avoid harm that would incentivise firms to evaluate consumer risk at every stage.
What is not to like in that? It seems that just a handful of respondents did not want any more than was already in those principles about treating customers fairly. But they were very much in the minority and, sadly, it seems that some of those in favour of a duty of care are not in favour of it being actionable. I am in favour of a duty of care, I am in favour of it being actionable and I am in favour of it applying to regulators as well, because something is going wrong all round and, frankly, I find the FCA’s hesitancy a matter of serious concern.
That takes me to the amendment of the noble Lord, Lord Tunnicliffe, which I also signed and which additionally incorporates a general principle of non-exploitation, which overlaps with my Amendments 5 and 73 that come later in another group: we have been borrowing from one another in these amendments in a constructive way. We have seen bad behaviour elaborated in the Promontory report in the GRG case and the excruciating way in which the FCA wriggled to excuse itself, claiming that it did not have power to intervene in commercial contracts.
The difference between my amendments, when we come to them, and that of the noble Lord, Lord Tunnicliffe, is that I have included small businesses as well as consumers in protection from exploitation. That may be his intention, as other amendments would change the definition of “consumer”, and I will have other things to say later in the third group about abuse of unequal power. Both duty of care and non-exploitation of vulnerabilities are matters that mark out quality regulation and, unfortunately, we know that, unless things are explicitly elaborated in legislation, there will be those who fall below the high standards and get away with it.
My Lords, it is a pleasure to take part in this first group of amendments, and I congratulate the noble Lord, Lord Sharkey, on the way he introduced it. There could barely be a better amendment to start Committee.
In 2017, during the passage of the Financial Guidance and Claims Bill, now enacted, there was much discussion of, and amendments tabled around, a duty of care, with support from all sides of the House. The response then was that the time was not right: we had to get through Brexit and then look at financial rules and regulators in the round. Four years on, with Brexit done, I think the time is more than now to consider duty of care in all its manifestations, as the noble Baroness, Lady Bowles of Berkhamsted, set out.
In saying that, like other noble Lords I am extremely grateful for the briefings and unstinting hard work undertaken by many organisations in this area. It is invidious to single out two, but I will, not least the Money Advice Trust and Macmillan Cancer Support. Duty of care was an issue in 2017; it was an issue way before that. The Covid crisis has not brought about the need for a duty of care; it has merely shone the brightest and starkest of spotlights on the issues right across the financial services sector.
It is difficult to put it any clearer than this, from a client of Macmillan Cancer Support in one of her darkest moments: “It felt like I was fighting my bank as well as fighting cancer”. Fighting my bank as well as fighting cancer—that is a more than good enough reason to think extremely carefully about how to bring about a duty of care. That one individual speaks for hundreds of thousands.
My Amendment 129 in this group seeks to introduce rights of action for SMEs for breaches of the FCA handbook. I believe the amendment would bring clarity and consistency to how the handbook operates. These rights of action are currently available only to private persons but, when we consider this in the round, not least in the world of FS when we think of fintech founders, are the “Ss” of SMEs—micro-businesses—essentially that different from private persons? Of course I understand the concept of the corporate veil and limitation in all its forms but, in essence, when it comes to operating in a regulatory framework, as we currently have, are micro-businesses that different from private individuals, who currently have this right of action?
Imagine this: currently, a micro-business has only the letter of the contract to take action against the bank. This seems wholly unsatisfactory and more than a little asymmetric. The nature of the relationship between a small business and a bank should be much more effectively reflected in the rulebook. Need I suggest some of the ways this may have helped in the past, with Libor, forex, the GRG, and Lloyds/HBOS activities in Reading? In particular, RBS’s global restructuring group was one of the most shameful episodes in this country’s banking history.
Fundamentally, the amendment can be summed up in a simple line: in reality, how can an SME or micro-business take a bank to court? Amendment 129 offers the appropriate level of support and clarity to our SMEs, and consistency in the operation of the rulebook. Our SMEs are the beating heart of our economy. I suggest we use the amendment to put some head alongside that heart.
My Lords, at this stage I have not put my name to any amendments, but I will speak in support of Amendment 4, tabled by my noble friend Lord Tunnicliffe, and make a few relevant points. Before I start, I make the Grand Committee aware of my financial interests as set out in the Lords’ register and echo the point from the noble Lord, Lord Sharkey, about the imbalance of power between the lender and the individual—a critical point that I am sure we will come back to in Committee.
Low financial resilience and overindebtedness are huge problems for individuals and the country. UK households have nearly £250 billion of outstanding consumer credit debt and more than 42.5 million people have used consumer credit. Those are the figures for 2019, pre Covid. In 2020 and into 2021 the problem has only worsened. The FCA recently found that the number of people suffering from low financial resilience increased by one-third to 14.2 million people in October 2021. That is nearly one-quarter of the UK adult population.
We know that low financial resilience is not just about overindebtedness. It can be caused by a combination of low savings and erratic family income. Erratic income and low levels of savings are not issues that the FCA can solve—government intervention and education are required to tackle those. However, overindebtedness is an issue that the FCA can help to address. Amendment 4 and a number of the other amendments in this group, as well as the later Amendment 8, would give the FCA some of the tools to do so.
As set out by the Government, the FCA has three key functions: protecting consumers, keeping the industry stable and promoting healthy competition between financial service providers. Of those three critical functions, I would like to concentrate on the first, of protecting consumers. Amendment 4 takes that current responsibility and would add to the Bill a clause which would give the Financial Conduct Authority a duty of care and, later, under Amendment 8,
“rules … to promote financial wellbeing”.
These would enhance the FCA’s powers to protect consumers—something which I am sure we all agree is necessary.
Christopher Woolard, chair of the recent Woolard review, said:
“Most of us will use credit at some point in our lives. So, it’s vital that we have a fair market that works for everyone. New ways of borrowing and the impact of the pandemic are changing the market, with billions of pounds now in unregulated transactions and millions of consumers at greater risk of financial difficulty”.
The Woolard report sets out 26 recommendations to the FCA, some on working with government and other bodies to make unsecured credit markets fit for the future. I hope that the Minister and Her Majesty’s Government will look at the amendments tabled and, where those issues and recommendations raised by Woolard align with them, we will see some government amendments or an acceptance of the amendments laid to the Bill.
This is specifically pertinent in relation to “buy now, pay later” products. On 13 January in the other place, Stella Creasy moved an amendment that would have required the BNPL industry to be regulated by the FCA. The proposal was defeated by the Government, by 355 votes to 265. The Woolard review makes the point, on the regulation of the unregulated “buy now, pay later” sector:
“BNPL products which are currently exempt from regulation should be brought within the regulatory perimeter as a matter of urgency. The use of BNPL products nearly quadrupled in 2020 and is now at £2.7 billion, with 5 million people using these products since the beginning of the coronavirus pandemic”.
The report continues by stating that
“more than one in ten customers of a major bank using BNPL were already in arrears. Regulation would protect people who use BNPL products and make the market sustainable.”
Seeing the light, the Minister, John Glen, agreed that Her Majesty’s Government need to act and bring BNPL into the scope of FCA regulation. I was hoping to see a government amendment to this effect, as the noble Lord, Lord Sharkey, said earlier, but I am sure it will be forthcoming at later stages of the Bill.
I also bring to the Committee’s attention an article in the Observer yesterday, Sunday 21 February, entitled “High-cost lenders ‘exploit NHS workers on pandemic frontline’”. The article highlighted a number of individual cases, as well as the alarming and eye-watering interest rates of over 1,300% being charged by some high-cost credit providers.
The article is based on a University of Edinburgh Business School research report, which makes it evident that the signs of financial vulnerability within the NHS workforce are being ignored by high-cost lenders on an industry-wide basis. Overindebted NHS workers are now struggling with unaffordable loans. They did not receive them from unlicensed backstreet lenders: more often than not, they got them through FCA-licensed and regulated high-cost lenders. This is why Amendment 4 is so important in stating
“the general principle that firms should not profit from exploiting a consumer’s vulnerability, behavioural biases or constrained choices”.
The reason this is so important is that many who turn to the unsecured loan sector have those constrained choices. Those constraints can come from a poor credit history and poor credit scores, often received by an individual years before. Protecting those individuals is even more vital.
Further analysis in the recent University of Edinburgh Business School report reveals that many NHS workers have little access to affordable high-street credit. This forces them to take out multiple high-cost credit loans or rely on persistent overdraft usage, often with exorbitant fees. In too many cases, high-street banks are failing to make affordable-term facilities and are instead trapping individuals in a cycle of persistent overdrafts.
In conclusion, the FCA currently has the power to ensure that all lenders advance only loans that are affordable and sustainable. This is clearly not happening, with so many individuals defaulting or becoming overindebted. The Woolard review touches on this, but, again, the argument is made that the reason that loans become unaffordable or unsustainable is that individuals’ circumstances change after the loan has been agreed. I do not believe that this is always—or even most often—the case. In fact, that is why the Financial Ombudsman Service has adjudicated time and time again against providers and in favour of individuals. Unaffordable and unsustainable loans are being forwarded all too often. Amendment 4 will help strengthen the FCA and hopefully rectify this issue.
My Lords, I am delighted to follow the noble Lord. I would like to support the case for introducing a duty of care and look forward to hearing from my noble friend as to why in the Government’s view it may not be needed.
I will focus my remarks on Amendment 72, so ably moved by the noble Baroness, Lady Bowles, and in particular on subsection (2) of the proposed new clause. It concerns me greatly that there is still a huge area of unregulated provision of financial services here, in particular in the case of young people who, after they have graduated and are looking to pay off their student loans, will be relying on their banking facilities. It does seem that we need either a duty of care or, as the noble Baroness, Lady Bowles, set out in subsection (2) of the proposed new clause, some means by which we indicate to potential consumers and customers exactly what the situation is. I find that this area is compellingly in need of greater regulation—or, if not that, then the pointing of actual customers or potential future customers towards acting in this regard.
I find it extraordinary what information is provided to any of us, and in particular to young people. The noble Lord, Lord Sharkey, did a great service in setting out not just PPI but a number of other irregularities—at the very least—that have come to light in the last five or 10 years that need some form of redress in order to close this particular loophole.
We are in an extraordinary situation where there are a number of non-regulated financial services. In particular, Amendment 72 would seek to redress this. But also, Amendments 1 and 4 imposing a duty of care have many strengths to commend them. I look forward to my noble friend in summing up giving the reaction of the Government to the proposal for such a duty of care in the circumstances set out therein.
I am very pleased indeed to join in this important debate. The noble Lord, Lord Sharkey, set out the situation in the macro field extremely well and I am pleased to support the speeches that have already been made by a number of noble Lords.
I will concentrate on two things. The first is the issue of protection from exploitation with the development of cybercrime. I hope we will be able to come back to this in Committee and on Report with respect to the risks that people are put into because of the lack of care within the whole of the financial services sector. Secondly, very small businesses and partnerships are excluded from redress, as the noble Baroness, Lady Bowles, mentioned. This is also is relevant to Amendment 129, moved by the noble Lord, Lord Holmes of Richmond.
On the first issue, in relation to cybersecurity, there is a growing trend that those who are affected keep quiet rather than reveal what has happened. This is a real danger. If, as I hope, we come out of the present dip in relation to financial services globally because of Brexit, we will be able to present to the world a marketplace which is both effective and forward looking—and is also secure. A duty of care to both individual customers and to small and medium-sized enterprises is a critical element in taking this Bill forward and strengthening the measures that exist there. I will not egg the measures that I think are necessary this afternoon, because there will an opportunity to come back to them. But I will just say that this is a growing area of real concern. An improved mandate for those operating in the financial services sector from the FCA would be very welcome indeed.
On the issue of small and medium-sized businesses and small partnerships, and the relationship between them and individual consumer, it is little known that access to the Financial Ombudsman is confined to individuals rather than small businesses and partnerships. What was said by the noble Lord, Lord Holmes, and also the noble Baroness, Lady Bowles, was highly relevant here. It backs up the need for clarity in terms of how we deal not only with prevention but with redress.
I give one small example, which I took up the with the noble Lord, Lord O’Shaughnessy, when he was at the Department of Health. To his credit, he saw the wisdom of trying to bring about change. As the noble Lord, Lord Holmes, has described, it was not received well at the time because of the struggle that was going on post the Brexit referendum and because of the difficulties the Government were facing. We have dealt with banks and financial services, but we need to concern ourselves with insurance as well. Perhaps now is an opportune moment to deal with the situation where an insurance company is taken over and the new provider offers a slightly revised agreement which is sent out without highlighting the key changes that have been made.
For instance, in cover for physical ailments and physical damage because of accident, there is no change, but in terms of absence from work and insurance by a partnership with more than 10 partners insuring together, the mental health clauses are changed to make any payment dependent on having to gain, within 12 weeks, the sign-off of a psychiatrist and a clinical psychologist. Anyone with any knowledge of this area will know that that is an impossible ask. Had it been highlighted to the partnership, it would have been able to look elsewhere for an insurer that was not going to exploit the market as this company did.
The partnership could not go to the ombudsman. It would have been entitled to if each individual partner had insured themselves, but because there were more than 10 of them signed up to the insurance contract, that was not possible. We need to put right nonsense of this kind and ensure that those making enormous amounts of money, which they will continue to do, do not do so at the expense of individuals or small and medium-sized enterprises.
My Lords, it is a pleasure to follow the noble Lord, Lord Blunkett. I very much support his call for a financial sector that is secure, that does not threaten the security of all of us and that does not exploit people who are forced to use its services.
I speak chiefly to Amendment 1 in the name of the noble Lord, Lord Sharkey, also signed by the noble Baroness, Lady Kramer, and me. It was ably introduced by the noble Lord. I speak to this amendment because it is a subject close to my heart and one that I referred to at length in my speech at Second Reading. This group fits together nicely when we look also at Amendments 72 and 129, which I also support. We are talking about a huge imbalance of power in the interactions between the financial sector and its customers. As the noble Lord, Lord Sharkey, said in his introduction, when talking about this we often focus on banks, but we have seen some truly outrageous behaviour from insurance companies during the Covid-19 pandemic, something that I have referred to previously in the House.
When thinking about this amendment I reflected on being a 19 year-old in Australia, many years ago, buying a studio flat. It was cheaper then to have a mortgage than to pay rent. My father stood as guarantor and met the local bank manager—they knew each other personally. This was before the financial deregulation that allowed the massive boosting of prices, as the excellent 2016 New Economics Foundation report The Financialisaton of UK Homes laid out. That was what made it possible.
However, the banking sector then was no ideal model. It was undoubtedly paternalistic, patriarchal and discriminatory, against people from BAME and certain socioeconomic backgrounds and on the basis of gender. I am not sure whether my father was forced to be guarantor because I was a single female and a strange type of person to be taking out a loan, or just because of my youth, but there was in the local bank manager an individual knowledge and understanding, and the hope that if something went wrong, an individual would know your circumstances and do their best to help you.
That is not the situation that we have now. We have a “computer says no” approach. Anyone with a problem can expect to encounter an endlessly changing rota of call centre staff reading from scripts. We could hope for a locally based institution serving the needs of local communities, something that other parts of the world, such as Germany, still expect from their financial sector. That would be a financial sector that served as a utility, not as a generator of maximum profit. Care would then be built in and we might not need an amendment such as the duty of care amendment, but we have to start from where we are.
The amendment would lay on the financial services sector a legal responsibility to behave like a support for, not a parasite on, our economy, our environment and our individual lives. As a former newspaper editor, I am perhaps speaking against my former interests, since these amendments, particularly Amendment 1, address the circumstances that fill many pages of newsprint and screens of websites from financial consumer champions. What is notable if you read those columns is how often financial institutions apologise and provide recompense as soon as their behaviour is exposed, implicitly, if not explicitly, acknowledging their failure to deliver on a duty of care that the public reasonably expect. Since financial institutions are not doing this, it is incumbent on your Lordships’ House and on this Committee to act. This would look after the most vulnerable, only a limited number of whom can ever reach the pages of those consumer champions. Everyone needs the protection that they provide.
In his introduction, the noble Lord, Lord Sharkey, noted the work of Macmillan Cancer Support and other campaigners in driving this amendment forward, but we need to realise that this is not just for the few; it is for the many, for all of us. We need to create some equity and equality in our society and this amendment would go some way towards delivering that.
My Lords, I understand the motives of these amendments and sympathise with a lot of what has been said. However, I will be a dissenting voice on whether the form of the amendments is proportionate and practical in meeting the objectives set out.
As we all recognise, financial services have a social purpose. They play a critical role in society and in people’s lives and they have to recognise that in their responsibilities. There are clearly still failures in the way the industry operates, some unintended and some still involving bad behaviour, and, as many noble Lords have pointed out, there is a problem in the unregulated sector. However, most of the major institutions now exercise their responsibilities carefully, trying to do so in the best interests of their customers. I do not recognise in some of the comments made the tens of thousands—in fact, over 100,000—ordinary bank workers who go into their branches or call centres every day and try desperately to do their best for customers, motivated by the most genuine service obligations. In the way that the banks have operated in providing basic bank accounts and the responsibilities that they have shown in their lending practices, the industry is by and large showing how it can evolve and act responsibly.
There are, of course, failures, as there will always be in any industry, but these can be dealt with under the existing FCA principles, reinforced as they are now by the SMCR regime. There has to be a boundary on what is reasonable to expect of the duty of care. We cannot expect financial services to take on the duties of the state as a social service for those who need extended financial support. Yes, it has obligations, but there is a limit to what the financial services sector can do for those in financial need.
My issue with the general duty of care is that it has no clear boundaries setting out when a financial service company has reached the limits of what it is reasonable to do under that duty of care. We have to recognise the reality that any intervention to increase customer support or protection has a cost. The direct costs of subsidising support to customers in financial need are now covered, as in utilities, through cross-subsidies—higher charges on other customers to pay for the extended credit or basic bank accounts for those customers in need. It is accepted within the industry and within society that a measure of cross-subsidy within the financial services sector is part of being a universal provider.
However, the indirect costs of compliance are more damaging; they may disadvantage those that they are meant to help. The more questions you need to ask your customers, the more detailed information you have to ensure they have understood and the more you have to penetrate into their lives, the more banks and insurance companies are forced to rely on formulaic compliance bureaucracy that erects barriers to simply understanding and addressing customers’ issues. People spend more time ticking the boxes than they do just listening and trying to provide a genuine real-world answer to the issues in front of the customer.
The danger is that, despite the best intentions of helping to ensure that people get good advice, there is an increase in costs and risks to compliance to the point where, as happened with the retail distribution review that took place some years ago, financial services companies simply withdraw from offering any services to those customers because they cannot take the risks and costs and the compliance burden pushes customers out of access to financial services.
Not having boundaries around what that duty of care comprises opens up the risks to financial services companies of court judgments and CMC claims that continually push the obligations and costs of compliance far beyond what is reasonable for a financial services company to do—one doing its best to offer financial products and serve its customers—and what is reasonable for the customer to take on, in terms of their responsibilities in setting out their needs.
I believe that, despite the motives behind this, it is much better to be prescriptive about what obligations there are for reasonable behaviour, as set out in the current FCA principles, which include the obligation to treat customers fairly and fairly communicate the information they require. These considerations require a high level of care and compliance, not always correctly done—but there are penalties when they are not done correctly. The SMCR regime is reinforcing that. As such, despite my sympathy for the motives behind these amendments, I believe that the intent behind them, however good, would not result in a proportionate or practical improvement in regulation and carries many dangers and risks both to financial services companies and, more importantly, to the customers whom we seek to protect.
My Lords, I agree with much of what has been said and it is not necessary to repeat it. I support the objective of the amendments—in particular, I support my noble friend’s Amendment 4—and I look forward to the Minister’s reply. It is difficult to see how the principle of these amendments can be refused.
However, it is necessary to make an overarching point, which I base on my experience over 50 years as a close observer of the financial services industry. The truth is that the industry has a systemic tendency to malfeasance. This is not an attack on the great many good people who work within the industry, as the last contribution mentioned, in banks and insurance companies, who only wish to do a good day’s work. However, the unremitting succession of scandals involving finance is not just a series of unfortunate one-offs; it is built into its very nature. This is a big issue, but I emphasise two simple reasons. First, there is an inevitable asymmetry of information. As Amendment 4 highlights, there are
“a consumer’s vulnerability, behavioural biases or constrained choices”.
This situation is bound to create the sort of problem that we have seen. The second, even simpler, reason, using the classic but apocryphal words of Willie Sutton, is because it is “where the money is”. People seek to gain money from where there is lots of it and there is lots of it in the finance industry.
There is much to be done to solve this problem. It is systemic but it still needs to be addressed because people need help. However, what is in these amendments seems to me simply a minimum of what might be done to address the problems that the industry so clearly incorporates.
My Lords, I simply do not understand the resistance we find from the Government and the FCA to the duty of care amendment moved by my noble friend Lord Sharkey, and supported by my noble friend Lady Bowles and the noble Baroness, Lady Bennett, and to the almost identical Amendment 4 proposed by the noble Lord, Lord Tunnicliffe, and supported by the noble Lord, Lord Eatwell, and again by my noble friend Lady Bowles. I am not going to repeat the saga of abuse that many noble Lords have described. That has been done incredibly well and is exceedingly powerful. I will say though that this issue keeps happening. I notice the headline in today’s Times:
“City regulator ‘slow to act’ against car leasing firm”.
Every time we think that we are perhaps past a period of abuse, another one comes along. To me, it is utterly unacceptable, as I hope it is to everyone in this House.
What makes me particularly angry is that the regulator has largely known, very early on thanks to whistleblowers, when the financial institutions that it regulates are treating customers badly. However, again and again, the regulator takes years to react, reacts minimally at first, initiates a lengthy review—often several—asks the organisation to review itself and then does too little, too late. I want to pick up one issue in illustration: the treatment of payday lenders.
Many people in this House will remember the experience of trying to pass legislation to get a cap on the interest rates that payday lenders could levy. I bring up this issue because it deals with the difference between treating customers fairly and a duty of care. The FCA took a very strong position that customers were being treated fairly so long as they knew the terms of the contract. There were, perhaps, some constraints such as a limited number of rollovers. The FCA did not look at the far deeper issue of the way that people were being abused by payday lenders and the extraordinary level of interest rates. That is why the duty of care is very much more powerful. As my noble friend Lord Sharkey said, treating customers fairly is undermined in the FiSMA legislation by the caveat emptor parts of the FCA’s rules.
I am not a bit surprised that the noble Lord, Lord Blackwell, objects to these duty of care amendments. When I sat for nearly two years on the Parliamentary Commission on Banking Standards, the industry objected to almost every measure that would have constrained the abuse which created the crisis in 2008, such as the Libor crisis and PPI. The saga was endless. I say to the noble Lord, Lord Blackwell, that in a later group of amendments I will be referring to the HBOS Reading case, another example of fraud perpetrated between 2003 and 2007. A number of bankers went to prison but today, in 2021, victims of that fraud still have not received fair compensation.
Dame Elizabeth Gloster’s damning report of last November on the FCA’s regulation of London Capital & Finance Plc said:
“The root causes of the FCA’s failure to regulate LCF appropriately were significant gaps and weaknesses in the policies and practices”.
That is simply true across the board. It is piecemeal, as my noble friend Lord Sharkey described.
Misbehaviour keeps happening and delayed redress is the normal pattern. To quote Einstein:
“The definition of insanity is doing the same thing over and over again and expecting different results.”
It is time to make a step change to protect consumers, and I hope very much that the Government do so in this Bill.
My Lords, in considering this Bill, we are all placed in a somewhat odd position. The Treasury is, right now, conducting a financial services future regulatory framework review. Indeed, phase 2 of consultation on that review concluded just last Friday. While I fully understand that some parts of the Bill before us are associated directly with the UK having left the European Union, other parts are not associated in that way. It is quite likely that we will be back here in a few months’ time debating the same issues all over again when the Treasury decides on its response to the consultation and brings forward legislation to implement the future regulatory framework.
It would be comforting if the Minister could assure us that we are not wasting our time but, of course, she cannot do that, because none of us knows what the final outcome of the regulatory framework review will be. None the less it would be helpful if, when she sums up, the Minister could assure the Grand Committee that the Treasury will treat debates on this Bill as, at the very least, an enhanced consultation to which the Treasury will have full regard when reaching its final conclusions.
Let us get down to business on the amendments in the names of my noble friend Lord Tunnicliffe, the noble Baroness, Lady Bowles, and myself. Every first-year student of financial markets knows that markets in retail products—financial products sold to individuals, households and small businesses—are seriously inefficient. One important reason why they are inefficient is due to asymmetric information, as the noble Lord, Lord Davies, said just now. To put it simply, the seller of the product typically knows much more about the risks involved in making a particular investment or other financial transaction than does the hapless investor. An extreme example of this is to be found when the chief economist of the Bank of England, Andy Haldane, confessed that he did not understand the pension that had been sold to him.
As the Committee will be aware, if it is the FCA’s strategic objective to ensure that the relevant markets function well, to do so in the presence of asymmetric information it has two broad operational options. Either it should regulate each individual financial product to ensure that the investor is properly informed or it could adopt the principle of Amendment 4—and, indeed, Amendment 1—and make general rules, including the power to introduce a duty of care owed by the authorised persons to consumers. Up to now, the FCA has adopted the former option and dealt with each issue as it arises. By its own admission, this has not gone very well. From its consultation entitled Our Future Approach to Consumers in 2017 through to the feedback statement published in April 2019, the FCA has wrestled with the issue of duty of care, and is still wrestling today. Yet it still persists with its failing approach of regulating each product, and that simply cannot go on.
Action is really imperative, for two main reasons: first, because of the persistent appearance of new products, such as the buy-now, pay-later schemes, which we will discuss later—persistent innovation, which the FCA meets with persistent delay. It is always playing catch-up to introduce the new rules, after taking time for appropriate consultation and so on, to deal with the new threats to the consumer.
The second reason is the now-ubiquitous sale of financial products via the internet, as referred to by my noble friend Lord Blunkett. How many of the Committee have ticked the box verifying that they have read the terms and conditions of internet sales, without a thought of ever doing so? It is the dense and incomprehensible text of those terms and conditions that is so often the electronic embodiment of asymmetric information: the very factors ensuring that the relevant markets do not function well and that the FCA does not perform its strategic objective.
Amendment 4 provides the FCA with the means to end this failure to meet the strategic objective. The enactment of the power to introduce a duty of care would place the responsibility of ensuring that markets function well firmly on the shoulders of those who have the information required to attain that goal. As my right honourable friend Pat McFadden put it when discussing the Bill in another place, with the enactment of a duty of care, financial services providers would necessarily ask themselves the question, “Is this right?” rather than what they ask themselves today, which is, “Is this legal?” That would create a real shift in how business is done. I say to the noble Lord, Lord Blackwell, that this has nothing to do with subsidies and subsidising. It is doing what is right. If the FCA had the power to introduce a duty of care, it could begin to live up to its strategic objective.
I am quite prepared to believe that our drafting of Amendment 4 contains petty infelicities. So what? What is important is the principle that the amendment embodies. I am confident that Treasury officials can always find the appropriate wording. But we are all aware that too many consumers are being treated inappropriately, whether by the mis-selling of products, denial of rights or obstructionist responses to complaints and so on. I am certain that Her Majesty’s Government wish to improve on the consumer protections previously enshrined in EU legislation. The introduction of a duty of care is a safe and sure way forward: a way to ensure that markets function well.
I regret that I cannot agree with the noble Baroness, Lady Bowles, that the duty of care should be extended to the regulator itself. That is unreasonable because it suggests that the regulator should be looking over the shoulder of the participants in every single transaction. That would require regulatory omniscience, and I think it is truly unreasonable. But I would like to say a few words in hearty support of the noble Baroness’s Amendment 72 in this group. Anyone who has laboured as a financial services regulator, as I have, will be well aware of the abuse addressed by this amendment: an abuse that has disfigured the promotion of financial products for far too long.
The failure to deal with this abuse was an important component of Dame Elizabeth Gloster’s investigation into the FCA’s regulation of London Capital & Finance plc. The abuse of promoting non-regulated activities while identifying the promoter—albeit correctly—as a regulated entity must also be addressed by the holistic evaluation of regulated entities, taking into account both regulated and unregulated activities, because, typically, the culture of a firm is not divisible. So, while I support Amendment 72 from the noble Baroness, Lady Bowles, I note that there is more to be done to implement Dame Elizabeth’s recommendations.
My Lords, I will start with a word of reassurance to the noble Lord, Lord Eatwell, and others that the Government will consider all the contributions to the debates on the Bill carefully, and in terms of the work they are doing on the future regulatory framework review and the broader regulation of financial services. That is an important point when we discuss these amendments. As the noble Lord just set out, the amendment to introduce a duty of care could be interpreted as quite a different fundamental approach to financial services regulation, which, with that scale of change, might be better considered as part of the future regulatory framework review. However, much work has been done on this subject and I turn to it now.
I will speak first to Amendments 1 and 4, which seek to introduce a statutory requirement for the FCA to make rules requiring authorised persons to adhere to a duty of care when providing a product or service. Amendment 4 would also require the FCA to have explicit regard for vulnerable consumers when discharging its consumer protection objective.
I am grateful to the noble Lords who put forward these amendments, which give the Committee the opportunity to discuss this important issue. I know that it was also discussed during the passage of the Financial Guidance and Claims Act, and the Government pay tribute to the work undertaken by Macmillan, whose “Banking on Change” campaign includes the proposal for a statutory duty of care. I agree with the charity that
“Money worries should be the last thing”
on a person’s mind when they are dealing with cancer, but I emphasise that the FCA is already taking steps to ensure that financial services firms exercise due care and regard when offering products, services and advice to consumers. A statutory duty of care does not add to the FCA’s existing powers in this area, and there are likely to be difficulties in applying a single duty consistently and proportionately to the wide variety of products and relationships in financial services. The Government do not believe that an additional statutory duty of care, as proposed by these amendments, is necessary.
Financial services firms’ treatment of their customers is governed by the FCA through its principles for business, as well as specific requirements in the handbook. The principles for business require firms to conduct their business with due skill, care and diligence, and to pay due regard to the interests of their customers and treat them fairly. The FCA has recourse to disciplinary action against firms that breach these principles.
The FCA has also announced that it will undertake work to address any potential deficiencies in consumer protection, in particular by reviewing its principles for business. The coronavirus pandemic has caused the FCA to delay the next formal stage of this work to allow firms to focus on supporting their customers during this difficult period. However, it remains committed to progressing this work and has announced that it aims to consult in the first quarter of this year.
I reassure the Committee that the Government believe that the FCA already has the necessary powers to ensure that sufficient protections are in place for consumers, and has the will to act, without the need for a statutory duty of care or expansion of the consumer protection objective. The Government will continue to work closely with the FCA to keep the issue under review.
Before I turn to Amendment 72, I reiterate the Government’s sympathy for London Capital & Finance bondholders. In May 2019, the Government directed the FCA to launch an independent investigation into the events relating to the FCA’s regulation and supervision of LCF. Dame Elizabeth Gloster’s investigation was provided to the FCA on 23 November 2020. It concludes that the FCA did not effectively supervise and regulate LCF during the period. She makes nine recommendations for the FCA, focusing on how it should improve its internal authorisation and supervision processes. The Government laid the report, along with the FCA’s response, before Parliament on 17 December. In that Written Ministerial Statement, the Government welcomed the FCA’s apology to LCF bondholders and its commitment to implement all of Dame Elizabeth’s recommendations. Dame Elizabeth also made four recommendations for the Treasury, which the Government have accepted in full.
Turning to the specifics of the amendment, through its rules and guidance the FCA already requires financial promotions to be clear, fair and not misleading. As part of those rules, authorised firms are specifically required to ensure that if they refer to their authorised status in the context of any communications relating to unregulated activities, they make it clear that those specific activities are not regulated. Misleading statements by a firm may involve a breach of the FCA’s existing rules and the FCA has broad powers to enforce against such breaches. Depending on the severity of the breach, it may also be an offence under Part 7 of the Financial Services Act 2012.
The Treasury has committed to keeping the legislative framework underpinning the regulation of financial promotions under review. As part of this, the Treasury is actively working with the FCA to consider whether paid-for advertising on online platforms should be brought into the scope of the financial promotions regime.
In addition, action taken through Clause 28 and the associated Schedule 11, as the noble Baroness, Lady Bowles of Berkhamsted, noted, gives the FCA enhanced powers to quickly remove a firm’s permission when it appears to the FCA that it is no longer carrying on the regulated activity for which it has permission. I also reiterate that Dame Elizabeth’s investigation found that the FCA had the right powers and rules in place with regards to LCF’s financial promotions.
Turning finally to Amendment 129, the Government are committed to regulating only where there is a clear case for doing so. This is to avoid putting additional costs on lenders that could lead to higher costs of borrowing for businesses—which are ultimately passed on to consumers—and to keep the rulebook as simple as possible to assist customers in understanding their rights.
The amendment, tabled by my noble friend Lord Holmes of Richmond, has legitimate aims and seeks to protect small businesses by allowing for rights of action against breaches of the FCA handbook. This is sought to be accomplished by requiring the Secretary of State to make regulations bestowing on SMEs a right to bring a complaint for an alleged breach of the FCA handbook.
Although I support the intention, there does not seem to be a clear case for such a power. The Government have given the FCA a strong mandate to prevent inappropriate behaviour in financial services and it has a wide range of enforcement powers—criminal, civil and regulatory—to protect a wide range of small businesses that have taken out a regulated financial product or service. For example, as of April 2019, the FCA expanded the remit of the Financial Ombudsman Service to allow more SMEs to put forward a complaint. This now covers 97% of SMEs in the UK.
The FOS complaints procedures are available to SME customers who have taken out a regulated product or service if the business believes conduct has fallen below an acceptable standard, which could include a breach of the FCA handbook. The FOS can also consider complaints about unregulated products if the provider has voluntarily signed up to the FOS. The FOS provides a free independent dispute resolution service, and is designed to be an alternative to resolution of cases through the courts, which can be expensive and take time.
In addition, all the major SME lenders are signed up to the standards of lending practice, which contain clear guidance on best practice. As industry standards and codes of conduct are taken into account by the FOS, the lending standards practice code is also considered by the FOS when deciding what is fair and reasonable in adjudicating. Moreover, with the recent launch of the Business Banking Resolution Service, medium-sized businesses now have access to an independent, non-governmental body which will provide dispute resolution for businesses, addressing historical cases for small and medium-sized businesses from 2000, as well as future complaints from medium-sized businesses outside of the FOS’s remit.
Given these factors, the Government do not believe that there is a case for the amendment, as there would be a number of direct and indirect costs and a replication of existing protections. These changes could in turn impact on additional bureaucracy and affect the price or availability of credit for small businesses, which is not a desirable outcome. I hope these answers have been sufficiently satisfactory that noble Lords feel able not to press their amendments.
My Lords, I declare my interests as stated in the register. I apologise to the Minister and the Committee for failing to get my name on the speakers’ list for this group on time and appreciate been given a chance to speak after the Minister. In the circumstances, I will confine my remarks to Amendment 1, introduced by the noble Lord, Lord Sharkey, with whom I often agree. However, on this occasion I strongly agree with what my noble friend Lord Blackwell said.
On the duty of care, the FCA has itself, as other noble Lords said, consulted on this question and provided feedback in November 2019. Many respondents thought that, rather than further complicating the FCA’s responsibilities, with the commensurate risk of increased litigation, it would be better to let the newly introduced senior managers and certification regime settle down.
I suggest that there is already evidence of cultural change in many regulated companies as a result of this, and that those who think we should not at this time bring in changes likely to make the FCA more cautious in the exercise of its functions are correct. It surprised me that while many respondents thought that the FCA should be given a duty of care, most of them thought that the duty should not be enshrined in law because it would lead, inter alia, to duplication of existing obligations, the loss of regulatory agility, and costs, delay and the stress of litigation for consumers. Even the adoption of a non-statutory duty of care would have many of the same effects. Surely the thing we most want to avoid, to ensure that the City retains its position as one of the two leading global financial centres, is a loss of regulatory agility.
My Lords, I believe that contribution has put another side of the argument. It is the balance between these two perspectives that the Government seek to strike. We also think the FCA is in the right position to strike it, with its obligations to protect consumers and its detailed understanding of the markets that it regulates.
My Lords, I thank all noble Lords who have spoken on this group and I note a largely positive view of a duty of care. I thank the Minister for her response. Her counterpart in the Commons took 58 words to respond to a similar proposition; the noble Baroness took more than that, but notwithstanding the length of her response I was not convinced by any of her arguments. Many of them seemed much like medium to long grass.
The case for a duty of care still seems clear and urgent. Essentially there are, as we said, five key reasons for adopting the duty. The first is that FSMA does not protect consumers adequately; the second is that the FCA is always playing catch-up. The third reason is that poor behaviour by firms continues, as I set out in my opening remarks. The fourth is that getting redress after the event is time-consuming and very stressful, and the fifth is the incentive for real and lasting cultural change in our financial services industry. All these seem to be conclusive arguments in favour of a duty of care.
The Minister’s arguments against seem to have a strange Alice in Wonderland quality to them. They amount to saying that it is not in the consumer’s best interests that financial services firms should be obliged to act in the consumer’s best interests. That simply cannot be right. We will return to this issue on Report but, in the meantime, I beg leave to withdraw the amendment.
Amendment 1 withdrawn.
2: Before Clause 1, insert the following new Clause—
“Competitiveness as an FCA and PRA objective
(1) The Financial Services and Markets Act 2000 is amended as follows.(2) In section 1B (the FCA’s general duties), after subsection (1)(b) insert “and—(c) supports the standing and competitiveness of the United Kingdom as a leading global financial centre with high market standards.”(3) In section 2B (the PRA’s general objective), in subsection (1) at end insert “, while supporting the standing and competitiveness of the United Kingdom as a leading global financial centre with high market standards.”(4) In section 2C (insurance objective), after subsection (1)(b) insert—“(c) which supports the standing and competitiveness of the United Kingdom as a leading global financial centre with high market standards.””
My Lords, Amendment 2 is in the name of my noble friend Lord Bridges, who gives his apologies that he is unable to be present this afternoon and has asked me to move the amendment in his place. It seeks to introduce the international competitiveness of financial services as part of the general duties of the PRA and FCA. I would have thought that the amendment is unexceptional and uncontroversial, in the sense that it is difficult to imagine how one could sustain the opposite view: that it is not desirable for the UK to maintain its standing and competitiveness as a global financial centre, or for the regulators not to have regard to that. I am sure that this is already implicit in the approach to regulation taken by the Bank of England, as in that taken by Her Majesty’s Treasury, but it is not formalised in the remit of the PRA and the FCA. This amendment would remedy that deficiency.
I do not need to labour the Committee with facts and figures about the huge importance of financial services to the UK economy and the wealth created by its global trading activities. If this were any other industry of major economic importance, for example the automotive industry or telecommunications, the need for international competitiveness would be taken as given. For financial services, the nature of the industry means that the regulators have, of course, been tasked to oversee other important objectives: the maintenance of prudential standards to avoid financial collapse and, as we have just been talking about, the protection of consumers in complex and life-changing financial transactions.
The amendment does not seek to override those. It would simply add to the general duties of the PRA and the FCA the need to have regard to the aim of supporting the standing and competitiveness of the United Kingdom as a global financial centre in the way those regulators carry out their specific objectives. To avoid any suggestion that this would mandate a drive to lower standards as a way of becoming more competitive, the amendment is clear that the mandate is for a global financial centre with high market standards. I believe it is widely accepted in this House, and in the industry at large, that our standing and competitiveness as a global financial centre can be maintained in the long run only by maintaining confidence in the soundness and integrity of the UK’s financial markets.
In practice, the amendment would mean that the regulators, in considering the design and implementation of regulations and rules, would consciously have regard to ways of achieving the desired outcomes with minimum unnecessary overhead costs and market restrictions. For example, in implementing the measures in this Bill for the regulation of investment firms under the investment firms prudential regime, the implementation of remaining Basel III banking standards and, more generally, reviewing the imported EU MiFID regulations, the regulators would have an explicit concern to pursue the simplification and streamlining of those regulations, moving to the UK’s preferred model of regulating through principles and outcomes to achieve the required standards for a more efficient regulatory approach that improves our international competitiveness.
The Bill in fact goes part way there already in new Section 143G, as introduced by Schedule 2, in which the FCA is required, in applying regulations to investment firms, to have regard to the likely impact of the rules
“on the relative standing of the United Kingdom as a place for internationally active investment firms to be based”.
However, this is applied only to this one limited area of regulation, rather than as a general duty.
If there were seen to be a conflict between international competitiveness and other objectives on some specific measure, it is surely right that this should be identified and an explicit trade-off decision made on the most appropriate priority, which may of course override the competitiveness concern. However, in most cases, efficient regulation, high standards and international competitiveness go hand in hand, rather than conflict.
Take, for example, the current consultation on the Bank of England’s proposal to remove the capitalisation of software from the calculation of banks’ regulatory capital. This is contrary to the practice adopted in the EU and in the US. At first sight that could look like it would put UK banks at a competitive disadvantage. However, not only is that change a sensible way to maintain the integrity of the prudential standard, but doing so would reinforce the UK as a leading global financial centre with high market standards, and, therefore, its competitiveness. The notion that these would often lead to conflict is mistaken: competitiveness can complement high standards.
In proposing the amendment, alongside my noble friend Lord Bridges, I believe that the arguments, including support for international competitiveness in the regulators’ general duties, are important and incontrovertible. I hope my noble friend the Minister will find some way to accommodate this in the remaining stages of the Bill or, if not, give a clear indication of how it will be addressed in other measures that the Government intend to bring forward. I beg to move.
My Lords, Amendment 3 in my name and that of my noble friend Lord Sharkey is an amendment to Amendment 2 and probes what is meant by “high market standards”. Could these mean, “no lower than current standards”, and what are they measured by? Are they just rules, which we hear a lot about, or do they also include enforcement? Regrettably, we also hear about that when it has all gone wrong, with the Gloster and Connaught reports being the latest examples of that. Like a taster menu, our amendment then leads on to the connection between standards and oversight of regulatory performance with respect to both rule-making and enforcement, and suggests that there should be regular independent reviews every three years. For clarification, that would not be instead of whatever Parliament decides it wants to do; it would be additional.
I will put my cards on the table and say that I am nervous about any introduction of competitiveness as a general duty, even with the qualification, or as a bidding, to consider ranking. If one thing was learned from the FSA’s demise and the financial crisis it is that giving a financial services regulator a competition duty can lead to disaster through creating incentives to balance industry profit against safety and consumer protection. It can potentially lead the regulator astray from its essential objective of safety and soundness. If there is such a remit it will inevitably lead to calls from parts of industry that do not want fetters, or even from shareholders that want profits. If competition appears as a duty there will be pressures to go just a little bit lighter touch, then just a little bit more, with arguments that this is all okay because it is among experienced market participants.
Unfortunately, light touch in one part of a market that may seem remote from retail consumers does not prevent contagion. Let us not forget the investment bank “slice and dice” of subprime mortgages, which fuelled the financial crisis by stimulating yet more subprime lending—what gets made gets sold and invested in. Later amendments deal with what happens nowadays with regulated mortgages that are sold on to unregulated entities, so let us not kid ourselves that different parts of the market are in self-isolation or lockdown.
However phrased, a competition mandate is different from a proportionality mandate, which the regulators already have. I am all for regulators making it much clearer how they categorise activity as part of proportionality and transparency. I wish they would do more of it—it can aid competitiveness too—but put in an additional competitiveness mandate and what does that mean, other than to go lighter than proportionality requires?
On the other hand, it is necessary to recognise that regulation is a good way to end up with a closed shop, preventing new entrants and new products, and there can be incentives on regulators to seek the stability of the graveyard. I can think of areas where I would lay that charge, such as fixation on gilts and sluggishness around approving new banking models. However, I do not see a primary competitiveness mandate solving that, even alongside a “high market standards” statement.
This takes us back to what is meant by high market standards. Who sets those? Whatever they are, I am sure they will be lauded as “world beating” even before the rest of the world has been looked at. However, I think that a regular, expert independent assessment can check and report on all aspects—the standard of rules, whether they are gold plated, how good enforcement and operational systems are and, yes, what can be learned by comparison with elsewhere. However, I do not think it is for the regulators to advise on whether they are better at doing things than elsewhere. I already know their answer.
The final part of my amendment suggests that the regulators pay for the reviews—so it is rather like a Section 77 review. Then it says that the review must be published without modification, because there was a certain amount of photoshopping of the Promontory report about GRG and it was made public only via the Treasury Select Committee publishing a leaked copy.
However, there are other ways that regular independent reviews could be done—more like an independent person FiSMA Section 1S review that the Treasury can require—or through an oversight body led by a handful of skilled individuals, as the Australians are now doing. It seems to me that, if you want assurance on high standards, which I do, that is the way to do it, in line with what looks like becoming the new best practice, and that is where the UK should be.
My Lords, I will speak to Amendments 6 and 7 in my name and that of my noble friend Lord Trenchard, who has a lifetime of experience in the financial services sector and understands the whole issue of competitiveness and UK influence from banking for many years in Japan. I am so sorry that because of procedural changes he is now unable to speak to these amendments.
I refer to my interests in the register, particularly as a non-executive director of Secure Trust Bank plc in Solihull and of Capita plc and as a member of this House’s EU Financial Affairs Sub-Committee. I was especially sorry to miss Second Reading of this very important Bill.
These amendments—like the one moved by my noble friend Lord Blackwell and those in the name of my noble friend Lord Bridges—introduce a competitiveness objective for the FCA and PRA. My Amendment 7 also applies to the Bank of England itself. My amendments differ because they spell out aspects of competitiveness that I know are important from a lifetime in business and from nearly three years as UK Minister attending the Competitiveness Council in Brussels.
Of course, consumer protection, stability and standards are important, but they are very well looked after in the structure of financial services regulation, even if the regulators do not always deliver or enforce properly, as we have heard from the noble Baroness, Lady Bowles. I come from a different perspective. Those of us with an understanding of economics know that needless red tape, inefficiency and lack of care for UK interests end up hurting UK consumers with prices that are higher than they need to be, delays that frustrate, and a failure to get things right first time. These also hamper innovation and productivity growth, two of the best ways to both benefit consumers—and I come from a consumer background—and stay ahead internationally.
This matters today even more than in the past. Financial services are the leading sector in the British economy, not only in London but in many other areas of the UK: Edinburgh, Cardiff, Newcastle and Birmingham, to name but a few. In the wake of coronavirus, Brexit and international competition, we need to treasure and enhance our leading position. France, the Netherlands, Germany, Ireland and Luxembourg are trying to steal our lead—but ineffectively, as this hurts their business and consumers and encourages investors and services to move to New York or Singapore. As Mr Barney Reynolds has argued, we must look again at the legacy of EU law, and I know my noble friend Lord Trenchard will have more to say on his ideas on another day.
We must not forget one point: small and entrepreneurial businesses are the backbone of this country. Everyone should remember that the big, powerful multinationals find it relatively easy to adapt to new regulations, rules and requirements, and to lobby for arrangements that suit their interests.
We must also create a benign climate for innovation, which is a vital part of improving efficiency. There is one great example: the Financial Conduct Authority’s so-called “sandbox”—clear, simple and easy regulation for fintech. Thanks for this are due to the current Governor of the Bank of England, but Mr Bailey and I were promoting this as good practice in India four years ago. It is dispiriting that there are not more such initiatives.
As my amendment states, we need “efficiency” and “competitiveness” in the interests of UK plc to feature in the purview of our regulators. A competition objective is not enough; indeed, it can sometimes harm smaller players, driving them bankrupt and causing problems for their customers, as bigger institutions mop up and take over their client base. Competitiveness is sometimes wrongly associated with bad aspects of globalisation. That is wrong: UK competitiveness is what this country now needs to strive for to support the UK base, rather than encouraging the sale of wonderful companies such as Arm to overseas interests. Alex Brummer has argued this forcefully in a series of books, and I agree with him.
While we come at the issue from different angles, I really do want my noble friend the Deputy Leader to listen to those of us who are seeking a change to the Bill to bring in considerations of “competitiveness”. So I will finish with the word’s dictionary definition:
“1. Possession of a strong desire to be more successful than others … 2. The quality of being as good as or better than others of a comparable nature.”
What could be better than that?
My Lords, Amendment 2, in the names of the noble Lords, Lord Bridges and Lord Blackwell, and the noble Viscount, Lord Trenchard, provides an opportunity to reopen an issue that was settled in 2012 by Parliament deciding against adopting a version of what their Lordships now propose.
Their amendment does not come as a surprise, not just because this Bill provides an obvious vehicle for its proposals but because it fits into the usual timescale of loss of institutional memory. Prior to 2012, we had a “have regard” on competitiveness built into FiSMA 2000; it required the FSA to have regard to
“the international character of financial services and markets and the desirability of maintaining the competitive position of the United Kingdom”.
This “have regard” was widely seen as contributing to the financial crash of 2007-08, which is why FiSMA was amended in 2012 to remove it.
During the discussion around and preceding its removal, there were some very forceful observations; three deserve particular attention. The first was from the Treasury, which, in its 2010 report, A New Approach to Financial Regulation: Judgement, Focus and Stability, said that there was strong evidence that
“one of the reasons for regulatory failure leading up to the crisis was excessive concern for competitiveness leading to a generalised acceptance of a ‘light-touch’ orthodoxy, and that lack of sufficient consideration or understanding of … complex new financial transactions and products was facilitated by the view that financial innovation should be supported at all costs.”
When he gave evidence in 2010 to the Future of Banking Commission, the noble Lord, Lord Turner, said:
“I’m not sure at all that a regulator should have regard to the competitiveness. Now let’s be clear, that is something different from the quality of competition … I think that it can be a legitimate aim of a regulator because competitive intensity is a reasonable tool, but I think when you start saying that the role of a regulator is to help, as it were, the competitiveness of a location or of the nationally registered firms, I think that can in a subtle way create a conflict of interest.”
In its final report in the same year, the Future of Banking Commission concluded that giving regulators specific duties to promote international competitiveness risks creating conflicts of interest and that:
“International competitiveness is best served by ensuring that domestic banks are able to compete effectively, without subsidy or special treatment. Promoting the success of British industry is a job for the … industry trade bodies, not for the regulator.”
Two years later, during Committee stage of the Financial Services Bill 2012, the then Financial Secretary to the Treasury told the Commons:
“We only have to turn to the FSA report on the failure of the Royal Bank of Scotland to see what use has been made of the requirement to have regard to competitiveness. On page 29, the report refers to ‘a strong focus on the importance of the “competitiveness” of the UK financial services sector and so of avoiding “unnecessary” regulation. This focus reflected in part the FSMA requirement to have regard to competitiveness issues.’”
He went on to say that the Government did not consider that a competitiveness objective would be a desirable feature in FiSMA. He explained:
“We do not consider that a requirement to have regard to competitiveness is necessary to achieve the right balance between over-regulation and under-regulation, or to ensure that proper consideration is given to the needs of the financial services industry or the wider economy”,
“To include a requirement to have regard to international competitiveness in this Bill would send completely the wrong signal about the nature of the regulatory regime in the UK.”—[Official Report, Commons, Financial Services Bill Committee, 1/3/12; cols. 228-29.]
That was true for that Bill and is true for this. All these objections are still valid. We should show more confidence in the City and our regulators, as Jes Staley recently suggested when he said that
“in a funny way we’ve gotten pretty good at working inside the regulatory framework that is here. It protects the financial industry … as we learn how to deal with this regulation, and it makes the bank safer.”
I think he was referring to his bank, not the Bank. He also said that he “wouldn’t burn one regulation” to achieve the aim of competing with New York and Singapore.
Our amendment to the rather swashbuckling amendment from the noble Lord, Lord Bridges, is a non-regression provision. If, by some lapse in judgment, the Government were prepared to accept the noble Lord’s proposal, our amendment would ensure that our current high standards are not lowered in pursuit of any competitiveness objective. Our amendment, as my noble friend Lady Bowles so eloquently explained, would also require a regular independent review of the standards of governance of the regulators in relation to their rules and the enforcement of those rules.
We do not believe that the amendment from the noble Lord, Lord Bridges, or others with similar intent are desirable or necessary. We appear to have more confidence than the noble Lord in the City’s ingenuity, creativity, sheer expertise and professionalism, and in our world-class regulators and current regulatory framework.
My Lords, this is the first time I have spoken in Committee, so I draw the Committee’s attention to my entry in the register. I will speak to my two amendments in this group. Amendment 87 is broadly drafted and follows on from the line of discussion and approach taken by my noble friend Lord Blackwell. By contrast, Amendment 106 is a highly specific focused proposal for improving the UK’s regulatory regime, on which I seek the Government’s response.
To take these in order, the purpose of Amendment 87 is to require the FCA and the PRA to take into account the impact on the UK’s competitiveness of any regulatory measures they seek to impose, and in particular, under proposed new subsection (2)(b), to assess the overall cost-benefit ratio of the UK’s compliance regime.
I know that even raising this issue risks one being labelled the money launderer’s or financial criminal’s friend. I plead not guilty to that, but I seek to ensure that our compliance regime is and remains cost effective. As evidence that I am not soft on financial crime, I draw the Committee’s attention to the fact that I have put my name to Amendment 84 in the name of the noble Baroness, Lady Bowles, which seeks to make failure to prevent financial crime a criminal offence, which we will discuss at a later date.
First, I want to consider culture. For too long it has tended to be argued that any money spent on compliance is money well spent. As business practices evolve so to, and quite rightly, should compliance practices, but no one has the responsibility to step back and consider whether some of the requirements of an earlier age remain effective and are still needed—so one has ever-increasing layers of regulation. Regulators are, by their very nature, risk averse. But somehow we have to create a climate in which we can find the right balance between a financial services industry which on the one hand might be seen as a system like the wild west, driving business away, and, on the other hand, a system so muscle-bound by regulation that the consequent time, expense and administrative hassle have an equally deterrent effect. It is to establish a formal mechanism to address this challenge that I have tabled Amendment 87.
We may well be told by my noble friend when he replies to this debate that the regulators are now well aware of this challenge. Of course, that is to be welcomed, but I question how far down that organisation this new mood or culture or approach has spread—and, no less importantly, how far it has spread into the compliance departments of the regulated firms. Too often, waving the regulatory stick has come to be seen as some sort of virility symbol.
The professional body, the Office for Professional Body Anti-Money Laundering Supervision, or OPBAS, in its latest annual report in March last year pointed out, in terms of disapproval, that 41% of professional bodies being supervised did not take any kind of enforcement action. No attempt was made to suggest what target figure was the right one; there was just the impression that not enough was being done and efforts and money spent must be increased. However, if you look at the list of professional bodies being supervised, it is not clear why many of them would need to take enforcement action except on the rarest of occasions. For example, one body being supervised is the Faculty Office of the Archbishop of Canterbury. I doubt that enforcement by the most reverend Primate the Archbishop of Canterbury needs to be a frequent event.
The second general point is that, too often, the attitude among regulators is, “What I have, I hold.” The House will have heard me before on several occasions speak about the poor cost-benefit ratio of the present suspicious activity report regimes, or SARs. Every year the number of SARs rises; in 2019, it reached 573,085, about 2,300 per working day. What use is made of these? The cost of all this to the regulated entities and so to consumers and clients is huge. Let us suggest that each SAR costs £250; that would create a total cost of £143 million for the sector, its customers and clients. Interestingly enough, that is almost exactly the same figure as the total money recovered by the National Crime Agency, cited in the same report, which was £150 million. Therefore, there is equality of cost, and there really seems little benefit at present.
However, to suggest that the system needs an overhaul and pandemonium breaks out. As the NCA report says,
“SARs intelligence has been instrumental”—
note the word “instrumental”—
“in locating sex offenders, tracing murder suspects, identifying subjects suspected of being involved in watching indecent images of children online and showing the movement of young women being trafficked into the UK to work in the sex industry.”
There is no mention at all of financial crime, but the clear inference is that if you wish to challenge the SARs regime, you are abetting these appalling crimes. No wonder that people are nervous about challenging the status quo.
Finally, all this feeds into the compliance departments of regulated firms. For the past 14 years, I have been the treasurer of the All-Party Group on Extraordinary Rendition. I remain extremely supportive of the group, but I would ask for a change, and I am pleased to say that the noble Baroness, Lady Kramer, has kindly agreed to take over. Accordingly, she will take over the bank account of the group and will assume signing authority. The fact that we are both politically exposed persons—PEPs—is causing enormous difficulty. It could be argued that the noble Baroness and I could use the APPG’s bank account for money laundering and financial crime generally, but the fact that we have fewer than 20 transactions per annum would suggest a limited scale for what we are going to do. However, it is clear that the noble Baroness and I will be faced with a paper trail of considerable proportions. It is this sort of mindless form filling and box ticking that is being repeated millions of times over and somebody, somewhere, needs to be charged with addressing this problem.
I turn finally to Amendment 106. It has the specific purpose of trying to improve London’s competitive position by removing, wherever possible, the obvious inequities, unfairnesses and inappropriateness of a one-size-fits-all approach by the regulators and creating in its place a regulative framework that is appropriate and effective as regards those to be regulated.
This amendment concerns the insurance sector, which is a key part of the UK’s financial services industry, and I have been helped with the wording of this amendment by the London Market Group. The group brokers in the main deals of sophisticated corporate clients, who have professional advisers at their disposal. As the FCA’s own wholesale insurance broker market study in 2019 demonstrated, these clients seek the services of a London market broker not because they are want to manage issues caused by information asymmetry—something that we have heard about already this afternoon—but because they recognise that the advanced expertise housed within broking firms can assist them in reaching the optimal outcome for their risk-management programmes. They are not consumers, but they need protection in the way that individual or less sophisticated corporate customers may do.
However, the FCA makes almost no distinction between the way it supervises the London market broker, active in the specialty markets in London, and the way it supervises a retail insurance broker dealing with an individual’s domestic and motor insurance requirements. Amendment 106 is drafted to ensure that that there are no regulatory loopholes that the mal-intentioned can exploit by those with malefic intentions. Proposed new subsection (2)(c) makes clear the distinction between retail and professional clients, while subsection (2)(d) asks whether the client has professional advisers and whether they are PRA or SCR regulated; and importantly, subsection (2)(e) covers any potential impact on the UK’s financial stability.
This amendment does not break new ground because the concept of the experienced investor is already well established. Those who qualify in this category can be offered opportunities to participate in new issues and refinancings with the minimum of fuss. Such a minimalist approach would never be appropriate for the general public. That is the approach the amendment adopts as regards the insurance industry. It makes a clear distinction between the different requirements of the professional and the general client. I hope that my noble friend will be able to give this amendment a fair wind.
My Lords, in participating with pleasure in this group of amendments, I declare my interests as set out in the register. I congratulate my noble friend Lord Blackwell on how he introduced the group and I agree with everything that he said—and indeed what is contained in the amendment tabled by my noble friend Lord Bridges.
I also endorse what my noble friend Lord Blackwell said on our view of the Basel framework, not least in terms of the issue of software. This is an excellent example of our move towards standards which really deliver, rather than standards which are perceived to be but are not necessarily higher or greater than other regulatory frameworks.
I entirely agree with the comments of my noble friend Lady Neville-Rolfe on the competitive approach that the FCA has taken to the regulatory sandbox. No greater compliment could be paid to that sandbox than the fact that it has been replicated more than 80 times around the world. We need to push forward in this vein of competitiveness and enable that sandbox to be there all the time for all comers, and similarly push forward on the need for a growth box—more of which in later amendments in forthcoming days.
I also encourage my noble friend Lord Trenchard: if I can tempt him to speak after the Minister, I think the Grand Committee would benefit from and welcome hearing from him, with his vast experience over many decades.
I turn to my amendments in this group: first, to Amendment 113, the review of financial services regulations. It seems an opportune time to look across financial services regulations and the totality of the rulebooks of the regulators, not least the FCA and PRA. I have not suggested an exhaustive list of the regulations and rulebooks that should be reviewed, but I thought it would be helpful to give a number of examples of where it seems sensible to conduct a review post Brexit and as we move to our own regulation of our financial services industry.
First, there should be proportionality. It should be a general rule—any regulatory framework should stack up to this, not just in financial services—that regulation should do exactly what it is intended to do and no more. Economic growth should always be implicit within regulation as well. If there needed to be a greater illustration of this, the current Covid crisis is most certainly it: a horrific health crisis alongside an economic crisis. We will need economic growth wherever it comes from. It is not just about preventing regulations stymying economic growth; they should be considered in the light of everything they can do to encourage, enable and unleash economic growth.
Finally, in some ways the most important element of my amendment is proposed new subsection (2)(c) on innovation and competition. The competition point has been eloquently and extensively made by most previous speakers. I included innovation because of the environment which we are currently in: the foothills of the fourth industrial revolution. We have fabulous competitive advantages in areas such as artificial intelligence, distributed ledger technology, the internet of things, data and so on. Regulations need to be understanding of this environment, enabling it and empowering all those elements of the fourth industrial revolution. If we needed any greater example, although not a direct comparator, we should look at the approach taken to regulation in the mobile telephony market and the positive results for the UK that came out of it; there are many learnings within that.
Amendment 114 is largely a probing amendment to unpack the whole issue of the payments market and to look at what can be done—again, in many ways, harking to the technologies of the fourth industrial revolution—for strong customer authentication, not adding increasing compliance burdens but starting from a position of what is required, what attributes one would need to rely on and what is the optimal way of achieving them. It should be in a way where it can all be done in real time, rather than, as all too often in the current system, a payment being made without necessarily knowing much, if anything, about where it is going—and, indeed, to whom.
Similarly, I would welcome my noble friend the Minister’s comments on the capital and liquidity requirements of the entities at the two ends of the payments landscape. As I say, this is a probing amendment at this stage, but there is a large potential for transformation in this world, putting together what has already been said about competitiveness, the economic opportunity for the UK and all the elements of the fourth industrial revolution that we have to bring to bear. Yes, that applies to financial services but, again, it also applies right across our economy.
My Lords, Amendments 2, 6, 7 and 87 seek variously to urge the FCA, the PRA and the Bank of England to take into account the competitiveness of the United Kingdom. This is a dangerous concept that can only harm Britain and our collective national security and well-being. Competition implies people winning and losing, trying to beat down others to push ahead of them, taking risks and cutting corners. We all know where that ended up in 2008.
Instead, we should aim for a more secure financial sector that provides more useful, effective and safe services to individuals and the real economy. That would have a global benefit. If we have a decent financial sector with good standards across the globe, everyone wins. If we treat this as a zero-sum game, we lose and the world loses.
The noble Lord, Lord Hodgson of Astley Abbotts, spoke—complained, it would be fair to say—about regulators being, by their nature, risk-averse. Well, I, like many other Britons seeking to avoid a replay of 2008, applaud that existing risk aversion and seek to strengthen, not weaken, it. Competitiveness has been, and continues to be in the calls of many, exactly comparable to downgrading. That includes relaxing capital requirements for financial institutions; reducing enforcement of criminal behaviour by financial actors, creating tax loopholes for billionaires or multinational corporations; and having weak competition policy that allows a small number of firms to dominate markets and exploit British consumers, workers and taxpayers. This all reflects the model of free ports that the Government seem so keen on.
The winners in this race are plutocrats and giant multinationals. This kind of competitiveness is fundamentally anti-democratic and profoundly destabilising in its contributions to inequality. Trickle-down economics have long been discredited; financial services that concentrate money in the hands of the few only harm the rest of us. I note that Amendment 3 in the name of the noble Baroness, Lady Bowles, tries to provide a form of insurance, as she outlined, but the best answer, as the noble Lord, Lord Sharkey, said, is not to insert “competitive” into the Bill at all.
The last global financial crisis was substantially the fruit of competitive financial deregulation in Britain and elsewhere, as Britain and other countries increasingly relaxed rules to attract capital, thus allowing financial actors to take highly profitable risks at the great expense of the rest of us. Separately, Britain has abjectly failed to prosecute money laundering via the City of London. Non-enforcement is a deliberate competitive strategy used by many tax havens. This corrupts our institutions and gives potentially hostile secret actors leverage over our economy and politics.
In short, we need an upgraded financial system, with tighter controls and a demand that it meets the needs of individuals and the real economy, as our debate on the first group of amendments focused on. This would support the financial integrity of our systems and benefit the UK economy, particularly our security and ability to meet everyone’s basic needs. A system driven by competitiveness benefits a few at society’s expense—that is, at the expense of small and medium-sized enterprises, even larger enterprises, and the vast majority of individuals.
There is also an important regional aspect to this inequality. A competitive financial system will benefit wealthy parts of London while harming Britain’s struggling regions. A better, upgraded financial system, spread out around the country, with local banks meeting local needs securely and safely, would be a significant improvement indeed.
The idea of competitiveness ensures that costs are spread across the majority of the UK population, with lost tax revenues and financial crises, while the benefits are realised in corporate headquarters mostly in the wealthy parts of London, overseas and, very often, offshore. No strategy that seeks to level up the regions based on a “competitiveness of the financial sector” agenda can possibly succeed.
We will come later to my Amendment 123, which starts from an extensive analysis of the “finance curse” and calls for an impact report on the costs of the financial sector—something I do not believe the Government have any kind of handle on, despite the hard work of a small number of underfunded campaigners and academics. A large body of cross-country evidence from such radical organisations as the IMF and the Bank for International Settlements shows that there is an optimal size for a country’s financial sector, where it provides the services that an economy and population need. Expansion beyond this size causes damage, increases inequality, boosts criminal behaviour and creates many other ills. We need a safe, balanced financial sector that does not suck in skills, resources and capital, taking them away from the businesses that need our essential—and currently often badly served—needs, whether food security or construction, public transport or care.
We are not Tudor buccaneers, whatever some members of our governing party might think. We live in an unstable, insecure world buffeted by environmental, economic and social shocks. We are seeking a new place in the world—we have much talk of global Britain —so it is worth thinking for a second about what the world sees when it looks at the UK financial sector. I looked through a report from the Tax Justice Network in 2019, which noted:
“The UK with its ‘corporate tax haven network’ is by far the world’s greatest enabler of corporate tax avoidance”.
I note figures out just overnight from the Jubilee Debt Campaign, which show that of the debt owed by 73 countries eligible for debt relief under the G20 initiative, 30% is owed to private lenders in the UK. If we want a respected, admired place in the world—something that could be only to our benefit—then an outsized financial sector, one “competing hard”, will cost us dear.
I will speak briefly to Amendment 102 in the name of the noble Lord, Lord Tunnicliffe, which importantly promotes transparency about how the Government seek to direct our international oversight and financial governance. I also express very strong support for Amendment 121 in the name of the noble Baroness, Lady Bowles of Berkhamsted, which refers to country-by-country reporting. We know that giant multinational companies shuffle money around like a fast-moving, shady casino dealer, making their profits in one place but seeking to shift them to places competing—we are back to that word again—on the basis of minimal regulation and taxation. Who then pays for the schools and hospitals their customers need? Who pays for the maintenance of roads, the police, the courts? They take their profits and run, and the rest of us pay.
The noble Baroness, Lady McIntosh of Pickering, has scratched from this group so I now call the next speaker, the noble Lord, Lord Mountevans.
My Lords, I support Amendment 2. The strength and robustness of the UK’s regulatory regime is vital to the health of our financial services sector. High-quality regulation is part of the attractiveness of the UK for inward investment and is crucial for enabling access to other markets; it is a competitive strength. It would be helpful for the Bill to signal an ambition in line with the Chancellor’s Statement in the other place on 9 November 2020 for the UK to become more globally competitive and have a long-term, ambitious strategy for financial services. The Chancellor’s Statement was a welcome signal of the kind of direction the industry is seeking.
The Bill should not be considered in isolation. The UK is undergoing broad developments in regulation: the Treasury’s future regulatory framework review, for example, will shape the UK regulatory framework for financial services and indicate how the sector needs to adapt to the UK’s new position outside the EU. This review is an important stage in the redesign of the UK’s regulatory regime and will play a key part in making the UK more globally competitive and attractive to international firms.
The review, and the Bill, are part of a much larger range of activities which require scrutiny. The development of the UK’s regulatory regime should be done holistically, taking account of a range of competitiveness drivers. The addition of a competitiveness factor will help to ensure that our regulators have regard to the effects of their regulation, as well as giving them flexibility to react to developing trends and help make the UK’s regulation robust, as well as globally attractive.
Global regulatory coherence and co-operation is more important than ever. It is through the development and implementation of global standards that the industry can support the global economic recovery from Covid-19 and enable investment into priority areas such as green finance and digitisation. A global and co-ordinated approach to regulation makes risks easier to manage and supports greater financial stability. The UK’s new regulatory regime must maintain the highest of global standards to maintain the sector as a strategic national asset and ensure robust capital markets. Strong standards attract business to the UK and give UK businesses better access overseas. The noble Lord, Lord Blackwell, elected to avoid rehearsing the statistics, which I hope we are all familiar with, so I will do the same. However, the facts speak for themselves about the need to ensure that the UK remains globally competitive in this sector.
Some in the House will know that I served a year as Lord Mayor of London. During that time, acting as an ambassador for British business of all types, the challenges to the UK’s position as a centre for financial services, as well as the undoubted opportunities which that position provides, were clear. Other centres have a constant eye to their global competitiveness. The noble Lord, Lord Holmes of Richmond, noted the significance of innovation; I am focused on the importance of innovation and am pleased to report that research published this month by the City shows the UK is a global leader in this area. The same research indicates that in terms of having an enabling regulatory and legal environment, the UK comes in third place, after Singapore and Hong Kong. Now is the right time to ensure that the UK has competitiveness hardwired into its regulatory arrangements.
On SMEs, in November Mr Sam Woods, the Bank of England’s deputy governor for prudential regulation and, as your Lordships will know, chief executive officer of the PRA made a Mansion House speech—or rather, since we are living in the era of Covid, a Mansion House-labelled e-speech—in which he highlighted the importance of designing a proportionate “strong and simple” prudential regime for small firms. Moves such as this are important because they show that regulators have an eye to their rules working in a way that supports competition, which I detect as the underlying theme of this clause.
My Lords, I draw attention to my interests as set out in the register. I recognise that these are probing amendments, but I exhort my noble friend the Minister not to underestimate either the strength of feeling on the question of international competitiveness or its importance to a sector vital to our economic recovery, as my noble friend Lady Neville-Rolfe stressed in her impressive speech earlier in this debate. The foundation stone for the regulation of financial services is still FiSMA—the Financial Services and Markets Act 2000—albeit in a form substantially amended by subsequent legislation. As the noble Lord, Lord Eatwell, reminded us, the regulatory structure is currently subject to a fundamental review.
The financial services future regulatory framework review and phase 2 consultation closed at the end of last week. The early indications of a general direction of travel are welcome. The original version of FSMA set out those four clear objectives for the new Financial Services Authority, the FSA: market confidence; public awareness; the protection of consumers; and the reduction of financial crime. In addition, the FSA was required to have regard to a number of other considerations, which included such obvious factors as efficiency, proportionality and innovation. They also included, as the noble Lord, Lord Sharkey, reminded us—and I quote verbatim
“the international character of financial services and markets and the desirability of maintaining the competitive position of the United Kingdom”
“the need to minimise the adverse effects on competition that may arise from anything done in the discharge of those functions”.
As other speakers have reminded us, after the crash of 2008, the incoming coalition Government inherited a severe recession and an unstable and untenable financial situation. They therefore undertook a deep consideration of regulation. In the debates in another place on what became the Financial Services Act 2012, concerns were repeatedly expressed to the effect that regulation under the FSMA had been not so much light touch as soft touch. Since 2012, the entire financial services sector, broad and diverse as it is, has effectively been punished—put into the naughty corner, as it were —almost entirely because of the alleged failures of the banks. The regulatory brush used was simply too broad and therefore not fit for purpose. The requirement to take account of international competitiveness was jettisoned because, it was argued, it might dilute the robustness of regulation.
I have also taken a close look at the Second Reading debate on the then Financial Services Bill, on 11 June 2012, in which one colleague after another raised this question of competitiveness, including my noble friends Lord Trenchard, Lord Hodgson and Lady Noakes. So this is a “Groundhog Day” debate, but I hope no less persuasive for that. My noble friend Lord Trenchard certainly wins a prize for consistency and constancy, because he eloquently argued that day:
“Some of us believed that competition and the competitiveness of our financial markets should have been made an objective of the FSA rather than merely one of the principles to which it had to have regard. I welcome the fact that the FCA is given a competition objective in the Bill, but it is inadequate in that it falls short of a responsibility to maintain or enhance the competitiveness of the UK’s financial markets”.—[Official Report, 11/6/12; col. 1245.]
As both the Association of British Insurers and the London Market Group have rightly pointed out, promoting the international competitiveness of the UK financial services sector to nurture its contribution to our economic strength must now be restored to the objectives of the regulators. This would bring our regulators into line with other, competitor jurisdictions, such as Hong Kong, the United States, Singapore and Australia. In its phase 2 consultation paper, the Government explicitly acknowledge:
“A gap in the original FSMA model is that, while it set high-level general objectives and principles, it did not provide for government and Parliament to set the policy approach for specific areas of financial services regulation.”
A move towards increasingly activity-specific regulatory principles is helpfully adumbrated, as my noble friend Lord Blackwell pointed out, ahead of the outcome of the FRF consultation, in Schedule 3 to the Bill. This would require the PRA, when considering capital requirements regulation, to have regard to
“the likely effect of the rules on the relative standing of the United Kingdom as a place for internationally active credit institutions and investment firms to be based or to carry on activities.”
This seems a welcome step back towards an old principle and, quite possibly, a Rubicon of significance crossed—or, more accurately, re-crossed. On that basis the Bill, while welcome in its own terms, is merely the beginning of a vital process which will determine the character of the post-Brexit UK financial services sector, potentially for a generation or more.
Once the results of the consultation have been digested, I hope to see far more acknowledgement in regulation of the great differences that exist between different elements of financial services, along with an explicit recognition that our international competitiveness matters. It is entirely spurious to claim that a regulator mindful of international competitiveness is likely to be a weak regulator. It could and should be a very effective one indeed.
As the noble Lord, Lord Mountevans, has just pointed out, our competitiveness relies on our strength. Our greatest strength is surely our reputation for providing the best advice and the best products at the best price, something no regulatory race to the bottom could ever deliver. If we really have the ambition to become the global centre for insurance and financial services—a realistic ambition, I argue, if we work together to deliver upon it—then we simply must get this right. I very much hope that the Bill does not go down as a missed opportunity.
My Lords, inevitably with so many amendments to one Bill, this group is something of an omnibus collection. I have some sympathy with some of them—for example, the country-by-country reporting amendment tabled by the noble Lord, Lord Tunnicliffe. While I disagree very much with the noble Lords, Lord Hodgson and Lord Holmes, on their overall support for an international competitiveness objective in other areas, they are pointing out a need for the regulator to look again at issues such as proportionality and how to adapt to the new digital world. However, that does not seem to need to be put into law. This is really advice to the regulator, and I hope that they will take a great deal of that good advice on board.
I want to reply to the noble Lord, Lord Hunt, because he echoed an opinion raised by the noble Lord, Lord Blackwell, but very effectively countered by my noble friend Lady Bowles. He talked about activity-specific regulation creating the opportunity for some significant divergence in the regulatory environment. The lesson of 2008 was that the financial services sector is linked systemically. As my noble friend Lady Bowles pointed out, the crash in 2008 started with largely fake and junk mortgages in the United States. It worked its way into various securities instruments that were sold to people in the UK who did not understand them, but should have.
The underpinning consequences of risk were also completely misunderstood. The way that derivatives were traded and structured created a potential risk of losing liquidity overnight. This is exactly what happened with the high street banks in the UK. They became competitive with others in the financial sector to develop the kinds of profits that they saw being made by rival companies, pushed their credit standards to the point where, frankly, they were no longer standards, and chose methods of funding themselves that made them vulnerable to any volatility in the overnight markets. This is not an industry in which we can separate the different pieces into silos. They are all interlinked and that must underpin any form of regulation that we have.
Like others, I and my colleagues remain deeply suspicious of any amendments that put an obligation on the financial regulator to support an international competitiveness objective. When the change was made in 2012 to remove the relevant “have regard” it was not done lightly. It was done because one could trace the impact that that had had on regulatory decision-making and, indeed, some regulatory deference. It was removed because it was a threat to financial stability in the UK and to the role of the regulator, which surely has to put financeability first and above all else.
I ask this Committee not to indulge in short memories, since this country is particularly vulnerable to failures in financial services. No other country depends for so much of its economic prosperity, its jobs and its tax revenue on the financial services sector. We saw that graphically in 2008 and the years that followed: we were hit the hardest by far. Risk for us has far greater consequences than it might do in many other countries.
I am sure that if the noble Lord, Lord Blackwell, were able to respond and if the noble Lord, Lord Bridges, were here—I understand perfectly that he has a very good reason for not being present—they would probably say that the industry learned its lesson after 2008 and changed its culture. They might argue that the regulator now has many more powers. To some degree that is, indeed, true. But I am very conscious, and I know that I sometimes refer to it too often, that those two years on the Parliamentary Commission on Banking Standards really scarred my mind and my thinking. Leading figure after leading figure in banking came before that commission—anyone is welcome to go back and read the verbatim testimony—and sought to escape any form of personal responsibility. They pretty much argued against any remedy, whether it was around the issue of personal responsibility, higher capital requirements or ring-fencing. It was absolutely clear that they and those who would follow them into those institutions would seek to undo any constraint as soon as they thought they could manage it—as soon as memory faded.
I want to point to something that the noble Lord, Lord McNicol, said in a previous cluster of amendments: that so much money washes through the financial sector that the temptation to push boundaries is palpable. It does not mean that there are not good people in the industry; of course there are, and we are all very grateful for that. However, over time, charismatic and seemingly short-term successful individuals have a long history of being able to take the industry to a point of risk that no one would ever have accepted had they sat down and explicitly defined where it all was going.
We do not have a good history of regulators standing up to the big institutions. Again, go back and look at that testimony: it is underpinned by deference. On the previous set of amendments I believe that the noble Baroness, Lady Penn, talked warmly of the tool that the FCA has in the form of the senior managers and certification regime. She is right: if that were used properly, it would be some tool. However, if we look at the ways in which the FCA has chosen to use that, it is so rare for it to turn and exercise the standard of “fit and proper” which in effect removes a chief executive from office because of regulatory failure. Within the industry, that standard is now regarded as essentially non-threatening. It is not that the regime does not do some good things—it pushes various institutions to create some internal systems that, one hopes, make risk more explicit and deal with issues around whistleblowing but, in terms of having the authority that I think so many of us hoped it would have, that is now long gone.
This is still true. One of the most damning descriptions I ever heard of UK regulators—in contrast with, for example, the US regulator—is that when a US regulator comes to an institution, that institution is in fear; when a UK regulator comes to an institution, people go and make tea. It has not proved the strong resource we all hoped for in disciplining the industry.
I take very strongly the position that we must not put any regulator, even a strong one, in a position where it is basically being told by the objectives that it can, without parliamentary intervention, set out regulations to match the weakest practice evident internationally. We also have to remember the other recommendations for accountability the Bill puts forward. A lowest common denominator strategy is not acceptable. Very unfortunately, this language, combined with the lack of parliamentary accountability in other parts of the Bill, would allow one to happen. We have to take a very strong stand.
My Lords, I will begin by speaking to Amendment 102 in my name and that of my noble friend Lord Tunnicliffe. It is a probing amendment and seeks to persuade Her Majesty’s Government to spell out their priorities as a participant in international discussions on the direction and detail of financial services regulation. After all, at the very heart of the Bill is legislation covering a wide range of aspects of international financial regulation.
Her Majesty’s Government being clear about their priorities would greatly assist the Committee. After all, the Bill is about incorporating the conclusions of the Basel Committee on Banking Supervision into UK legislation. What could be more international than that: submitting British law to the decisions of a committee of which Her Majesty’s Government are not a member? That is a rather exotic interpretation of taking back control. It is also about the travails of equivalence and, as amendments in the group testify, the relationship between financial regulation and international competitiveness.
Yet we lack a clear statement of Her Majesty’s Government’s approach to international financial regulation, particularly on its future now that the UK has left the European Union. What are the Government’s regulatory priorities? What are their future plans? In the documents associated with the regulatory framework review, we are given some insights into the Government’s goal for the institutional responsibilities for regulation, but what is the policy framework, not the institutional structure, that will guide their proposed reforms? This probing amendment provides Her Majesty’s Government with the opportunity to clear some of the fog. If noble Lords are to scrutinise satisfactorily the Bill and the outcome of the regulatory framework review when it comes before the House, they need this comprehensive insight into the Government’s thinking.
If we look for the core of Her Majesty’s Government’s international regulatory policy, it is obvious from the Bill that much is to be found in the analysis developed by the Basel Committee. Yet, as is well known, it is European Union directives that most closely follow Basel proposals—exactly those directives from which the Government declare independence and their desire to diverge. However, divergence from EU directives will inevitably involve divergence from Basel. So what is it to be: acceptance or divergence? It would be hugely helpful if the Minister, in summing up, could clarify the position.
Then there is the role of the G7. Ever since the G7 Halifax summit in 1995, following the Mexican financial crisis of the winter of 1994, financial regulation has been an ever-present item on the agendas of G7 meetings. By the way, it is Halifax, Nova Scotia, just in case the people of Yorkshire think they missed something. Given that the UK is to chair the G7 this year, how will Her Majesty’s Government approach questions of post-pandemic regulatory reform now that the UK has an independent voice in these matters? What lead will Her Majesty’s Government provide as chair to our G7 partners on financial regulation?
The issue of country-by-country reporting referred to in the amendment is primarily a question of the taxation of large multinational entities, but there is an important echo of the country-by-country issue in the section of this Bill that deals with insider dealing and money laundering. At the heart of the problem of financial crime is the question of beneficial ownership: an area of regulatory policy within which, as the noble Lord, Lord Callanan—the Minister for Climate Change and Corporate Responsibility—admitted, our framework is “attractive to exploitation”. He is right. Knowledge of beneficial ownership is as fundamental to the prevention of money laundering as it is to the prevention of tax avoidance and evasion. I will return to this issue later in our deliberations. The important point that arises at this time is that this is but one more example among many of the lack of clear policy perspective on behalf of Her Majesty’s Government. I hope that the Minister will be able to respond to the probing amendment and outline that policy perspective.
I now turn to Amendments 2, 3, 6, 7 and 8, all of which deal with the relationship between regulation and international competitiveness. I find myself somewhat out of sympathy with these amendments, primarily because the manner in which the issue of international competitiveness is addressed in the current version of FSMA is about right. In it, competitiveness is already an operational objective of the PRA and the FCA. Given the performance of the City of London over the past 20 years, this objective would seem to have been comprehensively achieved. It may be that the proposers of these amendments fear that the competitive position of our financial services industry will be undermined by the UK having left the European Union, and they are now desperately trying to repair the damage. Let us all hope that they are mistaken. Of course, the key point in FSMA is that competitiveness is subordinate to ensuring that markets function well, as in the case of the FCA, and subordinate to the promotion of the safety and soundness of PRA-authorised persons, as in the case of the PRA. That is surely right.
Similarly, with respect to the attempt by the noble Baroness, Lady Neville-Rolfe, to insert by means of Amendment 7 a competitiveness objective into the Bank of England Act, I cannot agree that Her Majesty’s Government should be ready to rank competitiveness equally with the bank’s statutory objective: to protect and enhance the stability of the financial system of the United Kingdom. Should they be happy to pursue international competitiveness while putting family finances at risk? Should they be happy to pursue international competitiveness by putting the soundness of our financial institutions at risk? I believe not. The current hierarchy of regulatory objectives signals clearly where this country’s regulatory priorities lie.
Let us remember that one of the most overpowering advantages that can accrue to any international financial centre is the reputation that it is well and securely regulated. That is an accolade not to be sacrificed. As has been said already, the danger in these amendments is that of the lowest common denominator. For all the reference to high standards, it is international competitiveness that will be a primary statutory objective, equal to or even above the stable operations of the money markets or the financial risks to which the British people are exposed. That would be unwise.
I regret that I also have little sympathy for Amendment 87, proposed by the noble Lord, Lord Hodgson of Astley Abbotts. Benchmarking is in fashion these days. We are regularly told that one or other government service is world-leading or world-class; what we are not told is whether standards in the rest of the world are good, decent or disreputable, and whether our world-class performance is just a little bit better than good, decent or disreputable. Benchmarking the UK’s financial system against others that are seriously deficient is no goal at all. Why should we settle for a deficient regulatory system? Why not have one that is sound and successful on its own terms?
However, Amendment 106, also in the name of the noble Lord, Lord Hodgson, is worthy of careful consideration. It calls for recognition of the nature of financial products and clients within the regulatory framework. The key point that I believe the noble Lord wishes to incorporate in the Bill is that different financial activities carry different risks and hence should be regulated differently. This is the main point of Clause 1, of course, which excludes certain investment firms from the capital requirements regulation.
This amendment incorporates a widely held view. However, it goes a bit too far. Financial services are, by their nature, highly fungible. As the noble Baroness, Lady Kramer, pointed out, regulatory arbitrage is a fact of daily life. Activities that carry different risks one day carry the same risks the next. Even the customary distinction between retail and wholesale activities is far more permeable that its common use would suggest. After all, all transactions ultimately impinge on the well-being of some households somewhere. So although the amendment raises matters that must always be kept in mind, raising the differentiation of regulatory approaches to the status of an objective is a step too far.
Finally, the amendments in this group in the name of the noble Lord, Lord Holmes of Richmond, call for reviews of financial services regulation and the regulations relating to financial payments. Although the matters of concern raised by the noble Lord are worthy of consideration, I hope that they are just the sorts of issues being addressed in the current regulatory framework review.
This is an important group of amendments since most of them challenge the Minister to clarify the Government’s thinking following the UK’s exit from the European Union. I am sure that we all await the Minister’s comprehensive reply with considerable interest.
My Lords, I am grateful to all noble Lords who spoke in this debate, which has opened up an extremely important set of issues relating to the competitiveness of our financial services sector. I am sure we all recognise that the UK has long been a global leader in financial services; I am the first to agree that, as we adapt to our new position outside the EU and the opportunities that it brings, it is essential that we continue to provide the right environment to support a stable, innovative and world-leading financial services sector. That is why I embrace this opportunity to speak about this vital industry’s place in the world.
First, I remind the Committee of my right honourable friend the Chancellor’s speech last November. He was clear about the Government’s commitment to ensuring that the UK continues to be the most open, competitive and innovative place to conduct financial services anywhere in the world. I say in response to the noble Baroness, Lady Bennett, that the Chancellor could not have been clearer about the huge value of our financial services sector to the entire UK economy, including nearly £76 billion in tax receipts in the last financial year and more than 1 million jobs. At the very heart of this vision are the UK’s world-leading regulators: the Financial Conduct Authority, or FCA, and the Prudential Regulation Authority, or PRA. They are respected across the world for their expertise and thought leadership on the regulation of financial services.
I will now address the proposals that the amendments invite us to consider. Amendments 2 and 6 would introduce a statutory objective for the FCA and PRA to support the standing and competitiveness of the UK as a global financial centre. Amendment 7 would introduce a similar competitiveness objective for the Bank of England relating to financial conduct and prudential regulation. Amendment 87 has a similar purpose and would require the regulators to take international competitiveness issues into account when making rules, as well as reporting to Parliament on this and benchmarking the UK against other international financial hubs. The supplementary Amendment 3 seeks to explore what is meant by “high market standards” and to instigate a formal review of regulator activity every three years.
I listened with interest to the many good arguments from noble Lords in favour of including competitiveness as an element of the regulators’ statutory objectives. I have also listened to other contributions, including those from the noble Baronesses, Lady Kramer, Lady Bowles and Lady Bennett, and the noble Lord, Lord Sharkey, which reminded us of the need to be cautious. They also reminded us of the paramount importance of protecting the safety and soundness of our financial system, the integrity of financial markets, and of protecting consumers, as reflected in the regulators’ existing objectives.
Those two facets of the debate point up the critical balance that needs to be struck and the arguments that are necessary to build a consensus on the right approach for the UK’s financial services sector. This is a delicate calibration that needs a great deal of thought, which is why I say to the Committee that these are not arguments for today. The Government’s future regulatory framework review is considering how the UK’s financial services regulatory framework must adapt to reflect our future outside of the EU. That has to be the right place to consider issues such as the regulators’ objectives.
The noble Lord, Lord Eatwell, asked me for a few further details on the Government’s approach to an overall policy framework. Their proposed approach will involve putting new policy framework legislation in place for key areas of regulation and moving regulatory requirements from the UK statute book to regulator rulebooks. Parliament will have the final say on the approach adopted and how it is applied through legislation. The Government will bring forward further detail on our approach to implementation, and invite stakeholder views on this, in due course. We expect that applying the FRF approach to the full body of onshored EU legislation will take several years to deliver.
We are committed to full, timely and consistent implementation of the Basel regime. I refer the noble Lord to the Governor of the Bank of England’s recent speech, which I am sure that he has already read, which sets out examples of some departures from the EU approach that we are contemplating, one of which is to exclude the value of software assets in the valuation of bank capital.
In saying that, it is worth recognising that a competitiveness objective for the regulators would not be a silver bullet to maintain and enhance the UK’s competitiveness; it is also not necessary in order to develop it. A range of factors determine the attractiveness of our financial ecosystem and make the UK a leading financial hub. This includes access to highly skilled talent, access to a broad international investor base, and dynamism and innovation to give us a leading position in the markets of the future, including fintech and green finance.
In fact, I reassure the Committee that the Government are already taking action now to ensure that competitiveness is a core consideration in our approach to financial services, and a consideration of the regulators. In the prudential measures in this Bill, for example, the UK’s competitiveness is one of the issues that the regulators must have regard to when making rules in these areas. We really are not standing still in this space.
The Government have also kicked off a wide range of activity seeking to seize the opportunities presented by having left the EU. This includes the review of the noble Lord, Lord Hill, into listings to make the UK a more attractive location for companies to list and trade in, and the UK funds regime review, which is considering tax and regulatory opportunities to make the UK more attractive for funds. The long-term asset fund will encourage investment in long-term investment opportunities. The Solvency II review is seeking views on how to tailor the prudential regulatory regime to support the UK’s insurance sector. Ron Kalifa OBE is leading an independent strategic review to identify opportunities to support further growth in the UK fintech sector. The payments landscape review is seeking to ensure that the UK maintains its status as a country at the cutting edge of payments technology. The consultation on cryptoassets and stablecoins seeks to understand how the UK can harness the benefits of new technology and support innovation while mitigating risks to consumers and stability. The call for evidence on the current overseas framework seeks to ensure that our regime is coherent, fair and easy to navigate. I should also mention the independent ring-fencing review, which will consider the rules separating retail and investment banking activities and any impact that they may have on banking competition and competitiveness. I hope that this long list assures noble Lords that the Government are absolutely committed to protecting and promoting the competitiveness of our financial services sector as we seek to ensure that the UK continues to be the most open, competitive and innovative place to do financial services anywhere in the world.
Amendment 33 looks at this question from the other side of the debate. It seeks to probe the legal effect of the obligation placed on the PRA to “have regard” to the UK’s international competitiveness when making its CRR rules. I have already spoken about the UK’s status as a global financial services hub and the work that we are doing to maintain it. The Government want to ensure that the PRA has specific regard to those ambitions when implementing its Basel rules because, while the Government and the regulators remain committed to the full and timely implementation of Basel, now that we are outside the EU, we have the opportunity to implement these standards in a way that takes account of the specificities of the UK market.
That does not mean a regulatory race to the bottom. This requirement is entirely subordinate to the PRA’s existing primary and secondary objectives of promoting safety and soundness, and effective competition, respectively. Amendment 106 in the name of my noble friend Lord Hodgson would require the PRA and the FCA to consider when developing new rules the nature of a product or service being provided, the level of risk this entails for UK consumers and the level of sophistication of a client. This is a sentiment with which it is hard to disagree, but I do not agree that an amendment to this effect is necessary or would significantly alter our current approach to regulation.
When exercising their functions, both the FCA and the PRA are currently obliged to consider proportionality under their regulatory principles. For instance, one of the core measures in the Bill enables the introduction of a tailored prudential regime for investment firms. This regime—the IFPR—will account for differences in the size and business models of investment firms at its very heart. Only non-systemic investment firms will be put on this new FCA-regulated regime, while those that are of systemic importance will remain regulated by the PRA.
Given the size, complexity and global nature of our financial system, we must of course make sure that customers understand the risks of the financial services products that they use. Having left the EU, the Government believe that there may be opportunities for responsibly applying more proportionate regulation in some areas. For example, Sam Woods, CEO of the PRA, made the case last year for a “strong and simple” approach to the regulation of small banks.
I hope that noble Lords will take from these remarks that the Government are committed to exploring and embracing the opportunities we now have to enhance the UK’s competitiveness while remaining committed to the highest international standards of regulation.
Amendment 102 considers international co-operation on country-by-country reporting and other topics. It would require a report on the Government’s priorities as a participant in international discussions on the direction and detail of financial services regulation. The Government have set out the clear principles that define our international strategy. We believe in quality regulation based on international standards, and we believe in deference to the regulatory regimes of other jurisdictions where appropriate—that is, recognising that different regulatory regimes can achieve similar outcomes. This is the best way to deliver for all market participants. The Government want to ensure that our legislative and regulatory framework for cross-border financial services achieves the goal of attracting liquidity and activity to the UK while supporting financial stability and upholding our principle of openness in financial markets.
In relation to the co-ordination of regulatory efforts to tackle financial crime and its facilitation, the Financial Action Task Force is an intergovernmental body that develops the international standards for combating money laundering and the financing of terrorism and proliferation. The UK is a founding member of the FATF and is committed to following and upholding its standards.
This Government have championed tax transparency through initiatives at the international level and through domestic action such as the requirement for groups to publish tax strategies. In relation to public country-by-country reporting, the Government continue to believe that only a multilateral approach would be effective in achieving transparency objectives and avoiding disproportionate impacts on the UK’s competitiveness or distortions regarding group structures.
I turn now to Amendment 113, which would require a review of all financial services regulations, and Amendment 114, which would require a review of payment services. Although I am supportive of their objectives, the amendments tabled by my noble friend Lord Holmes of Richmond would duplicate a significant amount of work that this Government are already taking forward to take advantage of our new freedoms and ensure that our financial services regulation is fit for purpose—some of which I mentioned earlier in my remarks.
On payments, as I touched on earlier, the Treasury is presently conducting a payments landscape review that aims to ensure that the UK maintains its status at the cutting edge of payments technology. A call for evidence has already closed and the Treasury will respond to this in due course. The call for evidence set out the key drivers of new payment systems and services, including the broader trend towards new service providers and payment chains, and asked questions about the opportunities and risks they create and the next steps that the UK should take to ensure that it maintains its position as a world leader in payments networks. Given the significant work already under way on regulatory reforms in the financial services sector, and this Government’s commitment to continue to assess and review these regulations now that we have the left the European Union, I ask my noble friend not to move his amendment when we reach it.
I have given a long answer, but I hope that it has been helpful to the Committee. As I hope I made clear, I have some sympathy with many of the issues raised in this debate. Later, we will debate a group of amendments focusing on innovations in financial services so there will be an opportunity to return to the broad theme of this debate, but noble Lords should be in no doubt that the Government are committed to promoting the UK’s competitiveness and seizing the opportunities that Brexit can bring us—but doing so in a responsible and measured way. For these reasons, I ask my noble friend Lord Blackwell to withdraw his amendment at this stage.
I have received requests to speak after the Minister from the noble Viscount, Lord Trenchard, and the noble Baroness, Lady Neville-Rolfe. I call first the noble Viscount, Lord Trenchard.
My Lords, I am grateful to the Committee for once again permitting me to speak after the Minister. Even though I have my name to two amendments in this group, I had not realised that the procedural change that the House is about to approve at 8 o’clock this evening—which I think is rather strange—now prevents one from doing so unless one takes an additional step, in a narrow window, of specifically putting one’s name down to individual groups as well.
I had wanted to speak in support of Amendment 2 in the name of my noble friend Lord Bridges of Headley, as moved so ably by my noble friend Lord Blackwell, and to Amendment 6, ably moved by my noble friend Lady Neville-Rolfe. I thank my noble friend Lord Holmes of Richmond for his kind words, and most heartily thank my noble friend Lord Hunt of Wirral both for what he said and for quoting from my 2012 speech on this subject.
Your Lordships may wonder why I have added my name to two different amendments which seek to achieve approximately the same result. This is because there are many ways to raise the importance of competition and the competitiveness of markets, and I have in my mind some further variations of the theme. In any case, I strongly believe that we must move quickly to maximise the attractiveness of London’s markets to be sure that the City, including our wider financial services industry, will remain one of the truly leading global financial centres, with all that that means for our prosperity as a nation.
I had wanted to speak properly and fully within this debate but am now hesitant to do so, as I am sure my noble friend the Minister will appreciate. I had wanted to make several points, and wished to explain why I think the noble Lord, Lord Sharkey, the noble Baroness, Lady Bennett of Manor Castle, and, indeed, the noble Baroness, Lady Kramer, are so wrong in believing that the FSA’s having regard to competitiveness was a cause of the financial crisis, or that competitiveness, of itself, heightens inequality. Either Amendment 2 or Amendment 6 would be an improvement to this Bill. I would like to ask my noble friend the Minister which of the two he prefers, because they are not precisely the same. In any case, as my noble friends Lord Mountevans and Lord Hunt have said, there is strong expectation and hope that the Government will do more to secure the City’s future in relation to improving the competitiveness of the markets.
My Lords, I am grateful to my noble friend Lord Trenchard, and sorry that he was not able to enter the main list of speakers for the reasons that he stated. I hope that we will hear more from him in later debates but I also hope that he will take some encouragement from the actions that the Government are already taking to promote the competitiveness of our financial services independently of any conclusions reached from the FRF review. Those are proof of the Government’s commitment and intent to put actions where our words have been. I very much look forward to debating his ideas further in the course of these Committee proceedings.
I thank my noble friend the Deputy Leader for his full and courteous responses, which I shall read very carefully before returning to the issue at Report, as I think that there may be something missing in the Bill and that it would not be wise to defer the whole matter of the next set of financial services reforms. What in my noble friend’s long and helpful list assists smaller financial services businesses, which do not necessarily want to list on the stock exchange yet suffer the full cost and burden of FCA and PRA regulation as they struggle to do a good job for consumers and their clients?
My Lords, I can probably expand this answer to advantage in writing. The Government fully understand the disproportionate effect of some of our regulation on small firms, which is why we are looking critically at whether a more proportionate approach is available to us. It is probably best if I spell out our thoughts in a letter, which I would be happy to copy to all Peers in this debate.
I have received one additional request to speak after the Minister, and I call the noble Baroness, Lady Bennett of Manor Castle.
My Lords, I thank the noble Lord the Deputy Leader for his full response in our previous discussion, but there was one figure that he raised in that response that I wanted to ask him about the source of and justification for. That was the claim that the financial sector contributed £76 billion in tax receipts. I am basing this question on work done by a fellow Member of your Lordships’ House, the noble Lord, Lord Sikka, who may not be joining us until later—so I wanted to raise this point now. I understand from his work that this figure comes from a report prepared by PricewaterhouseCoopers and includes £42 billion borne by customers in the form of VAT and paid by employees in the form of income tax and national insurance contributions. The remaining £33 billion is an estimate, and the report says that PwC
“has not verified, validated or audited the data and cannot therefore give any undertaking as to the accuracy”.
Could the Minister tell us what further justification the Government have for that figure?
My Lords, I thank all who have spoken in this debate, and the Minister for the extensive replies. As he said, we have heard a lot of views, a lot of which I felt coincided with one another, at least in terms of what was said, more perhaps than appears in the amendments. Ultimately, a lot of the things that were complained against could be dealt with through proportionality. Yes, it is not competitive if the actions of the regulator are not proportionate—be that in rules or supervision. Therefore, I think there is less need to give a specific competitiveness mandate, because that confuses whether you are seeking something else on top. I refer to what the noble Lord, Lord Blackwell, said in introducing his amendment, when he said that these things were probably taken into account but not formally, or they would be taken as given in any other industry.
Who is assuming that they are not taken as given within this industry? The Government have the possibility of giving remit letters in the consultation that is ongoing. There is the proposal that there may be more remit letters. It is the place of government to say what it thinks of the economic position of competitiveness, but without binding the regulators. I think that probably is about right, while we continue to explore what has already been said is a new and more adaptive system, because it is only for the UK, where more proportionality can be exploited. We know that the regulators do not get it right and the noble Lord, Lord Hodgson, was able to seize the opportunity to remind us all of the politically exposed persons regime—with which we are all, unfortunately, very familiar—as an example of where the requirements in some instances greatly exceed what is necessary.
It has been a useful debate. The Minister reminded us that there are numerous sectoral reviews. I agree that those are necessary, but my amendment had something slightly different. It was saying that there should more oversight of what the regulators are getting up to on a regular basis rather than from time to time when things have gone bad. For now, I will withdraw my amendment. I do not expect to repeat this amendment but, as Members will already know, other amendments are coming up around review where I will wish to pursue that point further. I beg leave to withdraw my amendment.
Amendment 3, as an amendment to Amendment 2, withdrawn.
My Lords, I thank my noble friend the Minister for his very fulsome responses and other noble Lords for their contributions. In many of the contributions there was agreement that competitiveness was important for the financial services industry. I cannot agree with the noble Lord, Lord Sharkey, that because the House reached one view 10 years ago, we cannot learn the lessons and think again about this issue. Neither can I agree with the noble Baroness, Lady Bennett, that a smaller financial services industry that created less wealth would be beneficial for the UK.
However, I was very struck by the contributions from my noble friend Lord Holmes and others about the importance of innovation in the area of payments, among others. I am reminded that you cannot have innovation without some element of risk. This is an example of where, if there were no consideration of international competitiveness, there might be no reason for the regulators to allow any risk into the system. They would play completely safe, whereas a measured management of risk to allow innovation is important. You cannot innovate without risk. Financial services is not about eliminating risk but about managing risk. If it were about eliminating risk, no bank would ever grant any loan and no insurance company would ever issue any insurance policy. I think that is a good example of how innovation is an important part of competitiveness.
I was grateful to the noble Baroness, Lady Bowles, for her amendment on the definition of “standards”, on which we had a constructive debate. This is not about the lowest common denominator; it is about high standards, and she challenged how we define that. It cannot be about keeping every rule exactly as it is now; it has to be about outcomes, and I think everyone would agree that high standards must mean maintaining or improving standards of outcomes.
However, if you take the example that was given on the impact of SARs regimes or, indeed, the way MiFID is implemented, there will be many opportunities to improve the effectiveness of regulation to produce better outcomes. This will not necessarily involve keeping exactly the same rules and regulations; it will involve improving them. This comes back to the point made by my noble friends Lady Neville-Rolfe and Lord Hodgson: this is about the efficiency of regulation and doing it better, which is, and should be, the driving force for a more competitive regulatory regime.
I was grateful for the Minister’s acknowledgement that the Government support promoting the competitiveness of financial services. I note his comments that this needs to be balanced against other objectives; I simply say that it is not balanced if the objective is completely missing—it has to be there so that it can be balanced. He made the point that, rather than introducing this measure now, he would like time to consider it in the policy framework. I and other noble Lords will need to reflect on that and what words of assurance he can give us, as the Bill passes, that there will be a commitment to do something about competitiveness as an objective. However, in the meantime, I beg leave to withdraw Amendment 2.
Amendment 2 withdrawn.
Amendment 4 not moved.
5: Before Clause 1, insert the following new Clause—
“Non-exploitation of consumers or small businesses
(1) The Financial Services and Markets Act 2000 is amended as follows.(2) In section 1C (the consumer protection objective), after subsection (2)(e) insert—“(ea) the general principle that firms should not exploit a consumer’s or small business’s vulnerability, behavioural biases or constrained choices;”.(3) After subsection (2) insert—“(3) Exploitation under subsection (2)(e) includes, but is not limited to, situations where—(a) there is a system of conduct, or pattern of behaviour, that relies upon unequal power between the parties to impose disadvantage on consumers or small businesses or gain advantage for the larger party;(b) notice or other compliance terms are imposed which make it impractical for consumers or small businesses to comply;(c) there is use of notice terms to coerce consumers or small businesses into unfavourable contracts;(d) conduct by a supplier causes a consumer or small business to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; or(e) there are risks that the supplier should have foreseen would not be apparent to the customer or small business.In this section, “small business” is as defined in Part 15 of the Companies Act 2006 (accounts and reports).””Member’s explanatory statement
This amendment is to protect consumers and small businesses from exploitation.
My Lords, Amendment 5 builds upon Amendment 4, tabled by the noble Lord, Lord Tunnicliffe, which was discussed within the first group and in turn built upon Amendment 1, moved by my noble friend Lord Sharkey. I will not revisit the “duty of care” part of the amendment, as it has already been well discussed, but the point about Amendment 5 and the similar Amendment 73 is to bring small businesses within the non-exploitation principle—defined by the noble Lord, Lord Tunnicliffe, in his amendment—and to highlight some things that regularly happen in contractual terms and which can be exploitative. Amendment 73 is more explicit and would allow the FCA to intervene where there is “Unconscionable conduct”, even if a consumer or small business has entered into a contract.
The issues that are highlighted as wrong behaviour, although within an exemplary list, are: patterns of conduct that rely “upon unequal power”; terms of notice
“or other compliance … which make it impractical … to comply”;
“of notice terms to coerce … unfavourable contracts”;
compliance terms that are “not reasonably necessary”; and risks that the larger supplier should have realised would not have been
“apparent to the customer or small business”.
This is not a random list of points—there are rather more in my Private Member’s Bill on the same subject—but a key list of matters that were used by GRG in the exploitation of small businesses, and which the FCA said it could do nothing about because they were outside the regulatory perimeter.
Once more I must look to other countries to see how we compare, and once more I find that Australia has tried harder. It has a general law of unconscionable conduct in commerce that deals with all these issues and more, and which extends to not only consumers but business to business. I do not know how many noble Lords read the various detailed contracts that one is forced to sign as an individual or small business to access almost anything nowadays. In the earlier group, these were similarly referred to by the noble Lord, Lord Eatwell. I have seen barely one that is reasonable. It is only getting worse as everything becomes a leased service rather than a product.
With these amendments I make the point for small businesses as well as individuals, and in the context of financial services, which are among the most fundamental of services, that bullying contracts must stop. They must be within the regulatory perimeter and the FCA must be prepared to intervene. Excuses about GRG and what the FCA did not do there hold no power. We saw what happened; we need strong measures that mean it must not happen again and that imitations of it must not be tolerated in day-to-day operations. I beg to move.
My Lords, I find myself in some sympathy with the noble Baroness, Lady Bowles, on Amendment 5 because this is a grey area where small businesses are perhaps not well served. My noble friend Lord Howe claimed, in his full and comprehensive response to the last debate, that this was not the right time or place to look at the regulatory objectives, as this would better take place under the Government’s future regulatory framework review. I would argue, in support of the noble Baroness, Lady Bowles, that small businesses are not well served by the current provisions. If you look at some of the work of the Financial Ombudsman Service, which the Committee has referred to, I would not hold out much hope for a small business claiming redress and a decision under that agreement. I would be delighted if my noble friend were to prove me wrong in summing up this debate.
Amendment 5, in particular, has strengths to commend it and I would very much like to lend it my support. I look forward very much indeed to hearing what my noble friend will say and whether the Government might look favourably on it, a lacuna having been identified in the regulatory framework.
I call the next speaker, the noble Baroness, Lady Bennett of Manor Castle. Baroness Bennett? We appear to have lost the noble Baroness, so if—
Apologies, my Lords, but I have sorted the problem out now. I speak briefly in support of Amendments 5, 73 and 95, in the names of the noble Baronesses, Lady Bowles, Lady Altmann and Lady Kramer. Although not a generalisation that is 100% true, the gender division of the people on various sides speaking on the Bill is interesting. It made me reflect back to the financial crash of 2007-08 and the role that the extreme gender imbalance in the financial sector was seen to have played within it.
When I thought to look at these issues about exploitation, unconscionable conduct, and legal protection against mis-selling, I went to the website moneysavingexpert.com. In a previous contribution, I referred to the role of such commentators who, using the power of public opinion, often seem to be a stronger check on the behaviour of the financial sector than the Government. But, of course, they are able to work only after the fact. Just looking down the list, we are talking about payment protection insurance, mis-sold ID fraud insurance, the mis-selling of package bank accounts and excessive charges on bank accounts—and that is just talking about individual consumers. A similar list would come up for small business. It is a long tale of woe that has caused a great deal of suffering and harm to individuals and small businesses, the operators of which have often put their whole heart and soul into the business.
What we seem to have now is a strategy of shutting the stable door sometime after the horse has bolted, and after a long delay for debate and inquiry. All three of these amendments are a very strong bolt that we should be sliding home now to protect consumers and small businesses from the overweening, immense power of the financial sector.
My goodness, this has moved fast. My Lords, let me start by addressing Amendment 95, because it is in my name. It would give SMEs the right to sue in respect of all regulated financial services, not just banking. It would—and this is an important example—entitle them to sue for breaches of the rules relating to insurance, otherwise known as COBS, in respect of business interruption insurance policies.
Another big practical implication relates to the cross-selling of regulated products or services as part of the add-ons to a loan. In the swaps mis-selling scandal—I believe my noble friend Lord Sharkey mentioned this in his earlier list, when talking about a duty of care—over 40,000 swaps were sold to SMEs. The banks had broken the regulatory requirements in over 90% of cases. It is almost impossible to imagine that having happened if the banks’ legal departments knew that the banks would be sued by their customers as a result.
None of the SMEs that have taken swaps cases all the way to court have won. Judges have repeatedly said that, had the customer been able to sue for breach of the COBS rules, that would have made all the difference. The evidence is there in Green & Rowley v RBS, Crestsign Ltd v NatWest, London Executive Aviation Ltd v RBS, and Fine Care Homes Ltd v NatWest. Those cases and the other swap cases that failed at trial show that—even where a judge is convinced that the customer did not understand the product they were buying and even where the bank salesperson knew that the customer was relying on them to explain the product—the common law fails to provide the customer with a remedy. I realise that the swaps scandal is, hopefully, in the past but, without the amendment proposed, there is nothing to stop banks from perpetrating similar behaviour in future.
My amendment addresses only part of the issue of the limitations of the regulatory perimeter, which both my noble friend Lady Bowles and the noble Baroness, Lady Bennett, have discussed, and it is why I support Amendments 5 and 73 in the name of my noble friend. I find it ridiculous that the regulatory perimeter treats small businesses as, in effect, akin to multinationals in their capacity to understand financial products and fight on an equal footing with big institutions.
My noble friend Lady Bowles has cited the case of RBS GRG. For those not familiar with this case, GRG was the turnaround unit of RBS. A number of firms were persuaded to allow themselves to go into the turnaround unit even though they were both viable and paying their loans on time; but RBS believed that under the terms of their loan agreement they were at risk because the value of their assets had declined, which created a covenant default. In a remarkable number of cases, those companies that were viable and paying on time were made bankrupt, their assets were stripped after having been assessed at very low market values and—surprise, surprise—the bank was able some time later to sell those assets for a much higher value, thereby generating profits. It was indeed not just a turnaround unit but a profit centre.
After great pressure from Vince Cable, the FCA initiated an investigation. It asked a group called Promontory to produce a two-stage report: one to look at the case and the other to make recommendations. However, after the first phase of the report was complete, the FCA explained that it could not publish it as it contained commercially sensitive information, and it therefore produced a summary. Miraculously, the original report made its way into the hands of the Treasury Select Committee. This, to me, is almost the worst part of the story: the summary that had been provided by the FCA and the report itself did not match. There was essentially a whitewash of the conclusions of Promontory. The FCA may have disagreed with the report that it received, but that would have been a very different declaration.
We have talked before about the senior management and certification regime; the FCA could have used that regime to try to deal with senior management who had been involved in this entire process, but it chose not to. That, I am afraid, is the history of the use of the senior management and certification regime. However, my noble friend Lady Bowles could equally well have cited the HBOS Reading fraud perpetrated between 2003 and 2007, which I mentioned earlier. Six bankers ended up in jail for that fraud, but we are now in 2021 and fair compensation has not yet been paid to the victims. This is now a Lloyds problem and has been for some time.
We have been through multiple reviews and are now awaiting the work of yet another review of compensation, the Foskett panel, which hopefully will make sure the compensation is appropriate—but, as I said, it is 2021. There have been issues; for example, a whistleblower who examined who knew what and when has been compensated twice by Lloyds for retaliation against her. There is currently a review by Dame Linda Dobbs into who in senior management knew or ought to have known what was going on.
This kind of history is simply not acceptable, and it is a consequence of this extraordinary regulatory perimeter. My amendment does not deal with all that: Amendments 5 and 73 help that circumstance, but there is a fundamental issue at play here. The FCA has looked into the perimeter and will say that it has decided to treat micro-businesses like consumers. However, I believe, as do many others, that it needs to go much farther. It is particularly important at this time, as we are looking to many people as entrepreneurs and starters of small businesses to drive the recovery from Covid. Surely they ought to have the kind of protection that is necessary against a financial services institution that does not always have their interests at heart. As I argued at the beginning, they are far more akin to consumers than they are to multinationals, and that needs to be embedded in the way in which they are treated by the regulator. Of course, the financial services ombudsman can look at many of these cases but, by the time we get to that point, the mischief and damage has been done, and this is not the way to handle this underlying problem.
My Lords, faced with speaking on this group, I looked at the Bill as a whole and, to a surprising extent, there is little reference to consumers or people who depend on the banking sector. The failure to contain these areas was brought out by the first group of amendments, where there was a very strong thrust to require the sector to exercise a duty of care.
This group, which I support, seeks to isolate a singular problem and address it directly. It is a problem that is not just unfair but evil, and one we find across many sectors—the problem of bullying. In many sectors, size is an advantage, and because of that, a small number of firms grow to a large size. The problem with size is that it enables bullying; you find it in many sectors, including airlines and supermarkets and with Amazon and Facebook. The problem with bullying is that, used skilfully and ruthlessly, it enhances profit and, because it enables profit, it is pursued, often covertly. It is the classic example of why benign regulation is so important in our economic and financial landscape.
These amendments are a bold move to add to that benign regulation by directly addressing the evil of bullying. This will be good for individuals but also—and this is a very important point—for SMEs. I was at the large end of the scale, and we were able to see off any attempt at bullying because we were big enough and ugly enough to be able to fight the problem with an equality of arms. The problem with an SME—and often we are talking about individuals—is that the concept of equality of arms in the courts is almost impossible; they can easily use up their revenue for a whole year on one court case. These amendments address the issue together.
I know the Government are likely to say, “Not now. We will do it later. We are looking at another area.” That just cannot go on, and I urge the Government to think about these ideas and work out some way to introduce this. The banking industry, in particular, has an appalling reputation. The evil things it has done over the years are frightening. It is difficult to believe, in a sense, that those evils were done by malice; but it is very easy to understand how the opportunities present themselves to behave in this way and generate more profit, more praise and more reward.
My Lords, Amendments 5, 73 and 95 relate to the protection of consumers and small businesses against misconduct. The Government are committed to ensuring that consumers and businesses can use financial services and products with confidence and that there are appropriate protections in place.
Before I comment on the specific amendments, I want to take a moment to set out the wider context. The Government have given the FCA a strong mandate to prevent and take action against inappropriate behaviour in financial services, and it has a wide range of enforcement powers to protect consumers and small business. Noble Lords will appreciate that the majority of business lending is unregulated—that is what the amendments test and probe—but the Government are committed to providing appropriate safeguards for SMEs in accessing financial services, while seeking to avoid driving up the costs of lending and unnecessarily reducing affordable credit options.
In the UK, loans of less than £25,000 to small businesses are treated as regulated consumer credit agreements for the purposes of the Financial Services and Markets Act 2000. This means that most small businesses already receive regulatory protection. In addition, in April 2019, the remit of the Financial Ombudsman Service was expanded to allow more SMEs to put forward a complaint. This covers 99% of small businesses in the UK. If a complaint is upheld, the FOS could make an award of up to £350,000 in relation to acts or omissions that took place on or after 1 April 2019, when its remit was expanded.
Small and medium-sized businesses also now have access to the Business Banking Resolution Service, an independent, non-governmental body which will provide dispute resolution for businesses which meet the eligibility criteria. The BBRS will address historic cases from 2000 which would now be eligible for FOS but were not at the time, and which have not been through another independent redress scheme. It will address future complaints from businesses with a turnover between £6.5 million and £10 million.
It is with that context in mind that I turn to the specific amendments. Amendment 5 seeks to protect consumers and small businesses from certain types of exploitation by financial services firms providing services to those groups. It proposes imposing new obligations on the FCA when it exercises its general functions. However, it risks putting up the cost of borrowing and limiting the availability of products and services. For example, it could require the FCA to make rules creating additional safeguards designed to ensure that exploitation, as defined by the amendment, does not occur. Given the different levels of financial sophistication of different small businesses, the rules may need to be designed to protect those with minimal levels of sophistication. Given the potential complexity of such new rules, financial institutions may be more reluctant to lend to small businesses.
Amendment 73 would duplicate similar existing protections that I have previously outlined, in a way that could be confusing to consumers, SMEs and lenders. On the issue of unconscionable conduct, in response to the banking crisis and significant conduct failings, Parliament passed legislation leading to the FCA and PRA applying the senior managers and certification regime. The regime aims to reduce harm to consumers and govern market integrity by making individuals more accountable for their actions.
Amendment 95 would broaden the scope of those parties who can seek action for damages related to mis-selling of financial services. However, I argue that these changes are unnecessary, as businesses already have robust avenues for pursuing financial services complaints, which I have already set out.
The Government are committed to regulating only where there is a clear case for doing so. This is to avoid putting additional costs on lenders that could ultimately lead to higher cost for businesses; these would likely be passed on to consumers and could restrict access to affordable finance—a key Government priority.
The Government’s view is that each of these amendments risks duplicating the existing protections that I have set out, while also making lending to SMEs more complex, which could make it harder for them to access affordable credit. Our view is that the existing protections get the balance right between protecting consumers and small businesses and not unduly restricting access to affordable credit options. For these reasons, I ask that these amendments be withdrawn.
I have received one request to speak after the Minister from the noble Viscount, Lord Trenchard, who I now call.
My Lords, again, I am grateful to the Committee for allowing me to speak after the Minister. I will speak only to Amendment 73 because it introduces another subjective concept: “unconscionable conduct”.
I searched for instances of “unconscionable” on the FCA’s website and found only one: John Griffith-Jones, the former chairman of the FCA, for whom I have the highest regard, said in a 2014 speech:
“In 1951 in the Money Lenders Act we described a 48% interest rate as ‘unconscionable’.”
It occurs to me that, as recently as 2018, the main banks were charging 1p per £7 borrowed per day for arranged overdrafts. This was about 50% per annum, but it was not disclosed; indeed, when the banks stopped telling people what their APR was and instead started telling them what the fee per £7 borrowed per day was, this was welcomed by the FSA, which thought that requiring to tell consumers the real interest rate was unhelpful because they would not understand it.
Now that the banks have reverted to informing customers of real annual interest rates, albeit in very small print, the cost of an arranged overdraft has gone down from around 50% to around 40%, which is possibly still unconscionable in today’s world of negative interest rates. As such, I certainly do not think that we should rely on the FCA to decide what is and is not unconscionable. Does the Minister agree that the banks should make clearer what real interest rates on overdrafts are?
My Lords, clarity around all terms and conditions is, of course, to be welcomed. I agree with my noble friend that one challenge with these amendments is potentially introducing new concepts, which might need to be defined through regulation, where we think that there are existing protections in place and the effect could be duplicative.
My Lords, I thank all those who have taken part in this debate; it has been short but interesting, and I thank those who have supported the concept that I am trying to elaborate. What the noble Viscount, Lord Trenchard, has just said is probably true to some extent—why should we rely upon the FCA for this? It is true that this probably should be more of a general legal offence of unconscionable conduct, which is what they have in Australia. So there is no point trying to argue that, in a common law country with a similar kind of legal system, you cannot work out how it happens and whether it is effective: I can tell you that it is.
As the Minister elaborated, the problem with having a subjective measure—as the noble Viscount, Lord Trenchard, called it—is that you then have to put a whole load of rules around it. That is exactly the problem with the FCA. It has done it with the senior managers regime, something that I always understood Parliament wanted to be a subjective measure—that is, if you behaved badly and something happened on your watch, you were responsible. That has now been tied up with contracts approved between the regulator and the employees in the businesses. Instead of capturing the people at the top, it has pushed responsibility down the chain. The same has happened with “fit and proper”. The FCA has chosen to redefine what that means so it will catch only very extreme cases rather than bad behaviour.
I hear that the Government are unwilling to do something that really is just saying, “Behave yourself”. It should not be too expensive to make companies behave themselves. It should not be too expensive to make sure that there is a conscience and that you ask the questions we got to when we were discussing the duty of care: “Is this right? Is it within the rules? Can I pull a fast one here?” I am very disappointed by the Government’s attitude on this. I am grateful that some small remedies have been introduced but they are really not sufficient. They do not deter bad behaviour. It is still worth taking the chance, taking the risk and making the profit. However, for now, I withdraw my amendment.
Amendment 5 withdrawn.
Amendments 6 and 7 not moved.
We now come to the group beginning with Amendment 8. I call the noble Lord, Lord Stevenson of Balmacara.
8: Before Clause 1, insert the following new Clause—
“Duty of the FCA to make rules promoting financial wellbeing
(1) The Financial Services and Markets Act 2000 is amended as follows.(2) After section 137C, insert—“137CA FCA general rules: financial wellbeing(1) The power of the FCA to make general rules includes the power to require authorised persons to promote financial wellbeing of consumers in carrying out regulated activities under this Act.(2) The FCA must make rules in accordance with this power which come into force no later than 6 April 2022.””Member’s explanatory statement
This new Clause would introduce a duty to promote financial wellbeing for the FCA which would strengthen the FCA’s consumer protection objective and empower the FCA to introduce rules for financial services firms informed by that duty.
My Lords, with this amendment, we come to the end of the group of amendments that precede the Bill. This is another slightly detached issue that I hope will get a response from the Government. Amendment 8 is supported by the noble Lord, Lord Holmes of Richmond; I am very grateful to him for his support. His amendments on financial inclusion, which are also in this group, raise many similar issues. I look forward to hearing his comments and to the subsequent debate.
I declare my interest as a former chair of StepChange, the debt charity. Amendment 8 would place on the FCA
“a duty to promote financial wellbeing”—
a new term—
“which would strengthen the FCA’s consumer protection objective and empower the FCA to introduce rules for financial services firms informed by that duty.”
As I have already said, this is a probing amendment, seeking at this stage what I would describe as a high-level response from the Government. I am not looking for detail at this stage; it is really a question of whether there is merit in further work being done on this concept. If there is, I am looking for some pointers about how the Government would like it to go forward.
The background to this amendment is a suggestion from the Money and Pensions Service that there is a case for giving the FCA the power to nudge—its term, not mine—financial services firms to underpin their activities with regard to the financial well-being of their customers and to go beyond current considerations of consumer protection or vulnerability, which I think they have already adopted to some extent. The intention is to remove any asymmetry of knowledge, expertise and capacity between the service providers and their clients. It is a very ambitious goal and would take a lot of work across many sectors not normally involved in the consideration of financial competence.
During my time as the chair of StepChange, we used the term “financial inclusion” to cover the need to have a society where everyone felt that they were knowledgeable enough to be secure and in control of their financial affairs; indeed, we have used the term since then. However, if we change that to “financial well-being”, we go much further. We could say that the aim would be to have the knowledge, confidence and resilience for all in society to pay bills as they fall due, cope with unexpected shocks and plan across our assets and income over time for a healthy financial future right through to well after retirement.
It is a very ambitious and much wider term than “financial inclusion” or any amount of financial education. The importance of the term is that it better captures a life cycle approach to the modern needs for economic health, generating confidence and empowerment within the population at scale coupled with a financial services industry that goes well beyond just designing and delivering good products and excellent services—which we accept they do, of course. It all should be backed by a regulatory system with a holistic overview and the powers to match.
Is this just smoke and mirrors, or is it a realistic vision of the way that things might be? Whatever the case, it is a good time to ask the question. As we discussed earlier today, the FCA’s 2020 Financial Lives survey found that just over half of UK adults—24.1 million people, in its figures—display one or more of the characteristics of vulnerability to their financial situation: a health condition, negative life events, low financial capability or low resilience. Other surveys have already been mentioned. The Salad Projects’ report was mentioned by my noble friend Lord McNicol, and hopefully will be again when he comes to speak on this group. It shows the reality of coping with low incomes and why a shortage of low-cost credit is such a major issue for so many citizens who, even when in regular employment and often with blameless credit references, cannot find appropriate ways to cope with even the basic costs of living, let alone saving for a rainy day and retirement.
The Government are currently consulting on a phase 2 review that includes financial inclusion on the levelling-up agenda, but we also have some other material. As has been mentioned already, The Woolard Review: A Review of Change and Innovation in the Unsecured Credit Market is a major contribution to the understanding of this area; it will come up again in later amendments. There is a lot going on. With this probing amendment, I seek a sense from the Government of whether they accept the case for a broader approach to financial well-being being championed by the Money and Pensions Service and by some firms such as NatWest and Nationwide. In particular, do they accept that, whether or not a formal duty of care is placed on financial service firms—I would support this—the forms of regulation in this area need to be expanded to deliver what the FCA calls
“fairer outcomes for consumers, including support for customers with poor financial well-being that might extend well beyond simple commercial transactions”?
Thirdly, would they consider taking this one step further and seeing what would be required from other partners and agencies?
If we really want a system capable of helping consumers to develop the skills and confidence to interact with financial service providers, people must be secure in the expectation that, if they need help in managing their decisions on their finances, they will not be ripped off and that there will be quality support for them. We must also ensure that education, advice, debt counselling services and other things focus on helping all citizens to develop the skills and confidence to interact effectively with financial service providers—not only providing the products that they need over the life cycle but developing their skills and confidence about their financial well-being and empowering them to take control and plan what they want to maximise their resources.
This is a big agenda that probably also needs action on many other issues such as low-cost credit sources. However, at this stage, we need a clear signal from the Government about how far this issue can go and on what terms they would like to see further work done.
I beg to move.
My Lords, it is a pleasure to speak on this group of amendments. I congratulate the noble Lord, Lord Stevenson of Balmacara, on the excellent way in which he introduced the group. The concept of financial well-being is a growing area and there is a lot for us all to reflect on. I thank him for all that he has done in this whole area of financial well-being, not least during his excellent time at the helm of StepChange.
We should thank all the organisations involved in financial inclusion, not least Macmillan Cancer Support and the Money Advice Trust. They go to people who are at the sharpest end of financial exclusion, and their commitment and the briefings that they provide to parliamentarians are a credit to everybody involved in that space.
I turn to my Amendment 9 in this group, which would place a duty on the Financial Conduct Authority to work toward the objective of financial inclusion. In doing this, I seek to raise the whole level of financial inclusion across our regulators. The context has moved on significantly during the Covid crisis. People who, fortunately, have never had to think about financial inclusion or have never been at a loss as to where the next bill payment will come from find themselves very much at the sharp end of financial difficulty. Fortunately, in many of those instances, the Government have stepped in through the furlough scheme and the self-employed and business loan schemes.
The reality is that, in a broad sense, these are enablers of continued financial inclusion. I would argue that, in this new world, it is difficult to consider the concept of financial stability while we still have such issues around financial inclusion. Financial exclusion has dogged our society for decades. It ruins lives, paralyses potential and corrodes communities. This amendment would give the FCA the objective of considering the barriers, blockers and bias that continue to mean that people are shamefully excluded from mainstream financial products.
Similarly, in the second point in my amendment, I want to place a requirement on organisations
“to report on their use of financial technology to increase financial inclusion.”
Not for one minute do I believe that fintech is the silver bullet—I am well aware of the issues around financial and digital exclusion—but fintech must be part of the solution and must be turbocharged at all levels of financial services. It must be understood much better by HMT, as well as the role it can play in varying degrees across financial services. This was proven at the beginning of the Covid crisis when, in a matter of hours, various fintechs came up with innovative solutions to address some of the issues that then rolled out as the crisis developed.
Having a financially inclusive nation makes sense. Having a financial inclusion objective within the scope of the FCA makes complete sense. I hope that this amendment will add to all the extraordinarily good work that everybody involved in financial inclusion is currently undertaking.
My Lords, I thank the noble Lord, Lord Stevenson, and my noble friend Lord Holmes of Richmond for tabling these amendments and for the important debate that they have initiated this evening. Both have considerable expertise in the field; I am only sorry that we are not all here together physically and able to debate the issues in our Pugin corridors.
I accept that financial inclusion is important, given the difficulties that a failure to understand finances can cause anyone, and indeed everyone. However, to my mind, this ought not to be a matter for the FCA, which should focus its efforts on providing a good, strong, unbureaucratic regulatory regime that allows those providing financial services to flourish and serves consumers well. Rather, a basic understanding of financial matters should, in my view, be inculcated first in school. We all need to understand the basics of loans, interest, probability and risk, how to manage budgets and pay our bills, the risk of fraud, what to watch out for, the value of a pension and many other things.
We do good work on teaching children about climate change and digital, but financial education, economics and risk have a back seat, with a brief reference in the citizenship curriculum for 11 to 16 year-olds. They should be a central part of the curriculum. They could also be a focus in work-experience schemes. Employers can help through their training schemes throughout the life cycle, since skills in financial matters are important to well-being, and therefore to a successful and happy workforce. This is the logic of the earlier points.
In the 2019 Conservative manifesto, the Prime Minister said he wanted to ensure that every child had access to a great state school and that every pupil gets the qualifications they need for a prosperous future, while learning in an environment where they are happy and fulfilled. Some of that investment needs to go into educating our nation in financial matters.
I am not averse to financial services firms helping through their social responsibility programmes, but I believe these amendments take us down the wrong road. I have less concern about Amendment 134, which provides for a review. But, if that were to proceed, it would need to take proper account of the role of schools in financial education and financial inclusion.
My Lords, I will be brief, as I set out many of my concerns and issues when speaking earlier on the first group.
I support Amendment 8, proposed by my noble friend Lord Stevenson of Balmacara. Before I start, I would like to make the Grand Committee aware of my financial interests, as set out in the Lords register.
As touched on in Amendment 4 earlier, low financial resilience and overindebtedness are a huge problem for both individuals and the country at large. We should all do all that we can, especially under the current circumstances, to push back against those issues.
Either we are saying that there is a problem and we need to do something about it, or we are saying that there is not a problem and we just carry on as before. With the figures and the personal stories of overindebtedness and unaffordable, unsustainable financial predicaments, I believe that there is a problem that does need resolving.
The FCA recently found that the number of people suffering from low financial resilience had increased by one-third to 14.2 million people. That is one-quarter of the UK adult population. |In earlier amendments, we heard a number of noble Lords, and a little from the noble Baroness, Lady Neville-Rolfe, saying that any increase in regulations, bringing in a duty of care or a duty to promote financial well-being, was either not the responsibility of the FCA or, in some earlier comments, would put more costs on individuals in increased fees and on businesses with increased administration. I do not believe that that is the case with the amendment as laid out by the noble Lord, Lord Stevenson. If you look at the text of it—and I understand it is a probing amendment—you see that the power of the FCA to make general rules includes a power to require authorised persons to promote the financial well-being of consumers in carrying out regulated activities under this Act.
I am very new to this sector and I may be a little naive, but I believe that one of the most significant drivers of costs to the industry is from non-repayment or defaulting on loans. We need financial well-being and literacy to be increased. The noble Baroness, Lady Neville-Rolfe, is right that it needs to start in schools and carry on through employment and employers, but that should not preclude the Financial Conduct Authority being able to step in and help. There is a benefit to businesses as well. If financial well-being can be increased, the number of defaults from people falling into indebtedness or failing to pay reduces, thus increasing profitability of a product, then in turn reducing the cost of that product to individuals and businesses. There is a lot in where the amendment proposed by my noble friend Lord Stevenson is trying to take us.
We touched a little on the Woolard review and its 26 proposals, and I hope that we will see a bit more of those. The noble Lord, Lord Holmes, touched on fintech. With the increase in open banking and the ability to look at individuals’ accounts, better and more detailed decisions can be made on how a product or a business moves on. My noble friend Lord Stevenson referred to the University of Edinburgh Business School report, which it carried out for Salad Projects, looking at the health and well-being of NHS workers who had applied for a loan. The report provides a unique insight into their financial lives, based on millions of individual transactions. What came out of that was information about their low financial resilience—the ability of those working in the NHS to deal with a financial shock to their lives. Often it was just a small shock, but they were unable to tap into the bank loans that many of us can take; they were forced into the high-cost credit loans market.
If we have the development and promotion of financial well-being, I hope we will see a reduction in those who are driven into that sector. This amendment will help to deliver that, but it does not preclude delivering that in schools or the workplace. The FCA is a powerful body that can help push it even further.
My Lords, I am delighted to support this group of amendments. I take this opportunity to pay tribute to the noble Lord, Lord Stevenson, and my noble friend Lord Holmes for their huge contribution to this field of financial inclusion. I single out the noble Lord, Lord Stevenson, not just for his role on the Front Bench but previously in chairing StepChange. He will be greatly missed from his Front-Bench responsibilities, and I am sure it will not be long before we see him return.
I also congratulate my noble friend Lord Holmes on being indefatigable in his campaigning for financial inclusion and bringing our attention to fintech. I join the authors of these amendments in identifying a need to address this issue, and I hope that my noble friend, in summing up, will answer this point. The noble Lord, Lord Stevenson, has asked for a high-level response, and I shall use that expression later—I like it. Perhaps we might get something more from my noble friend.
No less of an authority than “You and Yours”, of which I am an avid listener—I think there are two compulsory programmes we should listen to, one is that and the other, I have momentarily forgotten what it is, is the one that gives us all the figures and responses—spent the best part of a programme looking at credit ratings. What struck me is that often it is through no fault of an individual that they find that their credit rating has been so badly affected that they can no longer qualify for any credit. It can take months, if not years, to redress this.
I am concerned that if my understanding is correct Expedia is no longer acting for the Government in this regard. Can my noble friend confirm that we are down to two credit rating agencies? Do the Government share my concern that we should address this area of financial inclusion, financial awareness and each of us being aware of what our credit worthiness and credit ratings are? Amendments 8, 9 and 134 have identified issues that are worthy of attention in this Bill and I look forward to the response from the Minister.
My Lords, I have a lot of sympathy for the importance of inclusion. Financial services are clearly important to everyone, and I endorse the comments from my noble friend Lady Neville-Rolfe about the critical importance of financial education in achieving that. However, I have some difficulties with Amendment 8 on the definition of and requirement to consider financial well-being. Those reservations are similar to the ones that I expressed on Amendment 1 on the general duty of care.
Of course, the objective of well-run financial services companies is, and should be, to promote financial well-being. That is what their business is. That is the purpose of financial products. Financial services firms lend in order to allow people to buy houses and cars and to spread the purchases out over time. They help people to save in order to cover emergencies and to provide pensions in old age. They support businesses to help them create wealth. Financial well-being is the business of financial services companies. However, to impose a regulatory requirement to promote financial well-being runs the risk of extending the boundaries of what a regulated individual might be expected to do beyond what is reasonable to expect.
Despite the comments from the noble Lord, Lord McNicol, I am afraid that the amendment would create huge compliance costs and complexity. Of course, we need rules and regulations that protect consumers from unscrupulous firms that seek to exploit customers, but we should do that—as we do—through penalties for improper behaviour rather than by extending a general obligation on financial well-being. Having said that, I understand the motive behind it and I certainly support the objective of improving financial well-being through the financial services industry.
My Lords, I find the thrust of all three amendments in this group really interesting and worthy of thought. I would particularly have added my name, had I been fast enough, to Amendment 9 in the name of the noble Lord, Lord Holmes. I think that is a strong and very positive amendment. Parliament, financial institutions, regulators and civic society have been discussing financial inclusion for years, and all of us recognise that there has been some progress. The Government’s financial inclusion report of 2019 identified 1.23 million people without even a basic bank account. That is half of what it was about 15 years earlier, but I think we all know that it is still unacceptably high. I will say more about basic bank accounts in an amendment in my name in a later group, as I think there are some real issues there.
Debt management advice has significantly improved and much of our thanks is owed there to the noble Lord, Lord Stevenson, as other noble Lords have said. We will discuss amendments that would strengthen that in another group. The FCA has made changes to the high-cost credit market. Many of those changes both in the debt advice arena and the high-cost credit arena were not actually initiated by the regulator. They were driven by this House, and I think that this House deserves to take credit for recognising that need and for driving through what has been real and effective action.
However, the progress falls far short of expectations. The credit union sector in this country has not grown as hoped, and neither have the CDFIs—community development financial institutions. These two sectors are the backbone of financial inclusion in other countries around the world. A number of groups are seeking to implement new socially driven mutual banks, others are proposing fintech solutions, but the surge in new services once anticipated to eliminate financial exclusion is moving at a snail’s pace.
With Covid, the problem has become more acute. The FCA’s excellent Financial Lives 2020 survey, published recently, showed us how the problem is being aggravated. In February 2020, 10.7 million people were classed as having “low financial resilience”, down from 11.6 million three years earlier. However, by October 2020, that number had risen again—turning in the wrong direction—by an additional 3.5 million, and there were millions of others with limited financial resilience. The situation must be even worse today than in last October, and it will get worse as Covid pushes forward the switch to digital banking and bank branch closures accelerate—at least two have closed in my neighbourhood, and this must be true almost everywhere else. If you are financially excluded in today’s world, your options to improve your life and the lives of your family are constantly constrained.
The FCA has taken the view that, where financial businesses come up with new ideas to tackle financial inclusion, it will make sure that its regulation is appropriate. This is a difficult but important standard. However, the FCA has also taken the view that it is not its job to stimulate or incentivise new players to enter the market or to persuade existing players to initiate new approaches. The FCA would say—and I have had this conversation on multiple occasions—that that is the Treasury’s role.
I argue, as does the amendment from the noble Lord, Lord Holmes, that the FCA should be more proactive. Nobody is better placed than the FCA to drive the industry to close gaps in provision, especially in financial inclusion. We have seen regulators do it in the United States with the Community Reinvestment Act, which was originally a civil rights Bill but has had an extraordinary effect in making sure that there are community banks targeted at disadvantaged communities right across the United States. Numerous proposals have been put to the FCA over the years. I am not trying to fix on any one solution, but that change from passive to proactive really is necessary, and action is needed now.
My Lords, the noble Baroness, Lady McIntosh, mentioned that my noble friend Lord Stevenson has retired from the Front Bench, much to my personal disgust—because we are short of talent and he has a great deal of it. However, it is my duty to point out that the amendment he has proposed has the full support of the Labour Front Bench, although it touches on a subject that has terrified me for most of my life, although for no good reason.
The idea of poverty is very remote to most of us. When you think of the number of people who live in poverty, particularly in this crisis, in the areas where the support schemes have not worked properly, it is terrifying and difficult to understand how people survive. The problem with poverty is that the individuals involved lose their equity in society—they get to a point of having nothing to lose, and then we worry about the fact that they do not behave in the way we would like them to.
I was brought up in—how can I put it?—a low-income household, where we had probably the equivalent of the living wage, but it was not nearly as bad as today. First, I believe there is more financial inequality today. Secondly, employment among the working class in my youth and that of my parents was much more secure. Finally, it was a cash society. Whatever else you might say about cash, it is very easy to understand. In the non-cash society that we are drifting into—indeed, we are largely already in it—you can barely survive without a bank account. Creating basic bank accounts is very important but, whether we like it or not, many people will not understand the mechanisms. The situation of not working in cash means that it so much easier to spend money and to lose control of what your liabilities and payments are. Much as we may deride the jam-jar approach to running a domestic budget, it was easy to understand and, therefore, easy to manage.
Anyway, what can we do about inequality and security? That, of course, is the big issue in society; it has been in the past, it is particularly bad now, and it is something that we will probably be working on for the rest of our lives. However, we can do something about understanding society. I agree with the noble Baroness, Lady Neville-Rolfe, that this should start in school. I am a great believer that the curriculum on what one might loosely call citizenship should be much wider in many ways, and there is no question but that financial literacy and understanding should be part of it. This curriculum cannot be completed in school because you only really learn when you come across real-life challenges; so, after school, a concept of financial well-being is needed that will be part of the future world. I believe that these amendments could lead us strongly towards that better future.
My Lords, I welcome the opportunity presented by this group of amendments to discuss the importance of financial well-being and inclusion. The Government are proud of our strong record, and I know that making progress on these issues is a personal priority for both the Economic Secretary to the Treasury and the Minister for Pensions and Financial Inclusion. However, I recognise, of course, that there will be people who are struggling with their finances and need further support, particularly at this challenging time.
Given that these are probing amendments and given the invitation, at least from some, for a high-level response, I thought it would be helpful to set out briefly the Government’s approach, working closely with the FCA as well as a wide range of stakeholders, to promote financial inclusion and financial well-being in the UK. The Government produce an annual financial inclusion report; the most recent of these was published in November 2020, outlining our response to the Covid-19 pandemic as well as the progress we have made on issues such as access to affordable credit, support for credit unions and enhancing the use of financial technology. Since 2018, the Government have convened the biannual Financial Inclusion Policy Forum, bringing together key leaders from industry, charities, consumer groups and the FCA, as well as government Ministers, including the Economic Secretary to the Treasury, who was responsible for the passage of this Bill through the other place.
The Government also work with a number of stakeholders to promote people’s financial well-being. This includes engaging closely with the Money and Pensions Service, an arm’s-length body of government, which published its national financial well-being strategy in January last year. The strategy sets out its five agendas for change to improve the UK’s financial well-being over the next 10 years. This includes goals to increase the number of children and young people receiving financial education, to encourage saving, to reduce the use of credit to pay for essentials, to enhance access to affordable credit, to increase the number of people receiving debt advice and to support people to plan for later in life. Delivery plans will be published by the Money and Pensions Service later in the spring and the Government are supportive of this work.
The Government also work with Fair4All Finance, an independent organisation funded by £96 million from the government-backed dormant assets scheme, which was founded to improve the financial well-being of vulnerable consumers through increased access to fair and affordable financial products. To date, Fair4All Finance has focused on affordable credit and developed an affordable credit scale-up programme to help the sector develop a sustainable model for serving people in vulnerable circumstances.
The Government also work closely with the FCA, and I reassure the noble Lord, Lord McNicol, that the FCA is committed to improving the way that regulated firms treat vulnerable consumers. It is one of the FCA’s key areas of focus in its current business plan. Its rules ensure that the fair treatment of vulnerable consumers is required by firms and embedded into its policies and processes. I will give a couple of practical examples, as mentioned in previous groups. First, the FCA’s consultation on the fair treatment of vulnerable consumers closed in September 2020 and the FCA intends to publish further guidance on this matter imminently. Secondly, as discussed in the context of the amendments on a proposed duty of care, the FCA has announced that it will undertake further work to address any potential deficiencies in consumer protection, particularly by reviewing its principles for business. While the FCA delayed this work because of the pandemic, it aims to consult in the first quarter of 2021. I also assure the noble Lord that a number of other matters that he raised, such as the issue of buy now, pay later, will be discussed in subsequent groups of amendments.
I understand that these are probing amendments. I hope that noble Lords will take reassurance, from the measures that I have set out so far, of the Government’s commitment to this area and the commitment by the FCA from the work under way. However, as my noble friend Lady Neville-Rolfe has argued, the Government do not believe that further statutory duties on the FCA in this area is the right approach.
On the challenge of the noble Lord, Lord Stevenson, the Government see the value of considering the broader concept of financial well-being to include access to affordable credit and consumer protection, as well as financial education, as an important area for future work by the Government, the FCA and associated stakeholders.
I hope that the Government have demonstrated their commitment to taking this work forward, working closely with the FCA and a wide range of stakeholders, and that this provides sufficient reassurance to noble Lords of the Government’s commitment on this topic for them to withdraw their amendments.
I have received no requests to speak after the Minister, so I call the noble Lord, Lord Stevenson of Balmacara.
My Lords, I thank all noble Lords who have contributed to this debate. I am deeply embarrassed by all the personal comments and blushed to my roots, which I hope was not too obvious on screen. The noble Lord, Lord Holmes, rightly pointed out the excellent work being carried out by many other agencies and bodies in this area as well as StepChange. I completely endorse his comments; there is a lot of good work going on.
I normally find myself aligned very closely with the noble Baroness, Lady Neville-Rolfe—sometimes rather embarrassingly, given our respective party positions—but this time I seem to have completely confused her, for which I apologise. The noble Lord, Lord Blackwell, was right that there are two quite separate tracks here, as my noble friend Lord McNicol picked up on. One is setting up a regulatory environment within which more good behaviour and activity by firms enhances the overall capacity of the system to work well in terms of financial capability and well-being. The other is hoping for the wider context that is necessary for all this to happen—particularly starting with education, which is always a hard nut to crack. As the noble Lord rightly said, this could be picked up by employers, trade unions, wider agencies, anybody with an interest in seeing a holistic society using the non-cash elements that my noble friend Lord Tunnicliffe was so scared of but yet so sprightly embraced in his unique style.
We all must learn how to operate with new technologies and new operations. My children do not use cash; they have not used cash for 10 years. They are all flashing out ridiculously brightly coloured cards and seem to have a much better track on what they are spending and how well they are doing than I ever did. I completely admit that. However, that is no excuse for me—I must get up there and be part of that process. But there is a role for Government, there is definitely a role for the FCA and the regulator; there is a role for companies that want to go down that track and have the capacity to do so, but there is no fixed agenda for that yet.
I wanted to hear a high-level endorsement by the Minister that this was something worth exploring and working for. She has given that, and I am very grateful. We can see this as a burgeoning programme of work which might well surprise us all in terms of where it might reach and what it might do. We are all rightly trying to support it in a way that will be most appropriate. With that, I beg leave to withdraw the amendment.
Amendment 8 withdrawn.
Amendment 9 not moved.
Clause 1 agreed.
Schedule 1 agreed.
I remind Members to sanitise their desks and chairs before leaving the room.
Committee adjourned at 7.31pm.