Mutuals’ Redeemable and Deferred Shares Bill [HL]
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Lord Newby (LD)
My Lords, I begin by congratulating my noble friend on his work in this area over a number of years and on securing a Second Reading for this Bill, on which he has done an awful lot of work and which addresses a very important issue.
As the House knows, access to capital and credit is the lifeblood of any company, and the financial crisis and its ongoing impact have served to highlight this point in very stark terms. Mutuals are no different from other companies in that they need capital to extend into new areas, develop new products and services for their members, write new business or increase their financial resilience. However, the inherent design of mutuals can mean that they face difficulties when it comes to access to external capital, as noble Lords have pointed out. Mutuals are designed to serve their members, who will be customers, employees or defined communities, but they were not designed with capital investors in mind.
In broad terms, mutuals access their regulatory capital from retained earnings and by issuing subordinated debt. However, unlike other businesses, they cannot issue shares, which deprives them of access to the equity markets. They therefore tend to be restricted in how they can raise capital. Any capital for growth must be generated internally and that takes time to be built up. This patient and long-term approach is one of the hallmarks of the mutual sector and indeed one of its strengths. However, it can also limit the sector’s flexibility in adapting to new market conditions, as well as limiting a firm’s abilities to secure maximum investment in the business and to grow through acquisition.
Friendly societies and mutual insurers compete in a highly competitive UK insurance market, and the restrictions on raising external capital can place a limit on their ability to compete on equal terms with their public limited company counterparts. In the recent past, a number of friendly societies and mutual insurers have decided to demutualise, and in some cases the lack of capital was cited as a contributing factor to a mutual contemplating demutualisation. As both the noble Lords, Lord Naseby and Lord Kennedy, pointed out, this has led to a significant contraction of the mutual insurance sector in the UK.
The sector has made the case that current capital constraints are preventing friendly societies and mutual insurers acquiring other businesses that would strengthen the overall offer to members and policyholders. It may also be restricting these organisations in developing new or innovative products, especially if those products require material amounts of regulatory capital to be held. Growth in these areas would potentially be to the benefit of both with-profits policyholders and other members of the mutual.
The proposals put forward by the noble Lord in this Bill have been carefully drafted to provide these mutual organisations with a means to raise external capital in a way that preserves the mutual status of firms. The Bill addresses access to capital for two sectors: friendly societies and mutual insurers, and co-operative and community benefit societies. It provides that the Treasury may make regulations subject to the affirmative procedure to permit friendly societies and mutual insurers to issue deferred shares and to permit co-operative and community benefit societies to issue redeemable shares. The Government agree that the deferred share capital instrument for mutual insurers and friendly societies is a good way forward, and the mutuals have demonstrated a clear need and demand for this instrument. We therefore support these proposals in the Bill.
In respect of the proposed redeemable share instrument for co-operative and community benefit societies, the Government are unpersuaded about the merit of a redeemable share instrument as these societies already have a means of issuing redeemable shares. The Government do not see a clear need and demand for such an instrument, and as we have heard, in discussion with and the agreement of the noble Lord, Lord Naseby, we propose to bring forward amendments in Committee to delete these elements. But with that caveat, I hope that noble Lords will support the Bill today.
Finally, I should like to comment on the two very specific suggestions made by the noble Lord, Lord Kennedy, in his speech. He said that we should look at a mutuals expansion project to mirror that of the Credit Union Expansion Project. It is an interesting proposal and I will be happy to take it back to my colleagues in the Treasury. One of the challenges is how to recreate the conditions under which individuals feel that they want to invest their money in mutuals, take out policies of various sorts and engage in lending from them. I am a strong supporter of doing that.
As far as the way we deal with Private Members’ Bills is concerned, I have a considerable degree of sympathy with what the noble Lord said. I do not believe that the way they are being dealt with is as efficient as the way we deal with government Bills. Although it is far beyond my pay grade to suggest a way forward, I am more than happy to take his comments away. Apart from anything else, there is a real problem at the moment in that many noble Lords can secure a First Reading for their Bills, and then very often they—and more importantly, their supporters—think that those Bills are actually going to make progress. A huge amount of work goes into such legislation. Recently I was involved with a Bill that stood at number 25 or 30 in the list. A poor lawyer had spent months slaving over it. The promoter did not have the heart to tell that lawyer that, as I already knew, it stood zero chance of even getting a Second Reading. That is not sensible, and nor, frankly, are some of the subsequent ways of dealing with these Bills. This is not a matter for the Government but one for the whole House, and I am very willing to take it back, along with his other proposal.
With those comments, and with the caveat I gave earlier, I hope that noble Lords will support the Bill today.
Young People: Alternatives to University
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Lord Bhattacharyya
I thank the noble Lord very much. Building a better bridge to career success via technical courses is the only realistic prospect for student expansion. That means thinking in radical ways about the nature of vocational provision, from recruitment to integrating work and study.
I started by mentioning Professor Chris Toumazou. If his story tells us anything, it is that in the forgotten half of our young people we will find the talent, ambition and capability to transform our nation. We must not neglect their potential.
Lord Newby (LD)
My Lords, I remind all noble Lords that this is a time-limited debate. When the clock hits “6”, it means that the speaking limit has been reached. The consequences of speakers going over their time is simply that the Minister will have significantly less time to reply to the points that they have raised and the questions asked of her.
Banks: Bridging Finance
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Baroness Gardner of Parkes
To ask Her Majesty’s Government whether they have any plans to encourage banks to provide bridging finance to asset-rich, cash-poor homeowners who wish to downsize, regardless of age.
Lord Newby (LD)
My Lords, the Government are keen to encourage all those wishing to downsize, of whatever age, to do so. In the vast majority of cases, bridging finance should not be necessary. For older people, the major constraint to downsizing is often the lack of appropriate alternative accommodation. We are committed to increasing the flow of such housing on to the market, for example through the care and support specialised housing fund.
Baroness Gardner of Parkes (Con)
My Lords, I thank the Minister for that reply, but I do not agree with it. Older people are having major problems because where, years ago, bridging finance would have been available to anyone—particularly if they had big equity in a house and were moving to a less expensive house—there is now a strict age limit. It was 75 when I quoted it last time to someone in the Treasury; I checked it again, and it has gone to 70 now. In some cases, some of the banks I rang said it is 65. Does the Minister not think that there is a bit of age discrimination in this?
Lord Newby
There is a problem with how banks deal with older people who are looking to move, but it has nothing to do with bridging finance in most cases. It is simply about transferring the mortgage from one property to another. The mortgage market review suggested that banks should have some discretion in those circumstances so that people would be able to remortgage on the same terms that they had before, but unfortunately, as in a number of other cases, the banks are interpreting this in a very rigid way, which is undoubtedly disadvantaging some people.
Lord Best (CB)
My Lords, will the Minister look out for a report on affordable downsizing, due to be released on 19 November by the APPG on this subject, which I chair? Will he note in particular the central recommendation that, like the right to buy for young people, we get a right to move for those of us in our extended middle age?
Lord Newby
I certainly look forward to reading the report. I will be fascinated to see how that right might be translated into reality for a lot of people, but some local authorities are beginning to look imaginatively about how you help people to move. Very often, one of the big problems is just the physical challenges of sorting out the move, switching the bills and so on. Redbridge, for example, and a number of other authorities have started to provide a service to people who wish to downsize, to help them with all those mechanical arrangements which, for some people, prove to be the last straw in stopping them from downsizing.
Lord Desai (Lab)
My Lords, does the Minister recall that during the crisis when we changed from rates and the support grant to the community charge, there was a myth that there were many asset-rich but cash-poor people? It proved not to be true. We are again hearing this myth of asset-rich but cash-poor people, but if they are asset-rich, they should not need a mortgage, as they have enough equity in their present house to relocate.
Lord Newby
My Lords, that is obviously the case for many people who have been in the same house for a long time. Some people entering retirement who still have a mortgage may require a mortgage if they are moving to a smaller property, but it is almost by definition going to be a smaller mortgage than the one they previously took out, given that there will have been some capital appreciation. One of the key challenges for us is that research shows that almost half of all over-55 households have spare space in the house. If we can facilitate downsizing where people genuinely want to do it, society as the whole will benefit.
Lord Taylor of Goss Moor (LD)
Will my noble friend agree that older empty-nesters often wish to have their grandchildren or other visitors come to stay with them? There is a myth that when people downsize—which does free up housing for families—they somehow want to go into specialist, tiny homes for people with great needs at the end of their lives. That is not actually the key to unlocking family homes: the key is to provide something for people to move into that is appropriate to their needs and expectations. The problem is the fundamental shortage of housing of that sort.
Lord Newby
My Lords, yes, I completely agree. It is important that those housing associations that provide specialist housing designed for older people—one of which is chaired by my noble friend Lord Stoneham—are encouraged to grow so that we can have more appropriately designed and sized accommodation.
Lord Davies of Oldham (Lab)
My Lords, the House will have noticed the Government’s concern about this relatively marginal problem of the asset-rich. What about the asset-poor who are forced to downsize under government policy on the bedroom tax?
Lord Newby
The noble Lord knows that 1.7 million households are waiting for social housing in the UK, and the spare room subsidy is intended to help move people into accommodation in those circumstances. I think that he would agree with me that the fundamental challenge that we in all parties face is how to increase the flow of housing, not just in aggregate but so that it is designed to meet the different requirements of different groups, including the elderly.
Lord Flight (Con)
My Lords, other than a few of the more enlightened ones, banks are now refusing to provide mortgage loans to anyone over 70. It is very well to say that banks can exercise discretion here, but when they are told by the regulator that that is what the regulator wants, not surprisingly they want to protect themselves, so they say, “Well, we’ll do what we’re told”. If they do otherwise, they put themselves out on a limb if something goes wrong. Basically, the regulator needs to be advised to make it clearer that it wants to see banks use their initiative.
Lord Newby
My Lords, as I said earlier, many lenders appear to be approaching the rules in a way that is against the spirit set out by the FCA. The FCA is reviewing the way the mortgage market review rules operate, and I hope that there will be some movement there. A number of banks and smaller building societies, in particular the Family Building Society and the Bath Building Society, of course do not have any age limits in their lending policies.
Credit Unions
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Lord Newby (LD)
My Lords, the recent HM Treasury call for evidence sought views on how government and others could do more to support the development of the credit union movement. The call for evidence closed on 1 September. Responses are currently being considered by the Treasury and an announcement will be made in due course. We are also working with others, including the Church of England, the Ministry of Defence and banks, to facilitate increased access to credit unions.
Lord Kennedy of Southwark (Lab)
My Lords, I declare an interest as a director of London Mutual Credit Union. I am delighted to see the noble Lord, Lord Newby, here. I hope it is okay with the noble Lord, Lord Freud. Will the noble Lord join me in congratulating Her Royal Highness the Duchess of Cornwall on her work in support of the credit union sector? She is today hosting a reception at Clarence House to support International Credit Union Day. Will the noble Lord arrange for me to meet the relevant Minister in government to discuss how to get government departments to follow the example of Clarence House and this House and arrange for civil servants to be able to join a credit union using payroll deduction?
Lord Newby
My Lords, I would be happy to do that. The Government are keen that civil servants should join credit unions where possible. Some work has been undertaken on how we could do that at reasonable cost. In the mean time, civil servants are being encouraged both to join credit unions and to get involved as volunteers. For example, an accountant at DWP is the treasurer of a credit union in Sheffield. That is a good example of how civil servants can use their experience and benefit the credit union movement.
Lord Hunt of Wirral (Con)
My Lords, I declare an interest as the independent non-executive chair of the Lending Standards Boards and as having agreed to take a similar role with Cornerstone and this particular project. I join the noble Lord in welcoming the recognition of today’s International Credit Union Day. I congratulate my noble friends in the coalition Government on the project itself. Will the noble Lord join me in urging all credit unions, all parties and everyone in the financial services sector to make this project a success and to raise awareness of the great work done by credit unions, not only in the UK but throughout the world?
Lord Newby
My Lords, I absolutely agree with my noble friend. I am myself hosting a reception in the Treasury this afternoon to mark International Credit Union Day. At that event I will be having discussions with, and we will be hearing from, Paulino Rodrigues, the chief operating officer of Sicredi, a very successful Brazilian credit union movement from which we are attempting to learn some lessons on common branding and operating standards to give a real boost to the sector.
Lord Elystan-Morgan (CB)
My Lords, I join in the expressions of good will that have come from all other Members. So that the House may judge how far we lag behind other countries, will the Minister confirm that, in the United Kingdom, the level of personal credit derived from credit unions is less than 2%? Can he give some indication of how that compares with countries such as Australia, Canada and, of course, the Republic of Ireland?
Lord Newby
The noble Lord is right that the number of members of credit unions and the amount of money involved is a lot less here than it is in some other countries. There are now about 1.1 million members of credit unions. Although by the standards of some other parts of the world that is not very high, it does represent something like an eightfold increase over the past 20 years, so credit unions have been growing. The challenge for everybody now, having got to a firm base, is how to get a step-change up in professionalism and the ability of credit unions to manage larger volumes, and a better marketing campaign to ensure that people understand why credit unions might in many cases be better for them than the traditional banks.
Lord McFall of Alcluith (Lab)
My Lords, I bring attention to my membership of the Credit Union Foundation and the Lloyds Banking Group grants committee for credit unions. One of the lessons of the past has been that grant funding has made the sector weaker rather than stronger. Capital ratios are the key. Given that mutuals are unable to raise capital, any proposals by the Government should ensure that the capital allocation of credit unions is improved. Will the Minister keep this point in mind so that we have a credit union sector which is growing, is more stable and can serve the best interests of the poor members of this country?
Lord Newby
I begin by recognising the valuable work that the noble Lord does with Lloyds in this respect. The part that the big commercial banks can play, not so much in funding—although that is useful—but also in transferring expertise, is very important. One of the key things now for credit unions in increasing the amount of capital they have at their disposal is to encourage large numbers of people with some relatively small amounts of capital to become members of a local credit union and deposit some capital with it. The work of the Church of England, for example, is potentially very important. There are many members of the church who would be able to join a credit union and put in a relatively small amount of money which could collectively transform the capital position of the many credit unions with a very small capital base.
Lord German (LD)
My Lords, the investment made by the Government in the credit union movement has paid dividends. We note with pleasure that 7% of the Scottish adult population is now registered with a credit union. However, for them to rationalise, streamline, offer new products and help people avoid payday lenders, credit unions need to have good back-office bank functions and new products. What progress has been made with the banking sector and the Post Office to provide those appropriate back-office functions which will allow them to become more streamlined and help people to keep out of the hands of payday lenders?
Lord Newby
We all agree that we want to make it easier for people to keep out of the hands of payday lenders. The credit union expansion programme, to which the Government have committed some £38 million, is attempting to do exactly what the noble Lord describes. For example, it has established an extremely inelegantly named but very important thing called an automated decision-making tool, which makes it easier for credit unions to determine whether an applicant is eligible to become a member of the credit union. That kind of back-office support will make it much easier for credit unions to expand.
Insurance Bill [HL]
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Insurance Bill [HL]
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Lord Newby (LD)
My Lords, this Bill updates some important elements of insurance law. The existing legislation is outdated and does not reflect the commercial expectations of businesses purchasing insurance. That leads to disputes between insurers and policyholders, causing delay, expense and uncertainty. This undermines the reputation of one of the UK’s leading industries.
The Bill is based on the recommendations of the Law Commission and the Scottish Law Commission. The policy underlying the provisions has been the subject of extensive consultation, the results of which have been reflected in the Bill where possible. I am pleased to say that there is a broad consensus of support for the changes to the law from a wide cross-section of the insurance market. The Bill has therefore been deemed suitable to be considered by your Lordships under the procedure for Law Commission Bills.
The Bill covers two different topics relating to insurance: the law of insurance contracts, which forms the core of the Bill; and some provisions allowing the Third Parties (Rights against Insurers) Act 2010 to be brought into force. In relation to insurance contract law, the Bill addresses three main areas: first, disclosure in business insurance contracts; secondly, insurance warranties; and, finally, the insurer’s remedies for fraudulent claims.
Currently, the law is set out in the Marine Insurance Act 1906, which embodies principles developed in the 18th and 19th centuries. It is now out of step with modern commercial practices. Those principles were originally designed to protect a fledgling insurance industry against exploitation by the policyholder. The law therefore gives insurers wide-ranging opportunities to refuse liability for claims due to a policyholder’s breach of obligation, even where it seems completely out of proportion to any wrongdoing by the policyholder.
The law as it currently stands increases the likelihood that insurance may fail to respond as expected, or at all. This can significantly hinder UK businesses. Policyholders cannot always predict whether insurers will pay out or rely on technical legal arguments to deny claims. If they cannot assess quality, policyholders will buy on price alone, which could reduce the quality of insurance products available in the market. Insurance is a crucial UK export. It is important that the law does not undermine the confidence which international buyers place in the UK insurance market.
The Bill is short and principles-based. Where the language of the 1906 Act has acquired a particular meaning, the Bill adopts the same language to avoid unnecessary change or uncertainty. Many of the provisions are based on existing judicial precedent and will operate within the existing legal structure.
I shall now say a few words about each area of reform. First, regarding the duty on the policyholder to disclose information to the insurer, prospective policyholders must provide the insurer with information about the risk before the insurance contract is signed. This allows the insurer to price the risk accurately. However, the existing legal requirements can be difficult to understand and can be even more difficult to adequately comply with. A failure by the policyholder to provide all material information allows the insurer to refuse all claims under the contract.
The Bill updates and replaces the existing “duty of disclosure” with a “duty of fair presentation”. Policyholders still have a duty to disclose information and there is a duty on them to search for information, but there is also an obligation on insurers to ask the policyholder if they require further clarification. If a business fails to make a fair presentation of the risk, there is a new system of proportionate remedies for the insurer, based on what the insurer would have done if the failure had not occurred.
The Bill also deals with insurance warranties. An insurance warranty is typically a promise by the policyholder to do something which mitigates the risk. Under the current law, any breach of warranty completely discharges the insurer from liability from the point of breach, even if the breach is remedied before any loss is suffered. Modern insurance contracts are full of warranties, yet policyholders and brokers are often unaware of the harsh consequences of breaching them. The Bill provides that an insurer will be liable for insured losses arising after the breach has been remedied. This brings the law into line with best practice.
The Bill also abolishes “basis of the contract” clauses. These clauses convert every statement made by a policyholder on a proposal form into a warranty. Judges have been criticising these clauses for many years.
The Bill also introduces clear statutory remedies for the insurer where the policyholder has made a fraudulent claim. Insurers are particularly vulnerable to fraud by policyholders, and the law needs to provide clear and robust sanctions. A policyholder should not be able to think that fraudulently exaggerating a claim is worth a shot. The Bill puts into statute the remedy already upheld by the courts: that is, if a claim is tainted by fraud, the policyholder forfeits the whole of that claim. The Bill also clarifies an area of uncertainty: the insurer may choose to refuse any claim arising after the fraudulent act. However, previous valid claims should be paid in full.
The provisions of the Bill are a default regime for business insurance contracts. Parties may agree alternative arrangements if they do so transparently.
The Bill also contains provisions to amend the Third Parties (Rights against Insurers) Act 2010. The Government are committed to bringing the 2010 Act into force as soon as practicable. The amendments in the Bill will achieve this.
The Bill before us updates some important elements of insurance law and has widespread support. I beg to move.
Lord Newby
My Lords, I thank all noble Lords who have spoken in this debate. I think that they all stressed the importance of greater clarity in the areas covered by the Bill, and indeed they felt that the Bill achieves that clarity. Certainly, as a non-expert, I was able to get quite a long way into the Bill before I felt that I was losing my way, and that is a good way of testing how clear it is going to be. I thought that it was very clearly drafted in an area where there is plainly a lack of clarity at the moment.
I loved the description of the Bill given by the noble Lord, Lord Carrington, as being stuffed with useful things. Possibly that should be incorporated into the mission statement of the Law Commission—to stuff all their Bills with useful things. It is a delightful concept.
The noble Lord, Lord Sheikh, reminded us of the history of the sector and its current success, which is considerable, particularly in the UK. He pointed out that one of the consequences of the Bill, once passed, will be to reduce insurance litigation. That is clearly a most welcome prospect, given the very high levels of litigation that currently take place because of the ambiguities and problems that the Bill seeks to deal with. I was also grateful to the noble Lord for explaining from a practitioner’s point of view how specific provisions in the Bill will help to reduce current difficulties and make the sector and the UK market more competitive.
The noble Lord, Lord Sheikh, and the noble and learned Lord, Lord Davidson of Glen Clova, discussed a provision that is not in the Bill which relates to late payment. Originally, there was a draft clause in the Bill, but it did not receive consensual support across the market as a whole and the Government decided to remove it at this point. However, that was not because the Government and the Law Commission think that we should drop it as an area. Attempts continue to be made to reach a degree of agreement on this because it is a difficult area. If we can get a resolution of it quite quickly with drafting that would satisfy the noble Lord, Lord Sheikh, while meeting the basic requirements of a late payment provision, we think it would be worth doing. Efforts are ongoing. We hope that we might yet be able to bring that to a consensual point, which will enable us to legislate on it.
The noble and learned Lord, Lord Davidson, also asked about monitoring the efficacy of Clause 16 and pointed to the danger of widespread contracting out. At the moment, we do not see any pent-up demand for widespread contracting out, but the Government have committed to conduct a post-implementation review of the Bill after five years. We need a bit of time to see whether people in the market think that there is an advantage to contracting out. At the moment, we do not feel that there is a great danger in that area, but we will be watching it and will have a formal review after five years.
I hope that I have dealt with the specific questions raised by noble Lords. I am extremely grateful for the support they have shown so far, and I look forward to joining at least some of them in the Committee on the Bill.
Debt Management Organisations
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Lord Sharkey
To ask Her Majesty’s Government what steps they are taking to ensure that debt management organisations serve the interests of their clients.
Lord Newby (LD)
My Lords, the Government have given the Financial Conduct Authority responsibility for protecting customers of debt management firms. Debt management firms are subject to binding FCA conduct rules and must treat customers fairly. FCA prudential and client money requirements are also being introduced to protect customers’ money. The FCA will thoroughly assess every debt management firm’s fitness to trade as part of the authorisation process from October this year.
Lord Sharkey (LD)
My Lords, half of the clients of fee-charging debt management companies do not know that there are equivalent free services. These clients are mostly recruited by cold calling and 31 million cold calls were made last year. The FCA says that it does not regulate these calls. Can the Minister say who does regulate them and are cold callers required to advise of the existence of free debt management services?
Lord Newby
On the second part of the noble Lord’s question, debt management companies will be required under the new rules to signpost consumers to free debt advice, which will be a major improvement. There are two elements of regulation of cold calling and unsolicited text messages. The ASA has some responsibility in that area and it has already taken action to ban payday lenders’ use of unsolicited text messages. As with its regulation of other financial services markets, the FCA is committed to ensuring that cold calling by phone, text or e-mail makes the identity of the firm and the purpose of the communication clear to those being called.
Lord Kennedy of Southwark (Lab)
In a recent Parliamentary Answer I found out that since 2005 companies in the financial services sector have been fined £1.2 billion. Will the Minister agree to look at the points made by the noble Lord, Lord Sharkey, and maybe use a small portion of those fines to fund good charities, good organisations and credit unions which actually help people who are in debt?
Lord Newby
My Lords, as the noble Lord knows, the Government are already committed to funding credit unions to a considerable extent. On the issue of free money advice, the Money Advice Service has allocated some £38.1 million this year to fund free debt advice, which will be given through organisations such as Citizens Advice and StepChange.
The Countess of Mar (CB)
My Lords, I had just such a cold call this morning and the person who made it did not leave their address or their name. It was a tape-recorded message. Is there anything that I can do about that? Can the Minister say what will be done to protect people who have pension funds from being scammed? There was a lot about that on the radio this morning.
Lord Newby
The FCA has very considerable powers to regulate all financial services firms in this area. In the sector we are looking at, it took on responsibility earlier in the year. It has introduced stricter rules and is putting in place new authorisation processes. But if the FCA finds that despite the way in which it is tightening up its procedures, there are still significant problems in respect of cold calling, it has the powers to intervene further.
Baroness Chalker of Wallasey (Con)
Is it possible for my noble friend to insist that somebody who is either erroneously or speculatively called and does not want the services of a debt management organisation can dial 1471 and get the number so that we can put a stop to some of this calling? I have tried to do it; it does not work; and I am fed up with it.
Lord Newby
My Lords, it is clear that many noble Lords share my noble friend’s view that unsolicited cold calling is a nuisance. I think that people find this in a whole raft of areas, whether it is double glazing salesmen or this one. The absolutely crucial thing about cold calling is that, certainly for financial services products, those making the calls should be absolutely clear who they are calling from and why they are calling so that people have the opportunity to put the phone down quickly.
Lord Stevenson of Balmacara (Lab)
My Lords, I declare an interest as chair of StepChange, the debt charity. Is not the problem with debt management companies that the regulatory functions, as the Minister said, have only just started and that we are not taking advantage of some of the measures that already exist in the United Kingdom? Has the Minister looked at the situation in Scotland, where statutory relief is available to those who get involved in free debt advice schemes so that they are not charged additional interest and the pressure from people such as cold callers and others is reduced?
Lord Newby
My Lords, I am not aware of the situation in Scotland but I will willingly look into it.
Insurance Bill [HL]
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Pensions Advice
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Lord Kennedy of Southwark
To ask Her Majesty’s Government what safeguards will be in place to ensure that people receive sound advice when seeking to access their pension funds.
Lord Newby (LD)
My Lords, every individual with defined contributions pension savings will on retirement have a new right to free and impartial guidance to help them make informed decisions about how they use their pension savings in retirement. The Government will legislate to give the Financial Conduct Authority responsibility for setting standards for guidance and monitoring compliance with those standards. The FCA has published a consultation paper alongside the Government’s response on its proposed standards.
Lord Kennedy of Southwark (Lab)
My Lords, what has been announced by the Government so far is wholly inadequate. We all remember the pensions mis-selling scandals of the 1980s when people were enticed out of SERPS and then fleeced. What qualifications will individuals need to have in order to be able to give this advice, and what guarantees will be put in place to ensure that people do not see their pension pots go in fees, charges and wholly inappropriate products?
Lord Newby
My Lords, the key innovation in the way we are planning to introduce this change is that of giving every individual coming up to retirement an entitlement to free guidance. To ensure that the guidance is impartial, we have decided that it will be provided by independent organisations which have no actual or potential conflicts of interest; it is not going to be the pension companies providing that guidance. A team has been established within the Treasury to lead on service design and implementation, bringing together expertise from across government, the Pensions Advisory Service and the Money Advice Service. The FCA will be the ultimate backstop in terms of the quality of the advice given and the monitoring of it. We will legislate to give the authority that explicit power in the Pension Schemes Bill later in this Session.
Lord Jopling (Con)
My Lords, will the Minister endorse the wisdom of my father who, in giving me an instruction shortly before he died, said that after his death I was to ensure that my mother took no advice whatever from either the vicar or the bank manager?
Lord Newby
My Lords, being married to a vicar, I could not possibly say that vicars are not always good sources of advice. The key challenge raised by the Question is that for many people pensions are a subject of complete bemusement. This reform, which I believe is very welcome, will give people much more choice over how they spend their money in retirement. However, they will be able to spend it wisely only if they are given proper guidance, and that is what the Government are committed to ensuring.
Baroness Drake (Lab)
My Lords, guidance to help people make choices about how to spend their pension funds is of course to be welcomed, but given that the Government expect the industry to respond to greater choice by providing new retirement income products, how will they ensure that these new products meet the interests of savers in terms of quality standards, transparency and level of charges, so avoiding new manifestations of consumer detriment occurring yet again in the pensions and investment industry?
Lord Newby
My Lords, this is why we have set up a new framework for regulation and why we established the Financial Conduct Authority. We have given the authority much greater powers than the FSA had to deal explicitly with these problems. We have to be sure that the new products which are coming forward meet the standards that the noble Baroness wishes to see. The FCA is tasked with that job and is absolutely determined to avoid the problems of mis-selling that we have seen in the past.
Baroness O'Cathain (Con)
My Lords, is it at all possible that any information on pensions that goes to the ordinary man or woman in the street, like me, could be passed by the Plain English Campaign because there is nothing worse than page after page of small print in stupid words?
Lord Newby
My Lords, I completely agree. For many years I have been trying to persuade the financial sector to do as the medical sector does and establish a professional body of writers to try to ensure that the material that people get is comprehensible. As far as this particular process is concerned, the FCA is looking to provide a template that pensions providers will complete, which might be on as little as a single sheet of paper, that will provide the basis for the guidance that is subsequently given.
Lord Hughes of Woodside (Lab)
Do the Government recollect that millions of people, even today, are bombarded on a daily basis by different companies, offering help to get payment protection policies returned and so on and so forth? How will they guarantee that this new policy will not mean that we will be bombarded daily by people telling us that we must try to draw down our pensions?
Lord Newby
My Lords, the key thing is that people get guidance from a trusted source. There will be a commonality of approach. The FCA is producing very detailed technical guidance, which everybody providing the personalised guidance will provide. I recommend that the noble Lord looks at the FCA consultation document that came out earlier in the week, which explains how it is going to do that. There is a danger that we are so concerned that things might not work that we never innovate.
Baroness Sherlock (Lab)
My Lords, I remind the House of my interest in the Financial Ombudsman Service board. In the Budget, the Chancellor announced that everybody would get,
“free, impartial, face-to-face advice”.—[Official Report, Commons, 19/3/14; col. 793.]
on their retirement options. Now we learn that it will be guidance, not advice, and that face-to-face could mean online or over the phone. Will the Minister please tell the House how many people in 2015-16 will actually get face-to-face guidance? Will he reassure the House that that commitment will not be watered down any more? People coming up to retirement need advice they can trust.
Lord Newby
My Lords, the difference between guidance and advice is simply that within the financial services sector advice is a regulated activity which, as the noble Baroness knows, requires those who offer it to have gone through a significant process. This is a different level of advice. As far as face-to-face advice is concerned, the Treasury has undertaken a considerable amount of consultation. Many people have said that they would much prefer, in the first instance at least, to get their advice online or to do it on the phone. We have said, however, that any individual who wishes to have face-to-face advice will have it, and they will. It is simply that not everybody wants it that way.
Euro Area Crisis Update (EUC Report)
Lord Newby Excerpts(9 years, 10 months ago)
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Lord Newby (LD)
My Lords, I thank the noble Lord, Lord Harrison, and European Union Sub-Committee A for publishing the updated report. I also thank members of the sub-committee for organising the debate, and everybody who has spoken.
It is blindingly obvious that a stable euro area is in Britain’s interests. Some 40% of UK goods and services exports go to the euro area and the economic uncertainty emanating from the euro area at the height of the crisis had a chilling effect here. The Government welcome the return to growth in the euro area, but vulnerabilities obviously remain. We agree with the committee that the storm has not entirely passed. While growth has returned, it is weak and unemployment remains high. As the noble Lord, Lord Harrison, pointed out, growth across the euro area is ill balanced. The balance of payment surplus of Germany, for example, has reached record highs, while obviously other member states are still suffering very considerable economic problems.
The ECB’s announcement of its outright monetary transaction mechanism and its clear commitment to stand behind the euro have clearly helped relieve the pressure from the sovereign debt crisis. However, the euro area has to make some important steps to strengthen the single currency for the longer term. Countries in the euro area periphery are undergoing a painful but necessary adjustment. They need to carry on confronting head-on their problems of high deficits and low competitiveness. They are making very considerable progress. By the end of 2014, Spain is forecast to have reduced its deficit by almost five percentage points since 2012, while it, Italy and Portugal all registered current account surpluses in 2013.
My noble friend Lord Maclennan asked whether that adjustment was too quick. It is interesting to see that the rate and path of deficit reduction in Spain, for example, is much sharper than the one we have decided to follow here. It has had a number of consequences, one of which has been high unemployment and a fall in real wages. What is interesting about the Spanish economy is the extent to which it is rebalancing away from property and rebounding. The absolute pace at which some of these economies are adjusting and the extent to which that is optimal will not be clear for some time. However, they have made very significant steps and are to be congratulated, not least against a background, two or three years ago, in which many people in the UK said they would never be able to do it and that the euro would collapse as a result.
A well designed banking union comprising centralised decision-making on supervision and resolution supported by credible financing arrangements, can, in our view, support the long-term stability of the single currency. The ECB’s comprehensive assessment process is critical to restoring market confidence over the medium term and is an important step in implementing the single supervisory mechanism. We strongly support the announcements on stress tests and believe they provide for a robust process. However, all elements of banking union must protect the unity and integrity of the single market and the interests of non-participating member states and be legally sound.
Some progress has also been made on closer oversight of fiscal policy. Exit from the crisis will be easier the more the euro area does to support demand and share the burden of adjustment. The noble Lord, Lord Davies of Stamford, and my noble friend Lord Flight referred to the challenges of greater fiscal co-ordination. The noble Lord, Lord Davies, suggested an integrated unemployment insurance system, but I think my noble friend Lord Flight answered the question of how plausible that is, certainly in the short to medium term, by pointing out that the country making the transfer payments in such a system would be, to a large extent, Germany. There is very little evidence that Germany feels that is an appropriate way forward.
The Chancellor has long made clear his view that there is a remorseless logic that the euro area, like any single currency, needs closer economic and fiscal integration. The euro area needs the right governance and structures to address its current challenges, but the change in governance precipitated by the crisis has altered the EU’s decision-making structure and affected us, as we have heard from a number of noble Lords. We must ensure that any new arrangements work for those outside the euro area as well as for those within it.
My noble friend Lord Maclennan asked how we would maintain our position given these new arrangements and, although the noble Lord, Lord Kerr, thought it was slightly thin, the Financial Secretary to the Treasury pointed out that we will be and are closely involved in negotiations on EMU and in ensuring that proposals fully take into account the interests of both the euro outs and the euro ins. In answer to my noble friend Lord Maclennan’s question about how we are doing this, we are in constant contact with euro area partners at European Council and ECOFIN meetings, and we are pursuing the informal interpersonal relationships that we discussed at some length when we last had a discussion on the issue. I completely agree with the suggestion that in these interactions, we need to avoid hectoring and denouncing—something that UK Ministers of all parties, over several decades, have found exceptionally difficult in dealing with our European partners.
My noble friend Lord Maclennan asked how we are supporting the leveraging labour market reform and innovation. The Government support the attempts to tackle these issues. We support the ECB’s comprehensive assessment—stress test—and the asset quality review as a means to improve confidence in the banking system. We support the ECB’s moves further to develop the European securitisation market as an alternative to bank lending. Labour market reforms need to be undertaken on a country-by-country basis, along with wider structural reforms to promote growth.
The noble Lord, Lord Kerr, referred to the balance of competencies review and the challenges that it identified. It is a helpful and formidable document and has the great advantage of having a large number of sensible and practical suggestions of how decision-making processes might move forward. He identified a number of key challenges, none of which I suspect anyone in your Lordships’ House would disagree with. The one I highlight, which the noble Lord, Lord Davies of Oldham, also mentioned, is the question of staffing, which we have discussed in your Lordships’ House on a number of occasions. We discussed it at our last debate on the subject, and following that debate I wrote to the noble Lord who raised the issue of staffing and I hope that other noble Lords who took part in that debate, most of whom are here today, will have seen a copy of that letter about the initiatives that the Government were taking.
It seems to me that the banking sector needs to be willing to encourage its staff to participate in the European institutions. The sector is quick to denounce the Government but slow to take action itself and, in private moments, will admit that if it has somebody really good who would do it really well, the last thing they are prepared to do is to give that person up to do it. As long as that remains the view of the sector, the current situation will continue.
The noble Lord, Lord Kerr, made a couple of interesting and practical suggestions about the euro group and where and when its meetings might be held. I will draw those suggestions to the attention of the Chancellor.
The Government could not agree more with the points made in the report about the importance of the City of London as a leading international centre. We do not altogether share the gloomy prognosis of the noble Lord, Lord Flight, for the City. The City will evolve. Some areas of business will undoubtedly move elsewhere as global markets evolve. However recent developments, such as renminbi trading in the City and the Government’s decision to initiate a sovereign sukuk and therefore promote Islamic finance, offer very significant new areas of activity for the City which will help underpin its position as Europe’s leading international financial centre.
My noble friend Lord Maclennan asked about cross-border workers and pointed to the important role that they play in the UK economy. As I pointed out at Question Time recently, the growth in house building in the UK, that all parties now believe to be very important to the period ahead, will happen only if we continue to employ large numbers of skilled workers from the rest of the EU because it is physically impossible to train large numbers of skilled workers in the short term. For the future growth of the British economy, the continued involvement here of skilled workers from the rest of the EU is very important.
We have had an extremely interesting debate across some relatively familiar themes. I would like again to thank the committee for this contribution to the debate, and I look forward to its next update.