Covid-19 and the Use and Scrutiny of Emergency Powers (Constitution Committee Report)

Baroness Drake Excerpts

Tuesday 21st June 2022 Grand Committee

Moved by

[Baroness Drake]

That the Grand Committee takes note of the Report from the Constitution Committee COVID-19 and the use and scrutiny of emergency powers (3rd Report, Session 2021-22, HL Paper 15).

[Baroness Drake (Lab)]

My Lords, in June 2021, the Constitution Committee published its report COVID-19 and the Use and Scrutiny of Emergency Powers, following a broader inquiry into the constitutional implications of Covid-19 chaired by my esteemed noble friend Lady Taylor of Bolton. The social, economic and health implications of the pandemic were profound, the constitutional impact significant. The committee examined the emergency powers sought by the Government, and the extent to which they were used and how. We wanted to determine if there were lessons to be learned for future uses of the emergency powers, their safeguards and the processes for scrutinising them. We addressed four main dimensions: the legislative approach taken and parliamentary scrutiny afforded; co-ordination between the UK Government and the devolved Administrations; the impact of rapid changes to the law on the public and public authorities; and lessons learned. Inevitably, for any Government, national responses to such a fast-moving crisis can sometimes be sub-optimal. However, any Government must be open to learning lessons to inform future contingency planning. Witnesses told us that much could be done differently the next time.

I turn to the legislative approach taken and parliamentary scrutiny. The pandemic unquestionably necessitated a swift response from the Government. Two Acts of Parliament were used by the Government to make regulations: the Public Health (Control of Disease) Act 1984, and the Coronavirus Act 2020. However, scrutiny by Parliament was significantly restricted due to the procedures in the 1984 and 2020 Acts and Covid-driven changes to parliamentary proceedings. A large volume of new legislation came into effect as secondary legislation, much through public health regulations placing unprecedented restrictions on ordinary activities and freedoms, often without parliamentary approval. Of the 425 Covid regulations by the end of the 2019-21 Session, 398 were subject to the “made negative” or “made affirmative” procedures, and 86 were made using the urgency procedures under the 1984 Act. Regulations under the 2020 Act were more targeted on matters such as business tenancy forfeiture and local government elections.

The Government relied on the powers in the 1984 Act, rather than the Civil Contingencies Act 2004, and rather than incorporating a Covid-specific lockdown power in the Coronavirus Act 2020. Either of these latter two options could have resulted in greater parliamentary scrutiny and legal clarity. As a committee, we took the view that, if the use of the Civil Contingencies Act was not considered practically desirable, the Government should have voluntarily subjected themselves to comparable parliamentary scrutiny safeguards in pandemic-related legislation. We recommended that Parliament be consulted on any future draft legislation prepared on a contingency basis to address a potential emergency, ensuring that it provides for sufficient parliamentary scrutiny.

I turn to co-ordination between the UK Government and the devolved Administrations. Joint action was necessary to respond to a UK-wide crisis. The Coronavirus Act 2020 was the product of collaboration, passed with the consent of all three devolved legislatures. In the early stages, the First Ministers of Scotland and Wales and the First Minister and Deputy First Minister of Northern Ireland were invited to attend COBRA meetings. Ministers from the devolved Administrations attended meetings of five new ministerial implementation groups—MIGs—that looked at aspects of the coronavirus response. The different Administrations’ Chief Medical Officers and Chief Scientific Advisers met regularly, sharing information. The chairs of the Scottish and Welsh advisory groups on SAGE outputs were also participants in SAGE.

As the UK moved out of the first lockdown, however, although co-ordination on some devolved areas continued, such as scientific advice, procuring equipment and virus testing, intergovernmental co-operation appeared to decrease significantly. Each Administration started to take independent decisions about lockdown restrictions. On 10 May 2020, the Prime Minister announced the change from “stay at home” to “stay alert” but did not make clear that it applied to England only. This change was apparently made without informing the devolved Administrations. The UK Government set out three phases for easing lockdown restrictions in England. The Northern Ireland Executive set five, the Scottish Government four, and the Welsh Government opted for a traffic light system.

By early June 2020, both COBRA and the MIGs ceased to meet, replaced by two new Cabinet committees. Neither included representatives from the devolved Administrations. Yet the Cabinet Manual makes it clear that this is permitted on an exceptional basis to deal with an emergency response. Differences arose between parts of the UK on the countries exempt from quarantine restrictions and the international travel restrictions. This strained intergovernmental co-operation contributed to a lack of clarity about what rules applied where, causing difficulties for enforcement and compliance.

There is much to learn from the pandemic period to inform improving intergovernmental working. The Secretary of State, Michael Gove, recognised this when he

“described the pandemic as ‘a learning process for everyone’, raising broader questions about ‘making sure the whole devolution settlement works’. He said the UK Government intended to address this through reforms to intergovernmental mechanisms”.

Can I ask the Minister what consideration has been given to how the new intergovernmental relations arrangements could be deployed in the event of another national emergency similar to that created by the pandemic?

Turning to the impact of rapid changes to the law, the Constitution Committee noted that legal changes introduced were often set in guidance, or announced during media conferences, before Parliament had an opportunity to scrutinise them. The law was sometimes misrepresented in these public-facing forums, leading to a lack of clarity about what was legally enforceable. This posed challenges for the police and local government, sometimes leading to wrongful criminal charges. Guidance and media statements, when used appropriately, can enhance access to the law by simplifying legal complexity in a format that is easy to digest, but the committee found that, throughout the pandemic, government guidance and ministerial statements failed to set out the law clearly, mis-stated the law, or laid claim to legal requirements that did not exist.

Sometimes, public health advice was incorrectly enforced by the police as though it were law, and public authorities incorrectly suggested that guidance had the force of law. The report contains the detail of our findings but, as an example, on 23 March 2020, the Prime Minister announced the first England-wide lockdown in a televised address. The following day, the then Secretary of State for Health stated:

“These measures are not advice; they are rules. They will be enforced, including by the police”.—[Official Report, Commons, 24/3/20; col. 241.]


The announcement caused confusion about their meaning, with one police force threatening to search individual shopping baskets in supermarkets to check for non-essential items.

The UK Government’s website included the headline rules:

“Stay at home. Only go outside for food, health reasons, or work (but only if you cannot work from home). If you go out, stay 2 metres … away from other people at all times. Wash your hands as soon as you get home.”


The first instruction was a simplified explanation of a legal obligation. The second and third instructions were public health advice. The chair of the National Police Chiefs’ Council later had to clarify that the two-metre rule was not a legal requirement enforceable by police. The Secondary Legislation Scrutiny Committee also expressed concern that the distinction between legislation and guidance had been unclear, citing further examples.

New strains of the virus and spikes in infections made urgent legislative changes necessary, but sometimes seemingly non-urgent measures were introduced at short notice. In other cases, the urgency appears to have resulted from a lack of preparedness. The repeated repeal and amendment of Covid regulations added to confusion as to what restrictions applied at any one time. For example, on 2 and 3 September 2020 the “protected area” covered by the Health Protection (Coronavirus, Restrictions) (Blackburn with Darwen and Bradford) Regulations were amended twice in 12 hours. The Health Protection (Coronavirus, Wearing of Face Coverings in a Relevant Place) (England) Regulations 2020 were amended by three different statutory instruments made on 22 and 23 September 2020. The “all tiers” regulations were amended by eight further statutory instruments between December 2020 and March 2021.

In summary, legal uncertainty, short notice of new measures, and repeated amendment and revocation of secondary legislation combined in certain instances to undermine parliamentary scrutiny and made it difficult for public authorities tasked with enforcement to understand the law. Her Majesty’s Inspectorate of Constabulary reported:

“At times, the introduction of, and variation to, new legislation and guidance affected the police service’s ability to produce guidance and to brief staff. This inevitably led to some errors or inconsistencies in approach.”


The Secondary Legislation Scrutiny Committee recommended that an evaluation of how information about which instruments were superseded or had lapsed could have been provided more effectively. In our report, we strongly recommended that government information

“during a public health emergency conform to”

certain

“essential conditions to enable people … to understand the law”,

one such being

“A consistent approach to use of the terms ‘advice’, ‘guidance’, ‘recommendation’, ‘rules’ and ‘restrictions’”,


because those descriptions clearly did not have the clarity that people needed, and that in enacting any further restrictions,

“the Government should be guided by the principles of certainty, clarity and transparency”.

Finally, as to lessons learned, the Government used a wide range of emergency measures to respond to the pandemic, many introducing significant curbs on civil liberties and businesses. Scrutiny of these regulations by Parliament was significantly restricted. The chair of the public inquiry into the handling of Covid says that public hearings are unlikely to begin before 2023. Can the Minister give an indication of how long the inquiry will take? We recommended a review of the use of emergency powers by the Government, and their scrutiny by Parliament. It should take place in advance of the public inquiry, not after, so that the review can inform both the public inquiry and the planning for future emergencies. Can the Minister tell us the Government’s position on this recommendation from the committee?

It is unquestionable that the Government faced an enormous challenge with Covid-19, and the first responsibility of any Government is to protect their citizens. However, I refer to a conclusion that we made:

“All governments should recognise that, however great or sudden an emergency … powers are lent, not granted, by the legislature to the executive, and such powers should be returned as swiftly and completely as possible, avoiding any spill over into permanence.”


That conclusion is probably still valid while we wait to see the outcome of the various reviews that the Government are engaged in. I look forward to the Minister’s response.

--- Later in debate ---

[Baroness Drake (Lab)]

My Lords, I thank everyone who has contributed to a really important debate, in terms not only of efficiently dealing with a national crisis of huge relevance to its citizens—I am sure this will not be the only one—but of integrity around a Government and a Parliament in how they go about protecting citizens in that emergency.

I am very grateful to the noble and learned Lord, Lord Hope, for his contribution, and particularly for stressing the importance of pre-legislative scrutiny in any amendment of the legislation. The Minister referred to any changes to legislation being subject to parliamentary scrutiny, but the Constitution Committee puts a powerful case as to why that should also include pre-legislative scrutiny. Again, I thank the noble and learned Lord for the importance he placed on the need to ensure that we work with the devolved Administrations across the UK so that we can deal with UK-wide emergencies as efficiently as possible. I thank everyone who contributed.

I will reflect on some of the points the Minister made. He took us in some detail through the 1984 public health Act and how it operated. Although I do not disagree with a lot of what the Minister said, there are two or three key messages from the Constitution Committee. The Act could have been added to by incorporating a lockdown power in the Coronavirus Act. It was not that the emergency procedures needed to be used—quite clearly there were several cases where they did need to be. The question was whether it was an emergency in every instance that they were used.

I absolutely acknowledge that a Government faced with the challenges that this Government were faced with need to move with speed on regulations, but that raises the bar for the expectations of the level of confidence that people need in the scrutiny of those actions taken by government.

On going forward with pan-UK working with the Administrations, I welcomed the Minister’s comments in respect of the initiatives being taken by the Secretary of State for Health. The Constitution Committee also produced quite a large report on the whole issue of governance within the UK, Respect and Co-operation. In a sense, the response in an emergency is part of a wider governance structure that applies, so I hope some of our recommendations in that report will also apply.

In conclusion, there is no question but that the Government faced an enormous challenge. They had to respond quickly and to protect their citizens. In an emergency, Parliament transfers to the Executive so that they can move at the speed necessary to do that, but the efficiency with which the Government deploy those powers is therefore so critical. The extent to which they are open to checks and scrutiny on the deployment of those powers becomes even more important, and that was the thrust of the Constitution Committee’s report. What are the lessons learned, and what is the experience that informed those lessons, so that the preparedness for the next emergency—I hope we never have one—and the confidence in the level of scrutiny and checks are there? However, I thank the Minister very much for his response.

Motion agreed.

Ministerial Code

Baroness Drake Excerpts

Monday 6th December 2021 Lords Chamber

[Lord True (Con)]

My Lords, I can only repeat what I have said: standards in public life are important. I believe that the Prime Minister respects those fully. As far as the alleged events the noble Lord refers to, I point him to the statement made by Downing Street: that No. 10 has always followed, and continues to follow, Covid regulations at all times.

[Baroness Drake (Lab)]

My Lords, the Prime Minister sets the Ministerial Code and is the ultimate judge of standards of behaviour, but now highly reputable bodies are increasingly calling for reforms. It is the age-old question: quis custodiet ipsos custodes? Does the Minister agree that, to restore public confidence, the code needs to set stronger standards on how Ministers should use social media and respond to lobbying?

[Lord True (Con)]

My Lords, obviously the use of social media and lobbying are important and relevant matters. As the noble Baroness will know, there are recommendations before the Government and the country on lobbying, for example. My right honourable friend recently wrote to the Speaker supporting action on lobbying in the other place.

Money Laundering

Baroness Drake Excerpts

Wednesday 24th November 2021 Lords Chamber

[Lord Agnew of Oulton (Con)]

My noble friend is right to be concerned about the vigilance we need to deploy in this area, because it is a fast-moving target. We are always reviewing the situation. In July this year we published a call for evidence, which closed only a few weeks ago, in October. We will respond by June next year, looking at the issues my noble friend raised.

[Baroness Drake (Lab)]

In a recent speech on money laundering, the FCA’s executive director of enforcement highlighted the emerging risk to consumers of online offers from unauthorised companies, investment scams and other too-good-to-be-true propositions. The FCA warning list of such firms has doubled in just over a year. Can the Minister assure the House that there are no plans for regulatory easing of money laundering post Brexit? Will the Government increase the resources of the Serious Fraud Office and the National Crime Agency so that they can enforce legislation effectively and protect the high number of consumers now at risk?

[Lord Agnew of Oulton (Con)]

My Lords, as the noble Baroness will probably be aware, in 2018 we created a helpfully named quango oversight group called OPBAS, the professional body supervision group. It produces an annual report, which is always hard hitting on any failures—as indeed its most recent one was. This illustrates that we are entirely self-critical, to ensure that we are watching these developments carefully.

European Union (Withdrawal) Bill

Baroness Drake Excerpts

Tuesday 30th January 2018 Lords Chamber

[Baroness Drake (Lab)]

My Lords, this Bill preserves existing EU law as it applies in the UK, converting it into domestic law as retained EU law to provide legal continuity and certainty on exit day. It gives Ministers extraordinary correcting powers to amend such retained law where they consider there is a deficiency. We are therefore in, as the Constitution Committee observes, “uncharted territory”, so it is unsurprising that many organisations have expressed concerns that the Bill gives rise to ambiguity about the status of the different categories of retained EU law and that the Government are given abnormally wide powers to amend legislation.

In Committee, this House will examine whether those powers are greater than are needed for the task in hand, if and how they should be restricted, and the level of transparency and scrutiny that precedes the deployment of those powers. As my noble friend Lady Taylor of Bolton referenced, the Constitution Committee expresses the view that the overly broad powers that the Bill grants to Ministers to do whatever they think appropriate to correct deficiencies in retained EU law are “constitutionally unacceptable”. It goes on to suggest controls, such as “good reasons” statements, to be put in place on the proposed use of those powers.

Many important areas of law will be impacted by the Bill, and I want to reference workplace and equality rights—clearly a people’s issue. Clause 2 preserves EU-derived domestic legislation when the UK exits. That is important, as it addresses many EU-derived equality, employment and health and safety standards and rights, including where existing UK law has exceeded minimum EU standards—for example, on important maternity leave rights. Examples of other rights include the Working Time Regulations, the Transfer of Undertakings (Protection of Employment) Regulations, agency workers’ rights and equal treatment for part-time workers and fixed-term employees.

Clause 4, importantly, preserves the right to equal pay for equal-value work, which flows from Article 157 of the Treaty on the Functioning of the European Union. The impact that Article 157 and the accompanying EU Court of Justice case law have had on women’s pay and pension rights in the UK cannot be overstated. However, there are deep concerns that the “correcting powers” which the Bill affords to Ministers could be used to weaken such rights, including those contained in existing Acts of Parliament, such as the Equality Act. A range of workplace and equality rights in retained EU law could be vulnerable to change by subordinate legislation contained in other Acts of Parliament when that retained law does not have the enhanced protection that flows from EU membership.

Last December, the Prime Minister failed to rule out scrapping the working time directive, the agency workers directive and the pregnant workers directive. Maternity rights and part-time workers’ rights appear at risk. As the Fawcett Society powerfully observed, it would be regrettable if Brexit and this Bill resulted in the loss of the opportunity to be the best place in the world to be a woman.

There needs to be a robust process of scrutiny to ensure that executive powers in the Bill cannot be used to make changes in significant areas of policy and enhanced protections for key rights. There is also the question of Court of Justice of the European Union case law post exit, which the noble Lord, Lord Kakkar, spoke about at some length. Domestic courts will not be bound by such case law, but there are strong arguments to be put in Committee that courts should have regard to such judgments where they are relevant to the proper interpretation of law which originated from the EU. Without such regard, people in the UK may see their rights weakened.

It is also unclear how provisions in the Bill may be affected by future negotiations. During any transition period, the UK may not be able to weaken retained EU law. Future agreements on UK and EU relations may require the UK to comply with EU law, including on workplace rights. We need to understand those implications when we look at this Bill.

Finally, I return to a matter that I have raised previously. It may not seem significant to many in the great scheme of economic affairs, but it is hugely important to the people affected, and that is the need to replicate the protections from violence against women and girls post exit day. Women and girls at risk of violence may lose significant legal protections. European protection orders, which grant victims equivalent protection against perpetrators across the EU, will no longer be available to UK citizens. The ability to share data on perpetrators and a host of other measures aimed at tackling human trafficking, female genital mutilation and the sexual exploitation of women are also at risk. We need to understand how these rights and protections will be preserved post exit day.

Universal Credit

Baroness Drake Excerpts

Thursday 16th November 2017 Lords Chamber

[Baroness Drake (Lab)]

My Lords, the rollout of universal credit must be rooted in the claimants’ real world of squeezed wages, job insecurity and household incomes under pressure. Evidence consistently identifies people’s low financial resilience and rising indebtedness: 17.3 million working-age adults do not have £100 saved; £200 billion is owed in consumer credit, excluding mortgages; and 4.1 million people have failed to pay domestic bills or meet credit commitments in three or more of the last six months.

The majority of universal credit claimants arrive with pre-existing debt and no financial resilience. As the Secretary of State said: “We are able to make an estimate” of a UC payment “particularly given that it is likely that a lot of those people seeking advances will not have any alternative income over that first assessment period”. Citizens Advice confirms that claimants risk serious debt from delayed payments, that 79% have priority debts such as rent or council tax and that two in five have no money to pay creditors. I say to the noble Lord, Lord Farmer, it is not the concept of universal credit but the compromise on the essential design feature that it will make work pay that is the fundamental concern here.

The accumulation of benefit cuts is a major drag on the living standards of families on low and middle incomes. The Rowntree Foundation predicts that the four-year benefit freeze will increase poverty more than any other policy.

Universal credit was designed to focus on reducing worklessness, which is now at an all-time low. In-work poverty is now the increasing challenge. The wait of six weeks or more from claim to payment is a design flaw baked into the system and can be punitive, however nice the jobcentre staff are. Over 50% of claimants claim an advance because they simply cannot cope with that delay. Its stated purpose—to reflect a world of work where wages are paid monthly in arrears—does not reflect the world of the claimants. As has been said, they are paid weekly or fortnightly. As rollout increases, identified problems just become more pervasive and extensive.

The Government look to mitigate by increasing take-up of advance payments, asserting that such a system is the best way of spreading out their income. In reality, it has limited efficiency. The six weeks is still unmanageable for the majority without incurring debt to the state or a private lender. An advance has to be paid back in six months when claimants also face deductions for debts from council tax, utility bills and rent arrears. For the Government to rely so heavily on advance payments defers the problem and embeds debt as the default for claimants as a matter of public policy. It would be far better if the six-week period were reduced and the benefit freeze reappraised. The Government need to pause the rollout and reassess.

Finally, the Government introduced the two-child limit on the payment of child tax credit and the child element of universal credit to deter people from having more children and to reflect carefully on their readiness to support an additional child. Noble Lords argued that this limit should not apply to kinship carers—who often have their own children—who take on the care of vulnerable children to whom they have not given birth. There are more than 200,000 such children, saving the taxpayer the £40,000 cost of placing each child in foster care. The two-child limit was a non sequitur for kinship carers. The need was not for them to reflect carefully on their readiness to support a vulnerable child; the need was to support their readiness to do so. The noble Lord, Lord Freud, reflected and accepted this, stating:

“I am pleased to announce … that in recognition of the important role which family and close friends can play in caring long term for children who are unable to live with their parents and could otherwise be at risk of entering the care system, we are in favour of an exemption for children in such circumstances”.—[Official Report, 27/1/16; col. 1295.]


That concession is, shamefully, not being honoured. It is applied only if kinship carers had their own birth children before taking on the kinship children. If they take on the care first, then have a birth child, the exemption does not apply. Alyssa Vessey, who was 18 when her mother died suddenly, went to social services and told them she would raise her three young siblings on her own, to protect them from going into care. Four years later she had a partner, and had her own birth child. Alyssa was refused tax credits and a Sure Start maternity grant because she had breached the two-child limit. The DWP is reported as saying that the decision ensured fairness between the claimants and taxpayers. I say that Alyssa saved the taxpayer around £40,000 for each child not going into the care system— £120,000 per annum—plus £25,000 of care proceedings costs, together with the miserable saving of not paying her a maternity grant. A similarly affected pregnant kinship carer was advised by her local office that if she gave up caring for the kinship children, had her baby, then took them back at a later date, she would be eligible for benefits for both her birth child and the cared-for children. On any analysis of public policy, that is not honourable.

Financial Guidance and Claims Bill [HL]

Baroness Drake Excerpts

Committee: 4th sitting (Hansard): House of Lords
Wednesday 13th September 2017 Lords Chamber

Of course, such a significant regulatory change needs due consideration—there is no doubt about it. However, experts from the Financial Services Consumer Panel and the Lords Select Committee on Financial Exclusion have already examined the issue and endorsed the call for a duty of care. Also, if the Government agree to an amendment to achieve a duty of care as set out, the FCA would, of course, consult on the detail of how such a duty would be translated into regulation, providing a full opportunity to ensure that the duty would work for consumers and the industry. I hope the Government will be sympathetic to this important amendment and to the points raised here.

[Baroness Drake (Lab)]

My Lords, I, too, rise to support the noble Lord, Lord Holmes of Richmond. I congratulate him on using the opportunity of the Bill as it opens up the issue of how the FCA regulates claims management companies to seek to introduce the regulatory principle that an authorised person should act more in the best interests of consumers, particularly vulnerable customers. Consistently, not just today but previously, the noble Lord has put a powerful and informed case, particularly with regard to people with serious health conditions, including cancer, who have to cope not only with their illness but the financial impact of their diagnosis. That impact is felt not only in loss of income but in loss of access to or poor treatment by financial services companies. This, in turn, compounds their financial difficulties. The evidence of that negative experience is increasingly documented but people just know it themselves, intuitively. As Macmillan confirmed, and as referred to by the noble Lord, 90% do not even tell the bank when they have a problem, because they know that either it will be held against them or that there is little or no prospect that the firm will assist or offer support to mitigate the problems that their ill-health diagnosis has triggered. Not only will they face prejudice but they will be competing with customers who present a more attractive commercial prospect.

This growing problem will not be addressed simply by exhorting firms to behave better; the Government need to take much more of a lead. The Government have also been urged to take such an initiative by the Lords Select Committee on Financial Exclusion and the Financial Services Consumer Panel itself. A regulatory principle, as proposed by the noble Lord, Lord Holmes, would place an expectation on firms to support customers at times of vulnerability, change corporate culture towards the vulnerable and enable vulnerable customers to have the confidence to ask—and to ask earlier—for support, thereby enhancing their ability to manage their financial affairs.

As other noble Lords have mentioned, the FCA has committed to publishing a paper on duty of care but, by resting on that, the Government are kicking this problem into the very long grass. As the noble Lord, Lord Holmes, commented, the FCA has stated that it will not prepare such a paper until after our withdrawal from the EU. The paper will, as has also been said, only just start a very long process of dialogue, consultation, response, drafting and so forth. There will be a lot of people diagnosed with serious ill health in that time whom the environment will not support. There really is an urgency for those 4 million or more people who are expected to be diagnosed with cancer within the next 15 years.

The Government should seize the moment by taking the opportunity of this Bill to embrace the intent of the amendment of the noble Lord, Lord Holmes. I am sure the Minister will say that the amendment is either too extensive in its expectation or creates regulatory uncertainty, but it allows for the detail of how the regulatory principle of duty of care can be translated into the financial conduct rules by the FCA. Through its supervision, the FCA can identity and assess firms’ conduct that may affect consumers’ access. It has the power to make firms change their behaviour, but only where this is within its remit. Unfortunately, the FCA has no specific duty relating to consumers’ access to financial services. The noble Lord’s amendment strengthens the FCA’s remit in respect of claims management companies by introducing that regulatory principle, which begins to define how and when those companies should act in the best interests of consumers.

[Baroness Altmann (Con)]

My Lords, I, too, rise briefly to support my noble friend’s amendment and congratulate him on laying it in the way he has. I certainly sympathise with him about wishing to put in measures which might originally seem out of scope and the need to be rather convoluted about it. I also echo the words of the noble Baroness, Lady Drake: these are issues that have been recommended by the Financial Services Consumer Panel, highlighted by the Lords Select Committee on Financial Exclusion and would go some way to help change corporate culture to support those who are going through serious, perhaps unexpected, illness and need time to adjust to their circumstances or to cope with their treatment.

The cancer charities are rightly raising this issue and it would be very helpful if the FCA were able to encourage firms to introduce some kind of special measures or special help in recognition of the circumstances that people will from time to time find themselves in—not only to help those people when they apply for that help but to encourage somebody who has had a cancer diagnosis, for example, to ask for help, which very often right now they do not even think of doing. Therefore, I hope my noble friend will take this matter to heart and take this opportunity to address an issue that could have serious and important social benefit.

--- Later in debate ---

[Lord Elystan-Morgan (CB)]

My Lords, these debates endorse the fact that we dealing with a social nuisance of massive proportions. There are, I suppose, situations where a few cold calls might possibly be justified on some grounds, for example where a person has rights but is not conscious of how those rights can be carried out and brought to fruition. Those instances are in a small minority. The vast majority of cold calls are fraudulent and disgraceful. If there is an agreement between the two parties, then that amounts to an agreement to pervert the course of justice. I think I am right, as a proposition of law, to say that every agreement to pervert the course of justice is of itself a perversion of the course of justice. It is as serious as that.

A blanket overall prohibition, as the noble Earl, Lord Lytton, reminded us, is probably not appropriate. On the other hand, some very strict and practical steps have to be taken swiftly.

[Baroness Drake]

My Lords, I too rise to express my sympathy with the views articulated by the noble Lord, Lord Sharkey, and the noble Baroness, Lady Altmann. I also empathise with the point made by the noble Earl, Lord Kinnoull. I listen to what he says because he often makes some very wise nuggets on a point that warrant reflection.

We do not want to regulate CMCs out of existence, because people need access to redress where they have been poorly treated or have experienced a serious problem. Public policy has been pushing assisting people with access to justice out to the private sector, so we have to come up with a toughened regulatory system that does not deny that. In a well-regulated, well-run system where public policy itself is making it more difficult for people to pay for access to justice, well-regulated claims management companies have a role to play.

However, the way the CMC industry currently operates is clearly totally dysfunctional. It gives rise to three key problems. One that the noble Lord, Lord Hunt of Wirral, articulated in the previous debate is that it stirs up such an artificial level of claims without merit that it risks undermining that very protection regime for the genuine claimant. It raises the costs and charges faced by other customers for what they have to pay for products and services, often hurting those on lower incomes.

We know that the ease of entrance to the market means that claims management companies often do not treat claimants well. They give poor value to the claimant on fees and service; there is little inhibiting them doing so. I see that, a couple of years ago, 22% of claims management companies in one year lost their accreditation or received a formal warning—basically one-quarter of the industry having its card marked or forced out.

Also, we have a situation where new technology allows claims management companies to operate on a huge scale. They are harassing the public with very aggressive techniques, using new technology that allows such mass approaches. People are being bombarded with calls and texts; if you answer them by mistake, God are you hooked in. That triggers another series of harassing texts and calls. Very often the person does not even have the product or has not had the experience the call management company is targeting. These call management activities are one huge fishing trip that new technology allows which has got completely out of control. That trawling simply has to stop. There needs to be some appropriate intervention.

In supporting that, I go back to the reflective point that the noble Earl made. In a situation where assisting people with access to justice is increasingly being put into the private sector, we want a well-regulated claims management company that will help the genuine claimant get access to justice.

[Baroness Kramer]

My Lords, I intervene because it is important to stress that it is essential to ban cold calling, not give it a space. For example, those who are concerned about PPI claims can see advertising on the television. That is not cold calling or a sort of personal assault on your letterbox or your phone, whether by call, messaging or email. It is the personalised cold call that arrives. Often it is content that is intimidating and unless every phone call is recorded and checked there is absolutely no way to make sure it is not intimidating. It is the number of these things. If, for example, you say, “You can send five texts to every individual”, you will simply have a much greater group of people all sending five texts. It becomes almost impossible to manage unless you go for the ban strategy.

There are many ways to communicate. For example, I look at the way the FCA is now communicating with the general public over PPI. It has some excellent ads on television making it clear that there is a free way to call. It provides a phone number and a website. The whole process is easy. We would all be offended if the FCA now started cold calling individuals across the country, even to provide a free service. It is an invasion of private space. We have to protect private space, and cold calling is a mechanism which violates it. I hope that, in the interests of making sure people remain informed about the options available to them, we do not require them to give up control of that private space.

Bank of England and Financial Services Bill [HL]

Baroness Drake Excerpts

Tuesday 3rd May 2016 Lords Chamber

[Lord Bridges of Headley]

My Lords, Commons Amendment 10 places a duty on the Financial Conduct Authority to cap early exit charges that act as a deterrent to people accessing their pensions early under the new pension freedoms. The Government took the step of introducing this amendment in Committee in the Commons following detailed evidence-gathering exercises that showed the extent of consumer detriment caused by early exit charges and the imperative to act quickly in order to limit this.

Evidence from the FCA found that there is a small but significant cohort of people in contract-based pension schemes for whom early exit charges were posing a real barrier to accessing the freedoms. The FCA found that some 670,000 people over 55 in such schemes face an early exit charge, and for 66,000—almost one in 10—this charge would exceed 10% of the value of their pension pot. In some cases these charges would be high enough to make it uneconomic for an individual to access their pension flexibly, while in others, the presence of an early exit charge may have acted to discourage individuals from accessing their pension when it could have been the best thing to do in their circumstances.

It is therefore clear that the Government’s objective of ensuring that everyone who is eligible can access their pension savings flexibly is not being met and that action is needed to ensure that all consumers are able to make use of the freedoms. In order to ensure that the cap benefits current consumers who are eligible to use the freedoms now, subsection (4) of this clause provides that any cap will apply equally in relation to existing arrangements, as well as those entered into in the future. The decision to introduce a measure which will have retrospective effect in this way is not one that the Government have taken lightly; we recognise industry concerns about the way this cap will affect existing contractual agreements.

However, the Government’s view is that this action is warranted to ensure that individuals are not deterred from accessing their pension flexibly because of contractual terms they entered into long before the freedoms were introduced. These people would not have been in a position to make an informed decision about potential early exit charges when they signed up. Even some pension providers have conceded that industry practices have moved on and that the introduction of the pension freedoms means that these charges pose a much more significant barrier now than when they were agreed.

To be clear, this measure is about ensuring that consumers are adequately protected against early exit charges being imposed at a level so high as to deter them from accessing their pension early under the pension freedoms. This clause is not about determining the fairness of these, or other existing contractual terms and conditions more generally. That is a separate, wider issue which this Government have recently addressed in the Consumer Rights Act 2015, legislation which the FCA has the power to enforce against the firms it regulates.

It is important to consider the nature of the contractual terms affected through this measure. The Economic Secretary made it clear when introducing this clause in the other place that terms providing for market value reductions should not be subject to the cap on early exit charges. Subsection (8) of this clause gives the Treasury a power to introduce secondary legislation to provide for this exclusion to the FCA’s duty. FCA rules already place rules on how firms may apply a market value reduction, and the cap on early exit charges will not add to or modify these rules. Furthermore, in order to ensure that the level of any cap is fairly set, the FCA will determine the precise level of the cap, following further public consultation and cost-benefit analysis. The FCA will be setting out its next steps in this process shortly, with a view to implementing this cap before the end of March 2017.

This clause gives the FCA the flexibility to apply different rules to different classes or descriptions of charges if it finds that the evidence demands this, but the Government’s expectation is that any FCA cap or prohibition will apply equally for all those consumers accessing their pension aged 55 and above, up to their expected retirement date, rather than being set at different levels for different age groups. Although data collected by the Pensions Regulator suggest that early exit charges are less prevalent in trust-based pension schemes, we will also act to ensure that all members, regardless of scheme, are protected from excessive early exit charges, and the DWP and the Pensions Regulator will work alongside the FCA as they develop the design and level of the cap for contract-based pension schemes to ensure that this is possible.

The pension freedoms have given consumers much greater freedom of choice in the financial decisions they make at retirement. Commons Amendment 10 will provide important protections to consumers in contract-based pension schemes, ensuring that they are not deterred from using the pensions freedoms by excessive early exit charges. I beg to move.

[Baroness Drake (Lab)]

My Lords, I take this opportunity to thank the Minister for meeting my noble friend Lord McKenzie and me to discuss this amendment in detail. I am most grateful for that. As has been said, the amendment places a new duty on the FCA to make rules to prohibit or cap early exit charges that act as a deterrent to people accessing their savings under the new freedoms. This amendment is particularly interesting for two reasons. Unusually, it introduces legislation with retrospective effect on existing contracts and a new deterrent regime in addition to the existing fairness regime in financial conduct regulation—in effect, charges must not be at a level that deters people from accessing their savings.

The Government believe the legislation needs retrospective effect because of the need to protect existing and future consumers, and—more interestingly, when one reads the detail of their proposals—that fairness should not be determined solely by reference to whether or not it was fair to include a term in a pension contract a decade or decades ago, but that it has to be looked at against how unfair contracts legislation has evolved since those contracts were entered into, and through the new lens of the recent pension freedom reforms, all of which arguments I agree with. But given that the Government have taken the decision through this amendment to enable retrospective changes to existing pension contracts and recovery of amounts paid or payment of compensation for charges made in contravention of the new FCA rules coming into force in March 2017, and that the pension freedoms, which provide the new lens for looking at fairness, were introduced in April 2015, I cannot understand why the consumer protection in the new FCA duty does not apply with effect from April 2015. Why is it necessary to wait until March 2017 when the FCA rules are implemented—a full two years after the pension freedoms were introduced—before consumers are protected by the provisions on fair access to savings?

The Minister advised in his letter of 16 March that the Government are introducing this amendment,

“in light of detailed evidence gathering, and an imperative to act quickly in order to limit the extent of consumer detriment caused by early exit charges”.

The Government’s main defence for this two-year gap from April 2015 to March 2017 in protecting consumers is that savers who access savings between these two dates from a scheme whose early exit charges are considered excessive under FCA rules to be implemented in March 2017 cannot have been deterred by those charges and presumably are therefore not in need of retrospective protection. That argument simply does not sit comfortably with the Government’s view that some people are being denied fair access to their savings. It suggests that the new deterrent regime trumps fairness—in effect, if a person accessed their savings they have not been deterred, ergo the early access terms are fair.

There are many reasons why people may access their pension savings during that two-year gap, even though the charges may be excessive. There may be ill health or other compelling personal circumstances that override the deterrent effect. People may not be aware of, or understand, the excessive early exit charges, so do not make their decision on an informed basis. The FCA data reveal that 78% of affected consumers rated their pension provider’s explanation of the exit charge and its level as poor.

In his letter of 16 March, the Minister comments:

“In order to ensure that the provision benefits current consumers who are eligible to use the pension freedoms now … this clause provides that any prohibition or cap imposed by FCA rules applies equally in relation to existing pension contracts, as well as those entered into in future”.

In the light of that statement, it is most unfortunate that the amendment excludes from the protection consumers accessing their savings between April 2015 and March 2017, even though in other circumstances it allows for a retrospective effect.

[Baroness Kramer]

My Lords, I echo the objections just raised by the noble Baroness, Lady Drake. It is quite inexplicable that “retrospective” does not mean that the new regime will be recalculated from the date that people were able to access their pension pots. It seems equally unfair for people to have paid an inappropriate exit fee a year ago as it is for them to pay an inappropriate exit fee a year from now. Has the Minister considered how this will tend to inhibit decision-making by families until the new regulations are revealed? Instead of making the best decision for the family, there will be great pressure to delay that decision until the rules are clearer and, presumably, the exit fees are removed.

The amount of money involved in this process cannot be substantial but to the individual family that has been impacted, it is certainly significant. I really do not understand the Government’s thinking on this issue.

--- Later in debate ---

[Lord Bridges of Headley]

My Lords, I thank noble Lords who have spoken in this debate. Let me pick up on the final point which was just made by the noble Lord, Lord McKenzie. I heed what he says about getting access to this amendment sooner but I would somewhat refute what he says about the rushed nature of the entire policy. When this problem was first identified the Government took immediate action to address it by embarking, as I have mentioned, on the FCA evidence-gathering exercise. However, I thank in particular the noble Lord and the noble Baroness, Lady Drake, for the time that they have spent discussing this clause and amendment with me. I have already committed to write to them shortly to address a number of the very forensic and detailed points that were made to me last week. I will do that as soon as I possibly can.

A number of your Lordships including the noble Baroness, Lady Kramer, raised a valid question about why we are not backdating this measure to 2015, when the pension freedoms came into effect, and not requiring providers to pay back the early exit charges which they received from customers in the period between April 2015 and when the cap comes into effect. I would make two points on this, as already outlined in my remarks. First, the purpose of this measure is not to require the FCA to assess the fairness of the contractual terms of historic pensions. The intent of the measure is to ensure that early exit charges are not imposed at an inappropriate level which deters consumers from accessing their pension early under the pension freedoms. Clearly, those who have decided, or will decide, to access their pension despite an early exit charge have not, or will not, have been deterred by the existence of such a charge.

Secondly, I accept the observation that, once in effect, this cap will obviously benefit some consumers who would not have been deterred by the early exit charge in their contract. However, the Government believe that it is an ordinary consequence of introducing a new measure of this sort that those—in this case, consumers—who take an action before the law comes into force do not benefit from the new law. Moreover, it is right that the Government do not rush to make legislation which has any sort of retrospective effect but that they do so only when there is clear and compelling evidence that it is in the public interest, and then make that retrospection as minimal as possible to ensure that the action is proportionate. That is what I and the Government believe that this clause achieves. It is proportionate and focused on those who greatly need it, and that is why I commend it to the House.

[Baroness Drake]

Before the Minister finishes, if I may, the defence is given that this is not a fairness regime but a deterrent regime and that there is therefore no evidence of deterrence and no need to make it retrospective. But on the FCA’s own evidence, the knowledge and understanding of these charges is quite poor. It is difficult to be deterred if you do not know that you are being exposed to excessive exit charges. People will not know that they are being exposed to them until the FCA has done its business, which will be by March 2017. It seems a little unfair. At the very least, perhaps the Government should be taking steps to ensure that companies and other agencies make consumers aware that if they wait until March next year, they may get a better deal.

[Lord Bridges of Headley]

The noble Baroness, as so often, makes a very valid point. This is precisely what the consultation sets out to address. It aims to ensure not just that consumers are properly protected but that they make informed and proper decisions. I will write to the noble Baroness to make these points in more detail.

Trade Union Bill

Baroness Drake Excerpts

Wednesday 16th March 2016 Lords Chamber

All we need now is for Ministers to agree.

[Baroness Drake (Lab)]

My Lords, I support Amendments 9 and 10. Clause 10 has raised much concern and strength of feeling, and the debate has been binary: on the one hand, the view confirmed by the Select Committee that the Bill would have a significant and negative impact on Labour Party funding; on the other side, the Government’s adherence to their manifesto commitment to introduce opt-in to union political funds. The Select Committee attempted,

“to reconcile these two issues by setting out a proposed compromise”.

It identified a way forward, which, put at its simplest, means introducing the principle of opt-in for new members while seeking to mitigate the worst of the impact on union political funds and the Labour Party through changes to the provisions in Clause 10.

The principle of opt-in is in the manifesto, but the detailed process for implementing it is not. Amendment 9 captures the unanimous view on the desirable changes to Clause 10 and the majority view on the position of existing members. As the Select Committee observed, Clause 10 is very far from commanding a consensus, not only because of the impact on the Labour Party but because of the obstacles the Bill presents to the successful implementation of opt-in—what I would call the double-jeopardy effect.

The amendment would require new members to contribute to the political fund only if they have opted in, in writing or electronically. To restrict the opt-in system to an in-writing, on-paper process is an obstacle to successful implementation and is much less likely to achieve a good response rate. Doing something through the post can be harder than doing it online. People can mislay their form. It provides what in behavioural terms are points of friction, which encourage inertia and will discourage opt-in. Members do not make a decision on whether to opt in or not; rather, they make no decision.

The Government, in arguing for opt-in, refer to the shift in the market where consumers purchasing products or services are increasingly being asked to give active consent when entering a new commitment. But increasingly those opt-in decisions can be made electronically—indeed, that is at the very heart of our e-commerce world. Allowing opt-in to political funds electronically goes with the market shift. The amendment contains no requirement for members to renew their opt-in decision every five years, but would provide greater transparency in that all members, existing and new, must be reminded every year of their right to opt out and cease paying into the political fund. The Certification Officer must, in a code of practice, set out the annual reminder communications that unions must issue, monitor unions’ compliance and report.

The arguments against a five-year renewal are several. Regulated annual reminders to members of their right to cease paying is a more proportionate approach and is consistent with market practice. In the market, where an initial opt-in decision is required for membership, services or financial products, there are many instances where consumers are not required to renew their decision, although it is not unusual to send an annual reminder. The default is that the policy agreement or service continues. This can be compatible with Financial Conduct Authority requirements. It is reasonable for the provisions of Clause 10 to take a similar approach, given that other products in the market are normally of much greater value than a 9p political levy.

The Bill is disproportionate as, every five years, a member’s opt-in decision expires unless they have renewed it—so every five years, the union would have to contact all members to ask them to renew. The Select Committee reported that the administrative and financial burdens on unions arising from this requirement would be considerable and disproportionate against the size of the 9p contribution. The exercise would cost a union one year of political fund contributions every five years.

Depending on when a union last held its last political fund ballot, which it is required to do every 10 years, it could face the tasks of initially contacting or persuading all existing contributing members to opt in; contacting and persuading all contributing members to renew their decision to opt in five years later; then conducting a full postal ballot of all members to secure a renewed authority to have a political fund—all in the space of about six years, and all expensive.

The amendment increases the transition period to at least 12 months, to be set following consultation with the Certification Officer and the trade unions. Most witnesses agreed that a three-month transition period is far too short. Retailers were granted two years to prepare for charges on plastic bags. Following the Health Act 2009, which banned cigarette displays, the coalition brought the provisions into force in 2012 for larger shops and 2013 for smaller shops. The right-to-rent landlord checks in the Immigration Act 2014 came into force in 2016. Three months appears to be very mean-spirited when compared with the two or three or four-year transition periods allowed under other legislation on issues of considerable moment.

The Certification Officer advised that Clause 10 would require unions to revise their rulebooks and secure his approval. Many unions need to get member approval at an annual or special conference. This will take time and expenditure. Rules revisions, developing guidance on training for union staff and reps and other changes are too great a task to be completed in three months. It is setting unions up to fail. Moving to opt-in is not the only demand on union resources coming out of this Bill. Dealing with the abolition of check-off will be a major priority, too.

Finally, the amendment does not extend the opt-in requirement to existing members as part of the Bill. But it does require them to be covered by the transparency requirements to annually notify members of their right to opt out. This gives effect to the majority view in the report. Not extending the opt-in to existing members as part of the Bill is fairer and more even-handed. Human behaviour is such that persuading existing members to make an active choice is much more difficult. They are more likely to make no choice. As the noble Lord, Lord Burns, said, there is no trigger point such as joining the union. Response rates will be lower and greater expenditure will be incurred in prompting, chasing and following up. Not extending to existing members, but providing them with regulated annual notification of their right to opt out, increases transparency.

The noble Lord asked what the principle was here. The principle is that when you introduce a new regime for future members, you should have a protection regime for existing people. There are precedents. The principal protection for the existing members under this amendment is a compulsorily regulated regime of notifying members of their right to opt out, which will be monitored and reported on by the Certification Officer.

As the Select Committee observed, even without some of the onerous provisions in Clause 10, there will still be “a sizeable negative effect” on members contributing to political funds. The Select Committee’s overarching proposal was that the Government should implement their other manifesto commitment: to convene cross-party talks and make an urgent effort to reach agreement on party funding. The majority view was that the question of extending the opt-in to existing union members should not be part of the Bill but should be considered as part of those talks. As the Select Committee observed:

“The further danger of proceeding down a non-consensual route is that any cut in the Labour Party’s funding will simultaneously reduce the incentives for the other parties to make concessions with a view to achieving comprehensive reform”.

The amendment strengthens transparency considerably. It introduces opt-in going forward, but it also introduces fairness, proportionality and, even more important, what has been missing—a level of even-handedness.

[Viscount Hailsham]

Notwithstanding my considerable respect for the noble Lord, Lord Burns, and my noble friend Lord Cormack, now my near neighbour, and indeed the noble Lord, Lord Tyler, I am not with them on the amendment.

The amendment is in paragraph 142 of the Select Committee report. I am an advocate of the alternative view: a generous transitional period for existing members. I should like to think that the Minister will offer a more generous transitional period than she is presently contemplating. I cannot help feeling that, if she did, she would attract considerable support.

My reasons are very simple and can be briefly expressed. First, as a matter of principle, existing members should be covered by the opt-in provisions. The noble Baroness, Lady Drake, referred to the amendment as fair and even-handed. It is nothing of the kind. It actually deprives existing members of the greater ability to opt out, if they want to. There is nothing fair or even-handed about the amendment; it has a contrary effect.

However, I agree with another point made by the noble Lord, Lord Burns, and, incidentally, my noble friend Lord Cormack: that it would unbalance party funding. That is not in the general interests of the country or, therefore, within the general consent of this House. I therefore think that the alternative approach formulated in paragraph 142(b) of the Select Committee report is the way forward. A more generous transitional period for existing members seems to me to catch the sense of the House.

Bank of England and Financial Services Bill [HL]

Baroness Drake Excerpts

Tuesday 15th December 2015 Lords Chamber

[Lord Bridges of Headley]

My Lords, this amendment introduces an advice requirement for some of those consumers who wish to sell their annuity income streams on the secondary market.

We have already debated the extension of Pension Wise, enabling it to offer guidance for consumers in this market. The Government recognise the importance of protecting all who have a right to receive an income under a relevant annuity, not just the primary annuity holder, and this has been a concern raised by noble Lords previously. That is why we can clarify that we will be making the free and impartial Pension Wise guidance service available to anyone with a relevant interest in a relevant annuity.

Today, the Government are introducing a new measure to ensure that consumers are adequately supported when making the complex decision of whether to sell their annuity income streams. A regular income stream from an annuity is a valuable asset and, for the majority of individuals, it will be in their best interests to keep their annuity. Therefore, it is important that annuity holders understand the value of their income stream and are informed about the options available to them.

The Government have consulted on the steps that should be taken to support consumers with this complex decision. In addition to Pension Wise guidance, we asked whether consumers should be required to take financial advice in order to receive a tailored recommendation to inform their choices. We also asked whether the safeguards in place should vary depending on the value of an annuity to ensure that consumers with lower value annuities do not have to pay disproportionately high costs in order to sell them. There was broad support from both industry and consumer groups for requiring advice above a threshold. The Government have listened and are putting this measure in place through a government amendment to this Bill today.

This proposed new clause will place an obligation on the Financial Conduct Authority to make rules requiring certain authorised firms to check that advice has been received before annuity holders may sell their annuity income stream. The FCA will determine which businesses will be required to make these checks, what the checks will entail and when they will be carried out. We expect that the FCA will be consulting on its proposed rules during 2016.

The threshold for advice, including how it will be calculated, will be set out by government through secondary legislation. The Government will also lay secondary legislation to specify what type of advice individuals must have received. In specifying appropriate financial advice, the Government’s intention is to require advice to be FCA-authorised and regulated. The Government also intend to legislate that all UK buyers in the secondary market for annuities will be FCA-regulated. This will allow the FCA to design specific rules governing the conduct of both financial advisers and buyers in this market, and the Government will work with the FCA to consider any conflicts of interest that may arise between these parties. The Government are engaging with financial advisers and their representative bodies with the aim of ensuring that there will be enough participating advisers to meet consumer demand when the market opens. Within the financial advice market review, the Government are considering how the availability of financial advice can be improved, particularly for those who do not have significant income or wealth. The review is to publish its recommendations by the time of Budget 2016, and the Government will ensure that the financial advice requirement in the secondary annuities market fully reflects the outcomes of this review.

A further power will allow the Treasury to exempt from this advice requirement those individuals whose financial circumstances meet certain criteria. The Delegated Powers and Regulatory Reform Committee has recently recommended that this power be affirmative rather than negative, and the Government will respond to the House on this recommendation at the earliest opportunity. The Government will consult on the regulations to be made under all powers afforded by this clause in 2016.

Today’s debate coincides with the Government’s publication of their response to the March 2015 call for evidence on the creation of a secondary market for annuities. This sets out the wider set of proposals around, and the next steps for, the implementation of the secondary market. The response gives further detail on how the market will operate, including tax considerations as well as further details on the consumer support framework, part of which the Government are legislating for in this Bill. Your Lordships will no doubt be minded to consider the wider policy in today’s discussion, and your views on these proposals are welcomed. I beg to move.

[Baroness Drake (Lab)]

My Lords, I refer to my entry in the register of interests, in particular my membership of the board of the Pensions Advisory Service. I am also on the Delegated Powers Committee.

There is no pre-existing secondary annuity market which can inform an assessment of whether it would be a well-functioning market, what the key risks are or what is an appropriate level of consumer protection. I have had little time to digest the Government’s response to the consultation on this market, published today, but up to 5 million people could participate in this market—although interestingly, the Pensions Minister and the Economic Secretary both advise that for the vast majority of customers, selling an annuity will not be the best decision. There is a real tension in the policy on this secondary market. The Government have to ensure a robust consumer protection regime consistent with their asserted view, which I do not disagree with, that the right decision for most people is to retain their annuity. At the same time, an effective market needs a sufficient level of demand from consumers to sell their annuities and a sufficiently wide range of purchasers. These two requirements do not sit easily with each other.

While it is welcome that the Government are taking further steps through their Amendment 25 to protect the consumer, I have real concerns about the sufficiency of those protections. The Government will now also allow the original issuers to buy back annuities. This will be allowed only indirectly when facilitated through a regulated intermediary, such as a broker or financial adviser—presumably to enhance consumer prospects of a better deal—although annuity providers can still buy back low-value annuities directly. That raises several issues. What will be the threshold at which direct buyback of low-value annuities will be allowed? How will this be measured—by income stream, by income stream in relation to the individual’s financial resources or by the annuity’s value on the secondary market? Indirect buyback through an intermediary will mean an extra layer of costs for consumers, paying in effect for their own protection. How will the Government control those costs?

As individuals will be required to take advice, how will the Government ensure that advisers are willing to provide advice at a reasonable charge, particularly to those with modest value annuities? This is a problem under the required advice regime for individuals transferring defined benefit assets to defined contribution arrangements, so similar problems are certain to arise in a secondary annuity market. Will sufficient brokers enter that market to enable a fair price? Allowing buyback, directly or indirectly, must increase the risk of consumer inertia as individuals choose to stay with their original provider, notwithstanding any advice that they receive, heralding a weak demand size which is already so common in the pensions and annuities market. The Government intend to bring forward legislation to create a further regulated activity for buying back an annuity. What is the timetable for that legislation and will we have time to consider it properly?

Bank of England and Financial Services Bill [HL]

Baroness Drake Excerpts

Wednesday 11th November 2015 Lords Chamber

Moved by

[Baroness Drake]

26: After Clause 22, insert the following new Clause—
“Extending a duty of care to the financial sector
In every contract to supply a service, traders who are ring-fenced bodies providing financial services as defined under section 142A of the Financial Services and Markets Act 2000 (ring-fenced body) shall be subject to—(a) a fiduciary duty to their consumers and small businesses with respect to provision of—with reasonable care and skill, and(i) the operation of care services, and(ii) the management of any individual contract to provide services,with reasonable care and skill, and(b) a duty of care towards consumers and small businesses across the financial services sector.”

[Baroness Drake (Lab)]

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

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

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

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

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

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

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

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

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

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

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

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

allowing the FCA to ensure that,

“companies address conflicts of interest”.

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

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

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

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

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

--- Later in debate ---

[Lord Bridges of Headley]

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

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

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

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

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

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

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

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

[Baroness Drake]

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

Amendment 26 withdrawn.

--- Later in debate ---

[Baroness Kramer]

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

[Baroness Drake]

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

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

“We can’t launch without safeguards”.

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

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

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

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

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

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

[Lord Bridges of Headley]

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

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

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

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

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

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

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

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

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