Financial Services Bill

Baroness Kramer Excerpts

Monday 15th October 2012 Lords Chamber

[Lord McFall of Alcluith]

My Lords, I support my noble friend Lord Kennedy in his proposal, not least because, on my way down on the train today, I received a call from 0843 5600827. They wished to talk to me about my PPI claim of £3,350. Notwithstanding that, I received a text message saying that “time is running out”. I have never taken out a PPI policy.

This is an example of the instability which the industry is suffering at the moment because of this situation. I did chair a committee with consumer and industry representatives two months ago, in order for them to approach the MoJ to try to sort this issue out. Given these demands that have been made on the industry, the £8 billion that has been put aside for PPI mis-selling will surely increase. Let us not forget that we have interest rate swaps. On one of the sub-committees of the Parliamentary Commission on Banking Standards, of which I am a member along with the noble Lord, Lord Lawson, I asked an expert on interest rate swaps about the £8 billion. He said that that mis-selling could dwarf the £8 billion for PPI.

So this issue is current and will have a destabilising effect on the industry for the next few years, and also on consumers’ confidence. I do not think that the Government can escape their responsibilities on that by saying that this is not really a financial services matter, but for the MoJ. It is most certainly having an impact on financial services at the moment. Therefore, as a matter of urgency, the Government should take note of my noble friend Lord Kennedy’s amendment so that they can look at this issue in the cold light of day, outwith this Chamber, and get an adequate and decent solution, both for the industry and for the consumers who are suffering.

[Baroness Kramer]

My Lords, I suspect that everyone in this House has been plagued by the various attempts by the claims industry to get us to pass over all kinds of personal details. That worries me. Anecdotally, I have heard reports of people who responded positively to one of these messages and handed over their credit card details. They then found themselves being charged without realising that they were getting themselves into that situation. We have talked to various institutions, many of which say that half the claims presented to them are from people who have never had any relationship with them whatever. It was entirely a fishing expedition. At a time when we want our banks to focus on appropriate lending to individuals and small businesses, which they are all struggling to do effectively, to have the complete distraction and cost associated with keeping this abusive industry afloat is surely unacceptable to all of us.

[Baroness Sherlock]

I support in particular the comment made by my noble friend Lord Kennedy at the end of his contribution. He asked the Minister whether he would meet with my noble friend and other interested Members to consider if not this then what other action can and should be taken. I think that the House would be particularly interested to hear the Minister’s response on that.

It seems quite obvious that as a market the CMC sector simply is not working. Not only are significant numbers of people being pressured essentially into doing things which they do not want to do, but there appears to be no price competition in the market at all. All the evidence shows that consumers are just as likely to use a claims management company which charges 40% as one that charges 15% of any money that they might get back. Many simply are not aware that they could do it for themselves for free by going directly to the ombudsman.

If the Minister is not minded to go in that direction, will he tell the House two things? First, what would the Government be able to do very soon that would have a significant impact on targeting in particular the minority of claims management companies that are behaving very badly? Secondly, will he at least agree to meet interested Peers to discuss that matter very soon?

Financial Services Bill

Baroness Kramer Excerpts

Monday 8th October 2012 Lords Chamber

[Lord Eatwell]

My Lords, I will speak also to Amendment 149AC. Both amendments concern the process of applying to carry on regulated activities. I am sure that the Minister is aware that there is considerable disquiet at the moment about the very long delays associated with the application to carry on regulated activities. Undoubtedly this is having a deleterious effect on competition in financial services, and on what we might call the reformation of the financial services industry.

No doubt these delays are partly as a result of the fact that the legislation that will cover these organisations is in process, and therefore the appropriate officials at the FSA feel somewhat constrained in their ability to make decisions on what can sometimes be quite sensitive and contentious issues. None the less, those delays are very unfortunate. The two amendments are designed to facilitate the process of application and to ensure that it will be rather more efficient when the duties are passed over to the FCA and/or the PRA on what I have noticed is, rather unfortunately, All Fools Day.

Amendment 149AA calls for co-ordination between the FCA and the PRA when processing applications for permission to carry out regulated activities, in particular giving clear and detailed guidance—something that is not always in evidence at the moment—on applying for, varying or cancelling permission. I am particularly concerned about applying for permission.

It is important that when the responsibility is split, as it must inevitably be between the regulator responsible for risk, the PRA, and the regulator responsible for conduct of business, the FCA, the co-ordination between them when dealing with new applicants is as clear, transparent and carefully guided as possible. Amendment 149AA achieves exactly that—at least that is what it seeks to do—and if it does not achieve it, perhaps the noble Lord will tell us how he intends to achieve the same objective.

Amendment 149AC seeks to modernise and future-proof elements of the application process. The Bill does not refer to decisions previously made by the European Union regulatory authorities when referring to non-EEA firms and the weight to be attached to opinions on any non-EEA firms wishing to operate in this jurisdiction. The European Union regulatory authorities are going to be the major regulatory rule makers in this area, so leaving them out at this stage will limit and inhibit operation of the Bill in the future. We know that the European authorities will become important in this respect. Surely it is therefore imperative that some weight be given in the Bill to their opinion when non-EEA firms are likely to be offered the privilege of acting within this jurisdiction. I beg to move.

[Baroness Kramer]

My Lords, I want to speak very briefly to Amendment 150B in this group. As your Lordships will know, the Bill amends Section 55 of FiSMA. Section 55Q as now in the Bill refers to the,

“Exercise of power in support of overseas regulator”.

I would like the Minister to clarify the definition of “overseas regulator” because neither I nor some of those who are much more sophisticated than me in trying to understand regulation are fully certain whether that definition would include an agency or instrumentality of the European Union such as the three supervisory authorities—the ESMA, the EBA and the EIOPA—which have direct regulatory powers in their own right. All I am asking for at this point is some clarification as to whether these EU agencies or instrumentalities are encompassed in this and if they are not, why not.

[Lord McFall of Alcluith]

I will briefly refer to Amendments 151 and 152. They oblige the regulator to have regard to those associated with a person who has applied for, or has been given, permission. We realise that proposed new Section 55R provides that when considering previous issues the regulator may have regard to the applicants’ relationship. I suggest that this provision should be mandatory rather than discretionary and that relationships should be defined as including family, business or other associations. It would bring more clarity to the interpretation of this clause.

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[Baroness Kramer]

My Lords, I will speak to Amendment 173AAZA in this group and I will be brief. Your Lordships will recognise that this amendment is part of the family of amendments that we on these Benches have moved. Amendment 173AAZA addresses the issue of social enterprise. It gives the FCA the power to make general rules for social enterprises to advance the consumer protection objective and the competition objective, and for services to small and medium-sized businesses, to defined groups within the more deprived economic and social environment and for environmental purposes.

It is the contention on these Benches and through much of this House that the current organisations that provide financial services fail to meet the needs of important communities, especially small and micro-businesses and deprived communities, and very often they certainly do not provide the necessary financial services to environmentally-oriented projects. Part of the barrier to the entry of new organisations that could meet those financial needs is the approach of the regulator which is very much a one-size fits all approach. Throughout this Bill we have been calling for the regulator to have the power to deliver appropriate regulation. This amendment addresses those issues particularly around social enterprises and other organisations with a social objective.

We recognise that the Government are somewhat sympathetic to the issues that we have raised. This is a probing amendment but also a reminder that although we went away for the summer we have not dropped, and will not be neglecting, these issues as this Bill proceeds to its end.

[Lord Flight]

My Lords, three different sets of amendments that I have tabled are grouped together here and they cover rather different territories. I will be as organised as I can in presenting them.

Amendment 173AA is about fair process for product intervention powers. I understand, and have a deal of support for, the regulator being able to ban promptly products that are clearly undesirable. However, if additional product intervention powers are put in place, there ought to be legislative safeguards to ensure that the powers are used as a last resort and not regularly. Amendment 173AA seeks to put in place safeguards for the use of product intervention powers, such as those set out in the EU markets in financial instruments directive.

Many noble Lords may have noted that Martin Wheatley, the designate head of the FSA, had made statements about shooting first and asking questions later and had perhaps over-made his point. One of the issues I want to speak about on Report regarding the new regulatory order is that I have encountered reluctance by the industry to raise criticisms with the regulator for fear of unpleasant reciprocal action. I fear we are slightly swinging from an era where regulation was very lax to one in which there may not be enough open debate between the regulator and the industry.

My Amendments 173ACA to 173AE seek to remove the requirement to publish details of directions prior to the conclusion of the representation process. There is an analogous issue that will come up in due course with regard to warning notices. In a world where anything published is a label of guilt, I am inherently opposed to the publication of notices before there has been fair representation and a fair judicial process.

My Amendment 173AF covers slightly different territory. The Bill already gives the FCA the right to introduce rules without consultation where it would be considered that a delay would be prejudicial to the interest of consumers. This additional power, which my amendment seeks to block, is unnecessary and provides the FCA with excessive powers without appropriate checks and balances.

Amendment 173AG raises the issue that very little detail is included about what should be covered by the statement of policy. It would be better if the statement of policy were clear and transparent, particularly if there is no consultation on the specific use of the powers. Finally, the statement of policy should be used for production intervention powers generally.

I cannot find the appropriate notes. Amendments 187RA and 173AAC both cover completely different territory. As noble Lords will be aware, financial advisers are the only category of people who do not have protection from the statute of limitations for a period beyond 15 years. In practice, this means that if there are any outstanding issues when a financial adviser retires, there is no closure. There are many such situations. Sometimes issues may be with the ombudsman or the regulator from way back and there is no indication whether any action will be taken. This is a messy situation and it is ultimately unfair to financial advisers, and not helpful to clients, as it stops financial advisers being able to hand on or sell their businesses to others in the industry. I can see no really fair justification why financial advisers should not enjoy the same protection as those in other industries. I may add something further after the Minister’s response.

Financial Services Bill

Baroness Kramer Excerpts

Wednesday 25th July 2012 Lords Chamber

Moved by

[Baroness Kramer]

118AZA: Clause 5, page 17, line 35, at end insert—
“(3) Section 21 of the Financial Services and Markets Act 2000 (restrictions on financial promotion) is amended as follows.
(4) At the end of subsection (2) insert “or
(c) the content of the communication is for the purposes of a social investment.””

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[Baroness Kramer]

My Lords, this amendment takes us back to social impact investments. In moving Amendment 118AZA, I also very much support Amendment 121A in the name of my noble friend Lord Hodgson; it is also in mine. However, I know that he will speak eloquently to that amendment so I ask noble Lords to assume my support in the interests of the time pressures that we have today, and I will confine myself to speaking to the first amendment in this group.

Again in the interests of time, I will not go through the issues that define why social impact investment is so important and so beneficial, yet it currently feels very constrained. That has been done already, very eloquently, by my noble friends Lord Phillips and Lord Hodgson, both of whom are in their places here today, so I will talk within the narrower terms.

I want to make two points about social impact bonds, which are the primary form of social impact investment under general discussion. These bonds are, by definition, small. If the sector develops as it hopes, the range typically will be £1 million to £5 million. The bonds are small because they deal with very specific, local social problems, which might include building new social housing within a particular community or the resettlement of prisoners from a particular prison. That small size is key to understanding the regulatory environment in which these bonds need to live and thrive.

Secondly, qualified investors are not likely to provide a very large market for social investment bonds. Certainly the one that has been offered in Peterborough for prisoner resettlement is indeed funded by qualified investors, but that will be a less frequent occurrence. The real market for these bonds is people who live in the community and whose primary objective in purchasing the bonds is social good, with a financial return being secondary. That is the market that has to be reached if we are to develop this sector effectively.

That brings me to the problem that is addressed by this amendment, which is Clause 21 of FiSMA on the financial promotions order that sits underneath it. Under these rules a financial instrument cannot, in effect, be marketed except by an authorised person. Under the order there are a few exceptions but they do not apply at present to social impact investments. To become an authorised person requires going through a process that costs some £150,000. We have talked directly with the FSA and the FCA, with independent financial advisers and with others who do structuring, and there is a general consensus around that number. In a traditional investment, which might include a fund for £20 million, £30 million or £40 million, £150,000 is nothing. However, for a bond issue of £1 million, £2 million or £5 million, £150,000 is a very large amount of money and effectively makes it impossible to develop the instrument and market it to the general public. Therefore the rules as they stand make it impossible, in practical terms, for social impact bonds to actually be marketed to their primary would-be buyers, who are the general public.

That strikes all of us, I think, as a real flaw in this legislation and it has to be tackled. We have the irony that a charity could come to any Member of this House and say, “We have a very good cause. Please give us some money to fund this cause”—no problem with that at all. However, if that charity were to go to any of your Lordships and say, “We have a very good cause. Please give us some money and, no promises, but I will try to get you back your original investment and maybe even a small return on it”, that is handcuffs at dawn; it is actually breaking the law. That is an insane situation in which to be placed, but it is where we currently sit.

I say to the Government, to the Minister and even to the Bill team that, since the Government themselves are considering whether they should enter the field of promoting social impact bonds, I would hate to see members of the Civil Service finding themselves serving at Her Majesty’s pleasure as the consequence of having promoted these kinds of investments. It is an anomaly, and we seek to address it by this amendment. I will not pretend that the amendment is brilliantly crafted, but our goal is to get the Government to sort this problem out before the law of unintended consequences has a severe impact. This rule is already inhibiting the development of this market for no good purpose. It needs to be dealt with promptly, and I ask the Government to consider this issue seriously.

[Lord Hodgson of Astley Abbotts]

My Lords, I proposed Amendment 121A in this group. I am grateful to my noble friend Lady Kramer for her support. She has covered some of the ground that I wish to cover, and I will endeavour not to repeat the very powerful arguments that she has made. My amendment proposes inserting into the Bill a new clause with a further consumer protection objective, as stated in its subsection (a), in situations where consumers are,

“engaging in investment activity … to benefit society or the environment”,

so it comes at the problem in a slightly different way.

As some noble Lords will know, I have just completed a review of the Charities Act 2006. My terms of reference, given to me by the Government, were widely drawn. One of them stated:

“Measures to facilitate social investment or ‘mixed purpose’ investment by, and into, charities”.

My report, published a week ago, ran to 159 pages and contained 130 recommendations, a large number of which—15 or 20 or so—were concerned with social investment. I think that there is a great opportunity here, as my noble friend mentioned, and we are in danger of missing it.

So far my noble friend Lord Sassoon’s comments on this, no doubt written for him by the Treasury, are disappointing. As my noble friend Lady Kramer pointed out, we have this counterintuitive situation where you can give money but you cannot invest it. As long as you give it away and cannot possibly get it back, you are fine. However, you cannot say, “I will give you this money. I might lose it but I might get it back, and I might get it back with a small incremental return”, perhaps linked to gilts. You cannot do that, which must be counterintuitive. As the Government seek to develop social impact bonds—covering school exclusion, prisoner reoffending, getting people back into work—where charities and voluntary groups can do better than the state, which is therefore prepared to share some of the savings with these very effective voluntary groups, it must be sensible for us to try to find ways to facilitate the flow of money from the private sector into these sorts of schemes.

As we said in earlier debates, this idea is at an early stage, and there are many challenges. The first, not least, is to find some corporate form that can encompass all the different strands of funding: the charity itself, other funding charities, the Government and the private sector, which subdivides into corporate investors and individual investors. All these have different timescales, different legal requirements, different tax structures and different objectives. It is on the last of these—in particular, the objectives of private individuals—that I think we should focus and that my amendment seeks to focus.

Research suggests that if people could invest relatively modest sums—say, £500 or £1,000—in a social investment proposal with which they sympathised, with the possibility of getting their money back but no certainty, and perhaps with a modest incremental return, it would attract substantial support from across our society. One would hope that successful operators in this field might create a record of success that would enable them to raise larger sums of money and provide increasing services in the future.

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[Lord Lucas]

My Lords, all of us in this House wish for that sort of reply from my noble friend, although some of us are not so lucky. I am sorry that the noble Lord, Lord Peston, was not present to hear that so that his scepticism on this matter might have been calmed. It was indeed an excellent reply from my noble friend and I very much hope that my colleagues will be able to take advantage of it.

Perhaps I may draw my noble friend’s attention to an organisation called lendwithcare.org, which is an excellent example of how to do things right in this area. It is concentrating on micro-lending in the third world but the pattern it follows would fit very well the sort of projects that my noble friend Lady Kramer and others have outlined. It takes proper steps to make it absolutely clear to those who lend that there is a serious chance that they will never get back any money. That is crucial. There is far too much opportunity here to induce in those who sell something as a loan the idea that they have a reasonable chance of getting their money back, and that can be very dangerous in unregulated investment.

[Baroness Kramer]

I join in thanking the Minister for a very positive reply. It sounds as though we have real hope of making progress in this area. I very much appreciate the process that the Government have gone through to get to this point.

I also appreciate the comments of my noble friend Lord Phillips. I read into them that, with his legal-eagle mind, he and some of his colleagues may now be turning to this clause and to this area of the legislation to work out an amendment which, if properly drafted, could both address the issues which I, together with my noble friends Lord Hodgson and Lord Phillips and others, have raised and cover the absolutely fair and relevant point made by the Minister, which is that we have no wish to expose people to scams or to create an opportunity for this to be used as a back door to taking unfair advantage. That is extremely important.

Feeling very positive about all these issues, I beg leave to withdraw the amendment and I look forward to the summer discussions.

Amendment 118AZA withdrawn.

Financial Services Bill

Baroness Kramer Excerpts

Wednesday 25th July 2012 Lords Chamber

[Baroness Kramer]

My Lords, Amendment 128BG stands in my name and that of my noble friend Lord Sharkey, and I am delighted to hear that the noble Baroness, Lady Noakes, and the noble Lord, Lord McFall, are adding their names. Their names have not made it onto the Marshalled List, but it is very good to know that they actively support the amendment. I think that all of us would look at the wording in more detail, but it is, as are others, a probing amendment. The language was supplied by Which?, an organisation that I help, and it seems to me to be reasonably well drafted.

The PRA, as your Lordships will know, is the body which will authorise new banks. The track record of the regulator in authorising new banks in the United Kingdom is pitiful: one new banking licence in 100 years, for Metro Bank. Other banks which people may think of as new are organisations which have purchased an existing banking licence. It is a sharp contrast to virtually every other developed and, frankly, not-yet-developed country. We have seen consolidation in our high street banking services, not expansion and added competition.

The regulator, if spoken to, would argue that the reason so few licences have been issued, or only one, is that new investors are not coming forward with proposals for new banks.

I think that it would acknowledge that some have come forward, gone part of the way down the process and then reached such hurdles that they have essentially been required to withdraw. It is also true that most potential investors are discouraged before they begin. The Metro Bank case is publicly known; we know that it cost it between £25 million and £35 million to get through the approval process. That is not the regulatory capital; that is simply getting through the regulatory hurdles. That took about two and a half years. Anyone to whom I have spoken who would pick up the role of working with a potential investor has said that their advice today would be, “Do not even think about it. Find yourself an existing banking licence or give up the idea altogether”.

We have some new players in the industry. There is Virgin Money. The Co-op has picked up some Lloyds branches. All that is very good news and will add to competition on the high street. There is a new small bank in Cambridge, which has picked up the banking licence of the old pension bank in that area. I am not saying that there are no new players in the market. I just point out that they are appearing off the collapse of RBS and Lloyds, so this is a one-time only event; it is not a step change or a door opening to bringing new and effective players to provide competition.

I understand that, even without any assistance from the Bill, the PRA will reduce at least one barrier. In the past, the regulator has asked for a higher capital requirement from a new player than from existing players. I understand that that is likely to change, so that at least that playing field will be level.

We in this country are missing an entire layer of banking. We have spoken about this before in several debates. The small, local, community bank, frequently with social impact obligations as part of its core philosophy and mandate, often sponsored by a charity or supporting a social enterprise, plays a significant role in the economies of competitor countries. Germany has its savings bank structure; the Swiss their cantonal bank structure; the United States its community development banks. We all know that those small banks behave in a very different way from high street banks.

First, they are willing to work with vulnerable individuals in the community in a way that our major high street banks have no interest in doing—they provide basic bank accounts, but under duress and have no interest in such consumers. Because those small institutions are committed to a particular community and rise or fall with the success of that community, they are also committed to small businesses—both new start-ups and existing small businesses—within those communities and stick with them through thick and thin.

Looking at the German and US experience, savings banks, in the one case, and community banks in the other, increased their lending to small business during the recent financial crisis and period of austerity, because they knew their borrowers, they knew when management was capable, they understood the microclimate for a particular company. They could do the level of credit work that our major high street banks ceased to be able to do some time ago; they are largely sellers of commodity product, they are not real credit managers in the way that banks used to be.

We are missing that whole layer of banking. I argue that, for the sake of our communities and community growth, we need to rebuild that whole sector, but we cannot if we have a regulator so utterly resistant to any new entrants. For a small bank to serve a narrow community, perhaps within a single borough in London or a portion of, say, Liverpool or Sheffield, to set the hurdle that it must raise between £25 million and £35 million to get through the approval process means that it cannot even think about getting off the ground. We need an entirely different regime. Those are banks which are never going to put us at systemic risk.

I recognise that, to allow those new banks to come in, perhaps with a more modest banking licence, which would be a good way to do it, and certainly with lower capital levels, the regulator must accept that a number of banks will fail. We have a good example in the United States where these banks fail. Within seven days they are under new ownership and masterminded by the FDIC. This acts as the regulator to make sure that the depositor and the business book are protected. The shareholders may be wiped out, which is fair and appropriate, but the banks then revive in a new environment. From the depositor’s perspective there is no hiccup. That is an appropriate kind of failure regime.

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[Lord Sassoon]

I do not think that my noble friend has got it quite right. However, I cannot hide from him the fact that we believe that, because it is right and goes to the heart of the flaws in the present tripartite arrangements, the PRA should have as its single objective the one that I have described. Therefore, the nub of his concern remains, and I cannot pretend that it is not there. All I can say is that we consciously want to have the architecture as I have described it. However, the mitigation—and I think it is an important one—is that the PRA must consult the FCA before taking any steps that could in any way harm the FCA’s objectives, including, in this case, the competition objective. I think it is a reasonable check on the PRA’s action, given the basic architecture which we think is important.

[Baroness Kramer]

One issue that I have raised to which I have never had an answer, no matter whom I have asked, is where the PRA is expected to move in terms of the cost of getting regulatory approval. The Minister made mention of the capital requirements—and there is a whole set of issues around that—but one does not even get to the capital requirements if one cannot get through an approval process without a phalanx of lawyers, accountants and submissions which frankly act as a complete barrier to any potential small and local banking institution. I do not understand where there is any commitment from the PRA to tackle that set of problems.

[Lord Sassoon]

The fact that it has already started on the work which will lead to the document in the autumn and which goes to the most expensive element of getting authorised—namely, the amount of capital required—is a fundamentally important and good start. I do not pretend that that completes the business, but it tackles first the most expensive element: the cost of putting that capital aside. This is a start. It is not before time, but it is happening as we speak.

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[Lord Teverson]

My Lords, I shall speak to the amendments in my name and that of my noble friend Lady—

[Baroness Kramer]

Kramer.

[Lord Teverson]

My apologies to my noble friend Lady Kramer. I am thinking ahead and getting too far ahead in my own mind.

Amendments 144C, 144D, 144E, 147D and 147E refer to Schedule 3 and are very much in the area of the annual duties of the FCA and the PRA to make public their actions over the previous year. Apart from producing annual accounts, three methods of accountability are mentioned in Schedule 3. There is the annual report, which is the responsibility of both the FCA and the PRA; there is a public annual meeting for the conduct authority, but not for the PRA; and there is a consultation process for the PRA on the annual report that is followed by a further report by the PRA on that consultation. It seems to me that all three processes are not only admirable but essential for the full accountability of these important and key organisations both to the industry and the public.

My amendments would put the same responsibilities on both those organisations so that the FCA will also have a consultation process on its report, and a report on that, and the PRA would also have an annual public meeting. I note with interest the Minister’s remarks about one size not necessarily fitting both these organisations because they are very different. Clearly their responsibilities, actions and how they work are different but, in terms of their responsibilities to the broader industry and to the public, their responsibilities are very similar. That is why I think it is important that, as in my amendment, the Prudential Regulation Authority should have an annual public meeting. Again, the reasons seem to me to be pretty straightforward. Although the PRA has a relatively limited clientele compared with the FCA, its work, as we have seen through the financial crises of the past few years, is very relevant to the remainder of the financial services industry, customers of those institutions and to all taxpayers, who at the end of the day, if the regulators of those major institutions have been ineffective, carry the can for the cost of that regulation not working. For those reasons the very admirable process of annual accountability should be reflected in both organisations. On that basis I hope that the Minister will look favourably on these amendments.

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[Lord Hodgson of Astley Abbotts]

I have added my name to Amendment 140, moved by my noble friend Lord Flight. I underline the importance of co-ordination and think some means of measuring the effectiveness of the co-ordination mechanisms and processes between the FCA and the PRA should be established. Some annual review would bring significant benefits, and changes could then be incorporated in the MoU that exists between the two bodies, and would help control costs.

As I am sure other noble Lords have, I have had briefings from London First and the Council of Mortgage Lenders stressing the importance of this co-ordination and the need for these two bodies to work closely together. One swallow does not make a summer, but a very large firm rang me up to say that their chief executive was having to have a get-to-know-you session with the FCA and the PRA, talking about the generality of the firm, but they refused to co-ordinate the meeting. The FCA said, “Come down here and we will see you one time but then come down a second time to see the PRA”. He is going to have to make two visits to these organisations. It is a swallow and a cost, but also denotes an attitude, which is the very attitude that I think has to some extent poisoned the present relationships. In order to work in a cost-effective and business-friendly way, the regulators have got to understand that these firms have to operate and cannot just be at the beck and call of the regulator. They have commercial lives to live and the chief executives of these big companies are busy men. It is not beyond the wit of man, and common politeness, for the regulators to be able to agree a common diary approach for what is a getting-to-know-you arrangement, not an inquiry about something relating to their own particular functions. I very much underline what my noble friend’s amendment says. There is an awful lot of work to do if we are not to set off down the wrong road in this very sensitive and potentially extremely costly area.

[Baroness Kramer]

My Lords, I will speak to Amendment 140A, which is in this group. It is slightly different but we did not seek to have it regrouped, just in the interest of time. Amendment 140A would establish in the Bill that the PRA and FCA are considered equal in status. We have a letter from the noble Lord, Lord Sassoon, dated 18 June, which indicates that it is the Government’s intention to have parity of status, but I would defy anyone to read the Bill and come away with that particular conclusion. In the Bill, as your Lordships will be aware, the PRA has the right to veto certain of the FCA’s regulatory actions. I have no problem with that—it can be right and proper—but it reads over very quickly into a sense that the PRA is the superior body. The PRA is also part of the Bank of England family, a very powerful family. The FCA stands outside of that, which is right and proper. However, it creates the issue about the balance between those two regulators, particularly since the Governor of the Bank of England chairs the PRA as well as the FPC and the MPC. The FCA therefore stands in a different relationship to the governor and has a very different role. The governor is a very important individual in the international community in terms of public recognition and public standing.

Building a little on the comments just made about culture and behaviour by the noble Lord, Lord Hodgson, we must recognise that within departments there tends to be a sort of default behaviour to live in a silo. It is very difficult to persuade organisations to co-ordinate effectively with each other, and to have the kind of respect that goes with parity. Although there is a memorandum of understanding, a great deal of judgment is involved in that memorandum in terms of deciding when it is appropriate to share information, to consult and to co-ordinate. It depends a great deal upon attitude. I have been in at least two meetings with members who were a fairly broad representation of the financial services sector when it has been evident that the assumption of the sector is that the PRA is the lead institution and the tough guy, and that the FCA plays a somewhat secondary role.

This is of particular concern because of the range of financial services sectors that the FCA will regulate. It comprises 27,000 firms contributing £63 billion in tax revenues, providing over 2 million jobs, two-thirds of which are outside London. We must be very careful that it is not regarded as second class in its role. The London Stock Exchange is particularly concerned about this issue because of the role that the FCA must play in Europe. As your Lordships know, it has the seat of ESMA, which is highly significant. The UK market accounts for between 60% and 80% of EU securities trading but has only 8% of the vote on ESMA. Therefore, the status, standing and significance of the FCA will matter enormously in those European discussions which affect the City, the financial services industry, and the international world of finance more generally.

This amendment seeks to, in a sense, make it clear in the Bill that the FCA does not have second-class status and that it is equal in its standing with the PRA. It seeks to make sure that that then gets embedded into the culture of how these regulators relate to each other and co-ordinate with each other, and that the FCA has standing in international eyes, and is recognised by international regulators as the body they can appropriately talk to, and not as a body that they must go around in order to speak to the genuine powerhouses.

[Lord Stevenson of Balmacara]

My Lords, I rise to speak to Amendments 140A, 140BA, 140DA, 143C and 144JA. Amendments 140AA to 140DA appear to be, to use the words of the noble Lord, Lord Flight, in the same territory as those amendments that he was proposing and which have also been supported by the noble Lord, Lord Hodgson. Therefore, I do not think that we need to say much more except that we support them. We hope that our points will also be taken into account—they are relatively self-explanatory. We look forward to hearing the Minister’s response.

Amendments 143C and 144JA, raised in the other place, are intended to probe the practical aspects of co-ordination behind the FCA and the PRA on the ground—for example, across the membership of the boards. Schedule 3 on page 177 makes provision for the Bank’s deputy governor for prudential regulation to be on the FCA board. However, paragraph 6 states that:

“The Bank’s Deputy Governor … must not take part in any discussion by or decision of the FCA which relates to (a) the exercise of the FCA’s functions in relation to a particular person, or (b) a decision not to exercise those functions”.

Similarly, new Schedule 1ZB(5) states that:

“The chief executive of the FCA must not take part in any discussion by or decision of the PRA which relates to”—

I do not need to quote it further, it is very similar. There we have two deputy governors, supposedly sitting on these two boards to aid the co-ordination of these two bodies and to have cross-membership, and yet there is a provision that gags those two individuals and prevents them getting involved in discussions in certain areas. There may be a rational reason for this but it beats me as to what might be.

There is a further point. Paragraph 5 on page 177 of the Bill states;

“The validity of any act of the FCA is not affected”,

if there is a vacancy in the office of deputy governor, or if there is

“a defect in the appointment of a person”,

to those boards. However, if a deputy governor happens to stray in discussions into areas that relate to a particular person or to a decision on exercising a function, might there not be a serious risk that on judicial review—for example, a third party could challenge the validity of any act of the FCA—should it be discovered that the deputy governor had uttered a phrase or misspoken in a particular way about a particular person or issue?

One must be concerned about enshrining restrictions on the things that board members can and cannot utter so that they cannot take part in a decision. How would that be implemented? Would they have to leave the room when one of these topics came up? Would every single decision of the FCA and the PRA have to be separated into generic and operational questions? It would surely not be right to fetter internal discussions in this way. If it is right to put them on the boards of both organisations, it must be right to let them discuss everything that comes up on those boards. I look forward to hearing the Minister’s response to these points.

--- Later in debate ---

[Lord Stevenson of Balmacara]

In moving the amendment, I shall speak also to Amendments 143ZB to 143ZD as well as Amendment 144EA. This group of amendments relate to the consumer advice functions of the FCA, currently delivered through the Money Advice Service, and the separate responsibility that the MAS has for co-ordinating debt advice. I declare my interest as a chair of the Consumer Credit Counselling Service, the country’s leading debt advice charity, which has helped more than 1.3 million people in the last few years to deal with their unmanageable debts.

I start by asking the Minister if he can confirm the Government’s intention to retain the status quo in this area in so far as the body known as the Money Advice Service is concerned. MAS has responsibility for delivering money advice to members of the public as part of its consumer education function and has recently assumed responsibility for co-ordinating debt advice, which is currently delivered by a number of charitable bodies, including Citizens Advice, the Money Advice Trust and the Consumer Credit Counselling Service.

As your Lordships’ House will be aware, although the Bill continues the FSA’s current responsibilities regarding these functions to the FCA, new Section 3R in Clause 5 confirms that a consumer financial education body undertakes this function on behalf of the FSA at present and it is intended in this section of the Bill that the body corporate, originally established by the FSA under Section 6A of FiSMA, will continue to deliver these services for the FCA. So the Bill assumes that the MAS will continue.

I invite the Minister to clarify the situation, because rumours have begun to circulate, following the hearings held recently by the Treasury Select Committee on the Money Advice Service. These were fairly rumbustious sessions, and for long parts of them the committee was focusing on what it clearly saw as an unsatisfactory situation regarding the FSA’s current responsibilities for the MAS, its business plans and its operations. I gather that it would not surprise many observers if the Government intended to bring forward amendments on this topic. I will not repeat the rumours that have reached me, but the stories authoritatively report a range of decisions including the abolition of the MAS, to giving it its own statutory position within the Bill. I would be happy to give way to the Minister if he would like to clarify what the position is at this point. He does not wish to do so now so I shall continue.

These amendments seek to clarify the role of the Money Advice Service in respect of its money advice services, to ensure that it focuses with laser-like intensity on the needs of members of the public on low incomes and to ensure that it provides,

“targeted, proactive and easily accessible advice to those encountering economic disadvantage, financial exclusion or financial exploitation”.

In respect of the co-ordination of debt advice, the amendments seek to make sure that this means that the MAS will be explicitly focused on promoting the work of registered charities such as the MAT, CCCS and the citizens advice bureaux, so that people struggling with debt are made much more aware of the excellent free, independent and impartial support that is available to them.

There is one point which I hope the Minister will be able to help me with when he replies. While the MAS is a direct provider of money advice, it is not the Government's intention that the MAS should become a direct provider or regulator of debt advice, in direct competition with and duplicating the work of these long-established registered charities. He will recall that in the other place, the Treasury Minister, Mr Mark Hoban, said:

“The role of MAS is to commission free debt advice, not … to provide [it].”—[Official Report, Commons, Financial Services Bill Committee, 6/3/12; col. 345.]

That having been said, there is an issue here which it would be good to recognise—about whether it is credible to view money advice and debt advice as separate activities. We in our charity certainly take the view that when people come to us with debt problems, our priority is obviously to get them to repay their debts in as short a time as is possible, without jeopardising their basic needs and livelihood; and we are not into debt forgiveness.

However, another of our functions is to use the process that they are going through to educate them about how to deal better with credit in the future. In that sense, I have sympathy with those who argue that money advice and debt advice are two sides of the same coin, if you will excuse the pun. However, that may be an issue for the future. For the moment I am anxious to ensure that the Government are not seeking to complicate the debt advice space. There is a need for co-ordination, a reduction of duplication, and for all concerned to bear down on costs, as well as increase throughput. However, there is no need for additional direct provision of services by the Government. The registered charity sector can and will deliver a brilliant service here.

Recent research by the Financial Inclusion Centre has shown that there are 6.2 million households in the UK that are financially vulnerable. Half of those are already behind with debt repayments or face insolvency action; 3 million are living so close to the edge that they do not know how they would cope if there were to be even a small increase in their regular household bills. That is why the MAS needs to focus on those members of the public who are on lower incomes, and to target advice to those encountering economic disadvantage, financial exclusion or exploitation.

Around half of our debt advice clients have struggled on their own for more than a year before seeking help and many feel ashamed of their financial problems. When people do summon up the courage to ask for help, they need advice about the best remedies for them, and we would argue that they should seek free advice. Around 400,000 people in the UK are thought to be on commercially provided debt management plans, which cost them £250 million in fees every year. We estimate that for a typical debt of £23,000, a client of a debt management company pays more than £4,000 in fees to that company. Clients of charitable providers by contrast only pay back what they owe, and the time taken to get free of their debts is about 18 months less than with a commercial provider.

That is why we suggest in this group of amendments that a key function for the Money Advice Service must be to get financially vulnerable consumers to seek help earlier from charities such as National Debtline, Citizens Advice and CCCS by promoting free debt advice. The public interest here, surely, is to encourage people with debt problems to recognise the free debt advice sector as the best place to go for rehabilitation. Raising the profile of the free debt advice sector is necessary if we are to counter the aggressive advertising of fee-charging debt management companies which seems to be everywhere. However, this is difficult for the charitable sector to do under its own steam, as its charitable funding should really be used to deliver direct charitable benefit. In December last year, the chief executive of the Money Advice Service said that he wanted to build the profile of the free debt advice sector so that ultimately, everybody in need of debt help sees the free debt advice sector as the “better option for them”. I welcome that approach and beg to move.

[Baroness Kramer]

My Lords, I want to comment on Amendment 143ZE. I have great respect for the CCCS and the work that it does, but there is also at least one commercial player—I am thinking of Payplan—which, I understand, provides free debt advice on a basis very similar to that of the CCCS, and in fact Citizens Advice frequently refers people to it to deal with debt management. Like the CCCS, it gets its funding from the creditor and not by turning to the individual who is in debt.

Although I entirely agree with all the statements that have been made about those—perhaps not all but certainly many—who advertise and often provide a very unsatisfactory and highly questionable service to individuals who are in debt, leaving them in a worse situation than when they started, I am slightly cautious about the suggestion that only the charitable sector can provide free debt advice. We need all the players we can get in this business and, provided they do it in the appropriate way, we should surely encourage all of them.

I question why the companies that seek to have the debts repaid to them should not be more influential in this process. My understanding is that they would far rather work with those who provide free debt advice than those who muddy the waters by essentially taking the fee-paying attitude and offering and delivering a less satisfactory solution for everybody involved.

[Lord De Mauley]

My Lords, this group of amendments relates to the Money Advice Service and to charities involved in the provision of debt services. Amendments 143ZC, 143ZD, 143ZE all relate to the role of the MAS in the provision and co-ordination of debt advice.

Before I address the amendments, it may be helpful if I explain the MAS’s role in this area, which is to offer free and impartial information and advice on money matters to help people to manage their money better and to plan ahead. Through taking charge of their finances, fewer consumers should fall into unmanageable levels of debt. However, those consumers who do find themselves with high levels of debt will continue to need specialist debt advice.

The MAS, with its consumer financial education remit and national reach, is well placed to take a role in the co-ordination and provision of debt advice as part of its existing service. The Bill therefore includes provision to clarify that the MAS consumer education function extends to assisting members of the public with the management of debt and to working with other organisations to improve the availability, quality and consistency of debt services. However, the MAS does not directly deliver debt advice services itself, as the noble Lord, Lord Stevenson, said; rather, it delivers funding to providers of debt advice services, such as Citizens Advice, and it helps members of the public to access high-quality debt advice services.

Amendment 143ZC seeks to replace the existing requirement at new Section 3R(4)(f) under Clause 5 for the MAS’s consumer financial education function to include,

“assisting members of the public with the management of debt”,

with a requirement to include,

“providing high quality information about, and promoting awareness of, registered charities which provide debt services”.

I reassure the noble Lord, Lord Stevenson, that the Government are committed to the continued existence of the MAS and that there is no intention that the MAS should displace existing funding streams or existing services. The MAS intends to work with a large cross-section of the advice and creditor sectors to keep them up to date with its plans. I also reassure noble Lords that the MAS already signposts to other organisations which provide debt advice services and it will continue to be able to do this.

There are a number of amendments in this group and I have copious notes which address all of them. From the speech that the noble Lord made, I sense that I have dealt with his key points. If he wants me to go on, I shall be very happy to do so. However, if he is happy with that assurance, I hope that I can ask him to withdraw his amendment.

Financial Services Bill

Baroness Kramer Excerpts

Wednesday 18th July 2012 Lords Chamber

Amendment 110ZB attempts to make amends for this oversight. Professional standards need to be embedded in a firm’s ethos and this must be supervised by the regulator. Left to themselves, too many firms simply do not pass muster. We need to enhance the integrity of our financial services sector in order to ensure good consumer outcomes and drive up standards. The FCA must send clear signals to the firms it regulates about the behaviours it expects and the professionalism that must be evidenced. These amendments are part of enabling that to happen. I beg to move.

[Baroness Kramer]

My Lords, I shall speak to Amendment 110ZC, which stands in this group in my name and that of my noble friend Lord Sharkey. I thank the noble Baroness, Lady Hayter, for her kind words. This amendment illustrates why I and, I suspect, this House and the other place had a preference for a parliamentary committee, which will report by the end of the year, over a judicial committee which will report in a couple of years, because the issue addressed in it would certainly have been resolved one way or the other by that point and, I suspect, with damaging effect. I hope that the Government will respond to the amendment by telling me that it is completely unnecessary, but it arises out of deep concern following various newspaper reports that have discussed the size of the liability that may fall on the banks involved in LIBOR manipulation. We are talking not just about the fines that come from the regulators—they are significant but small in the way of things for banks—but about the liabilities that may arise from the various actions that are now under way and others which I am sure will join them.

As the Committee will know, two cases are already under way in the United States. One is in the Southern District of New York, which is a class action lawsuit titled “In re LIBOR-Based Financial Instruments Antitrust Litigation”—the use of “antitrust” obviously has significant consequences—and the second is in the northern California district court, filed by Charles Schwab against a series of banks, including a number of UK banks. Charles Schwab claims in its complaint that “significant harm” has resulted from the mispricing of,

“tens of billions of dollars in LIBOR-based instruments”.

Its complaint outlines the methodology of comparing the banks’ LIBOR quotes with some market-based yields and CDS spreads. Some excellent work done by the securities analyst Cenkos estimates that the LIBOR quotes were understated by 30 to 40 basis points in some cases. Cenkos does a simple calculation to show that if LIBOR had been mis-stated by even five basis points over four years, on £1 trillion-worth of notional contracts, the damages would be £2 billion. We are therefore looking at multiples of billions of potential charges.

It struck us as we were looking at this and reading some of the stories about Barclays considering separating the bank into an investment bank and a retail bank—that is the direction in which we are going in this country through ring-fencing, and I am very much in favour of it—that there might be scope for organisations to decide that those liabilities generated by LIBOR manipulation could happily be sited in the retail part of banks rather than the investment part. I am afraid that that view comes with some cynicism, as many of us now would not put anything beyond the decision-making powers of some bank boards and directors.

We are seeking from the Government some stern comments to the effect that we have got this entirely wrong and that safeguards are in place. If it is not the case, we hope that someone will quickly pay attention, because the decisions that could set this process in train could happen fairly quickly. I think that every one of us here and the public at large would be shattered if that was the conclusion to this aspect of the scandal. This is in no way meant to be a comprehensive response to the amendments; it is one particular issue that struck us as being in need of immediate comment.

[Lord Peston]

My Lords, I listened with enormous interest to the noble Baroness, Lady Kramer, and am sympathetic to what she said, but I cannot see how the amendment fits into this section of the Bill. If I have read it correctly, new Section 1D(2)(b) states that the integrity of the financial system includes,

“its not being used for a purpose connected with financial crime”.

As I understand it, these people have engaged in financial crime and been fined for it already. If the noble Lord, Lord Carlile, is to be believed, they will be brought before the courts to be examined some more. What unfair allocation does the noble Baroness have in mind? If some American investors have lost a great deal of money as a result of criminal activities by people connected with British banks, it would not be unfair if those banks had to meet the cost of those criminal claims. Is she saying that that would be unfair, or have I totally misunderstood the purpose of the amendment? It is most likely to be the latter.

--- Later in debate ---

[Baroness Kramer]

I would hesitate ever to say that the noble Lord, Lord Peston, had misunderstood any issue. Perhaps I can clarify. This is a probing amendment, and I cannot pretend that it is drafted with skill or placed in the Bill where, ultimately, a sophisticated legal mind— or, perhaps, the noble Lord—would put it. We felt that it was an issue that needed to be raised promptly. I fully accept that if courts decide that there is liability, that liability will be met, but if the institutions are dividing themselves into separate pieces and there is flexibility on where the liability is then allocated—into a retail entity or the investment banking entity—that is of acute interest.

[Lord Peston]

This sounds a bit like tax avoidance in a new version. If they separate the institution into two parts, they will then claim that there is a part that is not guilty. Is that the point of the amendment?

[Baroness Kramer]

I think that this is an issue that I will hand off to the Minister.

[Lord Davies of Stamford]

My Lords, I want to intervene briefly on two amendments. One is that moved by my noble friend, Amendment 104ZB. I congratulate her on it and draw particular attention to paragraph (c), which is enormously important. Paragraphs (a) and (b) stand by themselves and no one will want to argue with them, but I particularly congratulate my noble friend on paragraph (c), which deals with the need to ensure that all those involved in managing money or advising retail investors should keep abreast with changes in financial markets, which, as we all know, have been great in the past 10 or 20 years, and in financial products.

The range of financial products available is enormously confusing. Inevitably, it totally confused retail investors. It is enormously important that IFAs are kept abreast of developments so that they can give good advice to their clients. Among the complex and dangerous instruments that have emerged have been all sorts of derivatives used both for hedging purposes—thereby reducing risk if they are used intelligently and properly—and speculatively and extremely dangerously. That can be an acceptable product for a very sophisticated investor to use as a way to leverage his or her risk if he or she is determined to do that.

Just as it is so important to ensure that doctors are kept abreast of changes in medical science, which in a career of, say, 40 years, can revolutionise the subject, it is enormously important that that should happen in financial services. An “annual validation of competence” would be an excellent discipline that will itself create a market. Professional organisations, business schools and others will arrange regular courses for people in the financial services industry who are affected by the clause and need to keep up to speed. I hope that those courses will involve some test or examination at the end, so that it will be possible to use that as validation. That will greatly reassure the public. I congratulate my noble friend on proposing this extremely intelligent contribution to the Bill.

I also congratulate the noble Baroness, Lady Kramer, first, on being selected for the very important committee. Even those of us who thought—and still think—that a judicial inquiry is the right approach give our very best wishes to those who have taken on the important task of carrying out the parliamentary inquiry. The credibility of Parliament is at stake here, as is that of our financial services industry, so it is enormously important that people of the highest intellectual calibre and integrity have been selected. I know that the noble Baroness falls under both those categories, as does my noble friend Lord McFall, who is sitting behind me, and I also delighted that he has been nominated for the committee. That is very reassuring to us all.

Financial Services Bill

Baroness Kramer Excerpts

Wednesday 18th July 2012 Lords Chamber

[Lord McFall of Alcluith]

My Lords, I should like to add my support. My name is not on the amendment. A number of months ago I spoke to Giles Andrew, of Zopa, about peer-to-peer lending, and I was very taken by what he said. I think back to the MPC and the American whose name escapes me but who is just departing from the MPC to take up a post at the Peterson Institute in America and his comments about a spare tyre. We lack a spare tyre in the UK in terms of our banking. Whether it is a Labour Government or this Government, none of us has solved the problem of getting lending out. We have a lot to learn in that area. Our top banks are responsible for 450% to 500% of our GDP. We will not make progress on that. This initiative should be looked at. Nothing fundamental will change tonight but it is good that it is on the agenda and I am delighted to be associated with it.

[Baroness Kramer]

My Lords, I am in full agreement with the three previous speakers, who have covered virtually all the territory—which at this hour I will not repeat. However, I should like to add one point. The only argument that I have received from Ministers outlining why this area should not be regulated is that regulation is potentially too heavy-handed and will prevent the sort of growth of a new, young industry. I think that in this House we have rather more faith in the regulator, which has begun to move forward and understand that appropriate and proportionate regulation is a standard that can be achieved. I say that in order to pick up the entity to which the noble Lord, Lord Lucas, referred. Unlike the peer-to-peer lenders which fall outside the current regulatory framework, Seedrs had to be regulated because it is marketing equity investments. It falls into the regulated arena and has had to seek authorisation.

I quote from the blog of the chief executive:

“The authorisation process was long and sometimes painful, but we feel that it was an absolute necessity in order to satisfy both the letter and the spirit of the law. The FSA scrutinised every aspect of our business model and operations, and after over a year of iterative questions and answers, they gave us the go-ahead.

We are proud to be the first platform of our kind to receive FSA authorisation—or, to our knowledge, approval by a major financial regulator anywhere in the world. But more importantly, we are convinced that it was the right thing to do to go down this route, and we now look forward to launching the Seedrs platform as a fully authorised business”.

It is using the authorisation as a marketing mechanism. Having talked to the regulator and then followed through with Seedrs publications, it is clear that both sides have been satisfied with this process. Rather than being too onerous, there is a sense that regulation has been appropriate and that the authorisation has matched the circumstances. If we can achieve that with the equity platform, surely we can achieve that with the lending platform.

Finance Bill

Baroness Kramer Excerpts

Monday 16th July 2012 Lords Chamber

[Baroness Kramer]

My Lords, because of the way in which legislation progresses through the Commons and through this House, I feel that all of us present tonight have discussed all the issues contained in the Bill on numerous occasions. I have to confess to a small temptation just to say, “Please refer to speeches I made earlier”. It means that I shall be brief and just hit on the few issues that I wish to highlight.

To me, the most important measure in the Bill is the raising of the starting threshold for income tax to £8,105 this year and to more than £9,000 next year. Two million low-income earners will have been taken out of paying income tax altogether by this and previous lifts in the threshold and, as the Minister said, some 24 million middle and low-earning income tax payers will have seen their income tax bills reduced by about £330. This has to be right. It moves us well on the way to a starting threshold of £10,000, as set out in the coalition agreement. As a Liberal Democrat, I see it as a significant move towards a threshold that, in essence, starts above the minimum wage, with the notion that there is a relationship between earnings on the minimum wage and the point at which income tax starts. I believe that that has to be right as a major incentive into work and a major measure to tackle long-term poverty.

Cutting taxes significantly at the bottom end of the earnings spectrum is now pretty much taken for granted as the right thing to do across all the parties. I only have a short memory, but I remember all the debates not long ago when this looked pretty revolutionary. The Labour Party chose not to do it in what were considered to be times of plenty, so the fact that it is now being achieved in times of austerity will, I hope, embed this type of philosophy across all the things that we do, no matter which party we come from, as we look at taxation in the future. This is one of the most progressive tax strategies that Governments have adopted in recent years. It has the character of a permanent change and to me is far more effective than the one-off one-year VAT cut that has sometimes been proposed by Labour—which, interestingly, would help the richest members of our community the most.

The Bill also continues to strengthen support for business. I am particularly pleased with the increased incentives for small businesses, new start-ups and entrepreneurs. However, I ask the Government to look at extending the enhanced capital allowances regime to small businesses more widely than just to those in the enterprise zones. I am a member of the All-Party Parliamentary Group on Rebalancing the British Economy, an excellent group that I recommend to the House. Of all the evidence that the group has heard, I have been most struck by that given by Brompton Bicycles, a firm that sells a conventional product but is successful in large part because its manufacturing processes are at the cutting edge of technology. UK small businesses desperately need to accelerate their adoption of new manufacturing technologies to compete and grow. They may not be high-tech in their products, but to be high-tech in their manufacturing tends to make them much more competitive and effective. Incentives to invest in these new processes for small businesses are crucial and I encourage the Government to put this high on their agenda.

The tax avoidance measures in the Bill are very welcome and, I would say, long overdue. Stamp duty has been a particular concern of mine because avoidance by the wealthy is so unfair to the ordinary house buyer. The Bill clamps down on some schemes that use domestic corporate structures to avoid stamp duty, though, in my reading it has not yet eliminated what I would call the Cayman Islands problem—the number of properties that are now already in Cayman Islands trusts or will be put into them in future, avoiding not just stamp duty but also capital gains and inheritance tax. I hope that the Government will make a move on that very soon because it remains a significant loophole and a real sore to every taxpayer who pays up on stamp duty.

Economic growth overshadows all fiscal and economic debates. I am therefore pleased that the Funding for Lending scheme was launched last week by the Treasury and the Bank of England. However, it strikes me as extraordinary that the Treasury and the Bank of England have had to set up a scheme in such a way that banks can get discounted loans only by actually maintaining or increasing lending. That tells you that that they have responded to just about nothing else. To me, that underscores the argument for banking reform, which, hopefully, will be a major occupation for this House after Christmas.

This is a sensible Bill that has been produced in difficult times and I very much hope that we will see it pass.

Governor of the Bank of England

Baroness Kramer Excerpts

Tuesday 10th July 2012 Lords Chamber

[Lord Sassoon]

My Lords, the Bank of England is going to have a very large new mandate, and the points that the noble Lord makes are rather important to this. Whether on the MPC, the FPC or the PRA, the governor is going to be very well supported, not only by deputy governors but by a range of internal and external experts. Just for clarification, the governor no longer chairs the court; that is chaired by a non-executive chairman. I do not know how it was in the noble Lord’s day, but I am sure that co-operation with the Treasury is going to be the least of the new governor’s difficulties.

[Baroness Kramer]

My Lords, I regret that in the Financial Services Bill we have not established a mechanism whereby Parliament can have a say in confirming the new superwoman or superman to take up this role. Will the Minister at least give us an assurance that the Chancellor will look for someone who breaks away from the mould of groupthink, which contributed so much to the financial crisis in 2008, and who, while having all the necessary financial and economic background, perhaps comes with some other, different experience so that we can burst the bubble that has been a real problem in financial regulation?

Financial Services Bill

Baroness Kramer Excerpts

Tuesday 10th July 2012 Lords Chamber

[Lord Barnett]

My Lords, I support the noble Baroness, Lady Noakes, in a way, although the amendment would add even more confusion to the Bill than is already there. My noble friend Lord Peston referred to the fact that it is about shocks. I hope it is not an urgent shock, because the amendment would give time for draft orders to be laid for a period of up to 60 days or before the end of a period of 12 weeks. Then there must be orders in both Houses. I assume that both Houses would also take advice from their Select Committees. All that will be going on while urgency is required. I find the whole thing as confusing as my noble friend does. We are told at the end of the amendment that if this shock arises when the House is not sitting, all kinds of other things happen. As my noble friend said, if the noble Lord, Lord Sassoon, cannot clarify the whole thing for us in asking for the amendment to be withdrawn, we should be glad if he would take it away to think about it further and let us know what he or someone else thinks about it.

[Baroness Kramer]

My Lords, I am very much in favour of scrutiny by this House. I cannot pretend to be an expert either on the different varieties of orders or on the different measurements and tools that the FPC might introduce, but I would be concerned about a mechanism in this House that enabled tools to be amended. Although we have some experts, the capacity to understand the internal workings of a tool with sufficient precision to be able to introduce an amendment to a ratio strikes me as not the particular skill of a legislature or this House. We can raise questions about it or require that it be dismissed because the Government have not sufficiently made their case, but to amend it is not a skill with which we are particularly equipped.

For that reason, and with great respect to the House, it seems to me that the capacity for amendment is inappropriate in this case. The capacity to force the Government to make their case and to judge on that case is entirely appropriate, but not the capacity to substitute; that worries me.

[Lord Myners]

My Lords, I have considerable sympathy with the amendment. I declare my interest as a former member of the court from 2004 to 2008. I fully support the creation of the Financial Policy Committee—I think that it will become the most important committee in the Bank—but I am deeply anxious about the governance of the Bank and the lack of appropriate oversight from the court, the oversight committee as envisaged or, indeed, Parliament.

The Minister is in many ways the architect of this restructuring of regulation, as part of a project which he led for the Opposition, having ceased to work in the Treasury. I understand his thinking in evolving the proposals, but events have moved on. In the light of what we now know about the Bank of England, we must ask whether it is still right to put so much authority in the hands of the Bank without appropriate accountability.

When I was a member of the court, I sat in on a meeting of the Financial Stability Committee. That would have been in 2006 or 2007. At that meeting, one of the governors proposed that as a mechanism to cope with the crisis, the Bank should buy half a dozen or a dozen bicycles in order that members of the Bank could move swiftly and anonymously around the City. That tells us a huge amount about where the Bank sits in terms of its understanding of the complexity of financial markets. Some of the things that we have seen over the past few weeks have simply raised more questions about the wisdom of putting so much power in the hands of the Bank.

We are also about to have a piece of legislation to implement the recommendations of the Independent Commission on Banking. Having been intimately involved in the Government’s response to the banking crisis from 2008 onwards, I would point out that the losses incurred in the British banking system—at HBOS, Lloyds and Royal Bank of Scotland—largely occurred within the ring-fence. The losses of $5 billion which we have seen recently reported in London from JP Morgan took place within the ring-fence as envisaged by the Vickers report. The noble Baroness, Lady Kramer, looks somewhat sceptical about that. Those losses occurred within the treasury operations, or the investment office, of JP Morgan, and as such lay within the ring-fence rather than outside it. In being sympathetic to this amendment, and hoping that at the very least the Minister will go away and reflect on that, I think that the Minister will have to rethink some of the fundamental building blocks of this legislation—in particular the great powers and responsibilities that we are placing in the hands of the Bank of England—before we reach its next stage. These are powers and responsibilities that the Bank of England has historically not had and, in my judgment, is still not equipped to exercise.

If we are to do this then, at the very minimum, we must ensure that the Bank and its various agencies, including the Financial Policy Committee, are properly accountable to a court which is clear about its functions and clear about who it reports to. As a former member of the court I know that it was never clear who we reported to. It must also be clear about its parliamentary accountability.

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[Lord Peston]

Speaking as an economist, that sounds complete nonsense to me. I point out to the Minister that the measure I have just described was at the centre of the collapse of both the British and American financial systems in the post-2007 era. This is precisely what these financial intermediaries were up to and precisely what led to the enormous damage that all the economies have suffered. How the Minister can possibly say that that is not a relevant tool is completely beyond me. I could give him some more examples, but let us leave it at that one.

The only question then is whether the noble Baroness, Lady Kramer, is right that if it were introduced as an order we could not debate it in a way to be able to say that the Government’s method of dealing with this problem could be bettered. That is the only point at issue here. I would not like us to do this all the time. I would simply like us—and I mean the other place at least as much as us—to have the power to be able to say, “We can see that you’ve identified the problem and that you’ve got a solution, which you’re introducing by this order, but we think you could do it better this way”. That is all I am arguing and I cannot see what is unreasonable about it.

[Baroness Kramer]

I thank the noble Lord, Lord Peston, for giving way on that because I am again working in murky waters here. The Minister may correct me but I think the example that he referred to was of a leverage ratio, in which the assets had to be weighted in some way for their riskiness or toxicity. There would be an argument for using those weights within a leveraged ratio, would there not? You can use risk weights on anything, I say, having used them. However, that is not the kind of detail we would want to get into on the Floor of this House. My argument is that it would become so highly technical. If there is an amending capacity, that is exactly where we will take ourselves—and without a series of blackboards and three academics to lead us through it, I am not sure we could manage, frankly.

[Baroness Noakes]

Perhaps I might intervene on whether there is the power to amend or not. Debating under super-affirmative procedure is not like considering a Bill. There are no amendments tabled and voted on but there is the ability of either House to pass a resolution saying what it thinks. Much as the noble Lord, Lord Peston, articulated, either House would be able to consider whether it thought that the tools were up to the job. More importantly, as I tried to explain in my opening remarks, Parliament could consider the potential impact of using those tools and say to the Government whether it thought the tools appropriate in the context of the wider impact, not simply the narrow impact, on the regulation of financial institutions. The super-affirmative procedure does not allow a specific amendment process but it allows Parliament to say, “Government, we think you have got this wrong”. It is in contradistinction to any of the other procedures where we have the nuclear option: we either accept the order or we do not accept it. It is a more deliberative and amenable process, in particular for considering these very new tools which are being talked about. I hope that helps the Committee.

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Moved by

[Baroness Kramer]

98A: Schedule 2, page 174, line 3, at end insert—
“( ) In paragraph 13, for sub-paragraph (3)(a) substitute—
“(a) a director of the Bank to chair its meetings (“the chair of the Court”), and”.”

[Baroness Kramer]

My Lords, I think that I can be very brief in moving this amendment. Its purpose is to close a gap between the Government’s clearly stated intent and the language in the Bill. I am sympathetic to those who have drafted the language, because the complexities of the Bank of England Act 1998, as amended by the Banking Act 2009, make it quite hard to follow through a single train of thought, and I suspect that that is what has caused a trip-up in the language in this instance.

On the first day in Committee on this Bill on 26 June, the Minister was absolutely clear that the oversight committee—whose existence and procedures he put forward and the Committee accepted—should be made up of non-executive members of the Court of the Bank of England, and that its chair should also be a non-executive member. However, the language in the Bill does not allow that train of thought to follow through. It would permit the Chancellor to appoint the governor or deputy governor to the role of chair of the court and hence see that individual put into the position of chair of the oversight committee. I shall not bore the Committee at this point by trying to track through that but I assure noble Lords that that is the consequence of the current language. I simply say to the Government that I hope that someone can go away and fix this more elegantly than I have been able to do and, on that basis, I shall not be pressing the amendment.

[Lord Sassoon]

My Lords, I do not know whether anyone else wants to come in on this but it may be helpful if I speak now. This amendment in the name of my noble friend Lady Kramer returns us, as she says, to the territory of not only Bank of England governance but nomenclature, which we discussed at some length two weeks ago. As my noble friend says, one of the changes made in the Banking Act 2009 was intended to amend the Bank of England Act to require the court to be chaired by a director, which, as we established two weeks ago, means a non-executive member—again, as my noble friend pointed out. However, she has gone further because it is only my noble friend, with her razor-sharp eye, who has noticed that the relevant provision inserted into the Bank of England Act 1998, while allowing the court to be chaired by a director, does not require that it be so. That is clearly not correct.

Therefore, although I cannot accept the amendment as drafted because it does not cover all the necessary ground to give full effect to this change, I assure my noble friend and the Committee that we will go away and draft the necessary changes. I thank my noble friend for bringing this to the Committee’s attention.

More generally, I am aware from the discussion that we had two weeks ago that there are some irregularities in the terminology in the Bank of England Act which I certainly had difficulties with and I think that other Members of the Committee did too. A prime example of this is that the so-called Court of Directors includes the executive members of the court who are not, and cannot be, directors. This is plainly absurd. To say that this is all justified because the Bank has been in existence for 300 years so we just have to live with it is not the right approach. As I think I wrote following the first day in Committee, I will consider further whether any other changes might be made to the 1998 Act to clarify these terms, making them more consistent with current usage. We cannot proof the legislation against further changes over 300 years but we can at least try to update a few things.

With thanks to my noble friend, I ask her to withdraw her amendment, as she has already indicated she will do.

[Baroness Kramer]

I beg leave to withdraw the amendment.

Amendment 98A withdrawn.

Financial Services Bill

Baroness Kramer Excerpts

Tuesday 10th July 2012 Lords Chamber

[Baroness Kramer]

My Lords, I was delighted to add my name to Amendment 139A. The excellent speeches which precede me really laid out the case, so I have just a couple of comments. Although the financial services industry is currently the target of very much justified anger, I hope that this legislation sets a regulator in place which will last more than a decade. I think that the previous legislation lasted pretty much for 12 years. We have to take the long-term view and make sure that it is fit for purpose for the long term and when the period of correction within the industry has passed.

It also seems that the language is carefully crafted in such a way that it did not in any way encourage the regulator to look at this as an opportunity to take more risk but as an opportunity to make sure that there was healthy and sustainable growth within the financial services sector. Perhaps I may give a simple example: in a few later amendments we will look at social investment, which is one of the new fields that are beginning to gather some momentum. That is an aspect of the financial services industry which has initially gone to Luxembourg.

The City now is expressing serious interest in the opportunities. Many institutions in the UK could use those kinds of instruments. But the regulator has not been aware of the differences between that sector and other sectors and, therefore, the sensitivity of regulation necessary to support the growth in a new area. I think most people would agree that we are not talking about unethical behaviour or the kind of risk that might be involved in some aspects of the more casino side of investment banking.

There are many areas where there is huge potential going forward. It will be absolutely essential that the regulator takes that on board and is a supporter of the healthy and sustainable growth of this industry, both to support the real economy and the many direct jobs involved with the sector.

[Lord Hodgson of Astley Abbotts]

My Lords, I support Amendment 101A in the name of my noble friend Lord Flight about the importance of maintaining the competitive position and that that needs to be uppermost in our minds. But I am also attracted by Amendment 139A which has drawn in the regulatory principles that are to be followed by both regulators. It seems to me that here we will be starting to set the culture. It is the culture of the regulator that will have such an important impact on the way our financial services develop and the way the people who work in them behave. As my noble friend Lady Noakes said, it is important not just to see this through the prism of City eyes but to realise that there are a wide range of financial services in Edinburgh and the provinces of this country which require the appropriate regulatory framework.

Competition, by its nature, introduces novelty—novelty being something that the regulators tend to fear. It carries risk, but of course what is old and familiar is much easier to deal with. In a way, that is liked. But, particularly when established firms tend to draw attention to the risks of novelty, the regulator tends to back down. I am not suggesting that we should not take risks. We need to be risk aware but we must not be risk averse. There is a danger that in the pendulum within the Financial Services Authority and, no doubt, driven by the criticism that it has faced, we have gone to the end of the risk-averse scale. There is a great deal we still need to do in this Bill to provide the right framework and culture. I shall look forward to returning to this in amendments to which we will come shortly. For the time being, I am delighted to support my noble friends’ two amendments.

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[Lord Flight]

My Lords, I shall speak briefly to Amendments 108A and 117A, which essentially cover the same territory. They seek legislation which explicitly encourages the FCA to extend consumer access to financial services that meet their needs.

To that end, it is desirable that the FCA should assess the impact on markets and consumers when making regulatory decisions. For example—we have yet to see the result—the RDR reforms, though from many aspects fully justified, run the risk of having the reverse effect of reducing substantially the access to financial services and products for the great majority of people. In the absence of a requirement there is the risk that the FCA will always be steered towards risk-averse regulation, preferring to see markets restricted for large groups of consumers in order to avoid any individual consumer getting sub-optimal products.

The issue also arises in the context of the Government’s welcome initiative to encourage the development of simple financial products. If it is to succeed, it will need a regulator which is working with the grain of that policy rather than in the other direction, and which has a clear brief to act in a way to help extend consumer access to financial services that meet their needs, and not the reverse.

[Baroness Kramer]

My Lords, Amendments 102, 118 and 121 are very dear to my heart. They are perhaps some of the most important amendments to the Bill that have been brought forward. I have been interested in financial services for deprived communities for more than 20 years, partly from living in Chicago and seeing the impact that community development banking had on the revival and regeneration of Chicago’s south side. It was an area once written off because it was both black and impoverished and, in the end, it was only action by the banking regulator, under legislation, that drove forward change which was, and continues to be, dramatic.

The noble Lord, Lord McFall, who is not in his place today, will remember the visits that the Treasury Select Committee made to community banks in the United States in 2006—I take some credit for nagging the committee into making some of those visits—which made clear how much we are missing in this country. Both individuals and small and new businesses in the United States have a degree of access to financial services and credit that we cannot rely on in the UK.

The changes in the United States came through a piece of civil rights legislation, the Community Reinvestment Act. This amendment is not a copy of that Act, but it attempts to repeat its achievements. The data that the Act forced banks to publish exposed vacuums in lending across the United States and, to no one’s surprise, they matched very much with the boundaries of deprived communities and—I hope that we would not see the same thing here—the boundaries of communities of ethnic minorities. The regulator then stepped in and required those banks to meet the target of serving those communities, or to fund someone else who would, before allowing them to engage in mergers and acquisitions. It was an extremely effective strategy and continues to be so to this day.

The amendment is also a read-over from the banking reform White Paper, because it would allow the regulator to play a significant role that is described in paragraph 4.4 of that White Paper as,

“a more diverse banking sector”.

Surely the areas where banks are failing to play a role should be at the top of the list for new and diverse participants.

On our previous day in Committee, I said that the role of the regulator nowhere seems to touch on a responsibility to make sure that financial services are available all across our complex communities. Competition is focused on making sure that there is multiplicity of products, not that there is coverage of the full range of demand. Surely if we wish all our citizens to be able to participate in the economic growth of the country and want small businesses to become established, to grow and to build our economic future, we have to pay attention to that access and coverage issue as well. The requirements set out in these amendments get us to that point.

[Baroness Hayter of Kentish Town]

My Lords, I rise to support the amendment moved by the noble Lord, Lord Sharkey, and to speak on other amendments in this group. I believe that the Minister received a letter from the Community Development Finance Association which specifically supports the amendment. It is a powerful case and I trust that he will respond positively at the end of this debate.

Although the Bill grants the FCA significant powers, it makes little mention of consumer access to financial services and products. Access to such services is essential in a 21st-century society, but the Bill makes no mention of it. It would be extraordinary for a competition authority, as the FCA will be, to be required to judge the effectiveness of competition in the markets which it regulates without taking into account whether the market is delivering products and services that are good value for money.

There is not much point talking about a fairer, more competitive market if consumers are unable to access the services on offer, yet uncertainty as to whether the FCA can have regard to affordability might make it reluctant to take action on a fundamental aspect of competition for fear of being challenged. Amendment 104AA, in my name and that of my noble friend Lord Eatwell, is about access by consumers to financial service products and the need for good value for money, including for the financially excluded in society.

In many parts of the country, there are individuals who struggle even to open basic banking facilities or to gain access to small levels of credit, yet credit is a necessity of life for many people, bridging the gap, as we know, between when one has to spend and when paydays arrive. I know that in another place Mark Hoban has said he fully agrees that consumers should have access to financial services that meet their needs, but he prayed in aid the FCA’s new competition objective, which he said would give it an explicit mandate to consider the needs of consumers and to act to improve competition. However, that does not necessarily bring people into the market; it is probably only competition for those who are already there.

Amendment 104AA would remove any uncertainty by spelling out accessibility and affordability. Amendment 102 offers a way forward for financial institutions which reflects a decent, responsible approach to the needs and ambitions of communities in a way that would benefit not just them but the economy as a whole. The amendment would promote an appropriate level of services in deprived communities, as we have heard, and ensure that the FCA plays its role in that by its interventions in affordable loans, savings and insurance products. As we have heard, that is crucial for small businesses and social ventures as much as for individual consumers. It is estimated that more than 4.5 million small businesses and social ventures and more than 3 million households are unable to access the fair and responsible finance that they require. It is particularly apposite in the context of the current revulsion—one has to use that word—felt about some parts of the banking community. This is the chance for them to rise to the challenge and show what the good side of banking can be.

All of us have heard of small shops or service providers going to the wall thanks to the inappropriate policies of banks. It is not simply about mis-selling of interest rate swaps, important though those were; it is also about the unavailability of financial products for small entrepreneurs or, sometimes, for larger ventures that want to locate in some more deprived areas. There needs to be a proper investment strategy for social enterprise and small businesses, especially where they work in those difficult areas.

In the past, I thought that encouragement alone would work in making banks be socially responsible in such a way as to help consumers and potential consumers in difficult areas. I no longer think that. When the previous Government were trying to set up basic bank accounts, we tried very hard, along with the FSA, but people were still denied access. People need a bank account and insurance these days; they have become essentials rather than nice- to-haves.

Amendment 104AA would make the FCA have regard to consumer access to affordable and appropriate financial services, and Amendment 118A requires an access and choice code to make clear what the FSA expects of those it regulates. I hope that the Minister will be able to accept the amendments and enable the FCA to play a role not just in promoting competition for existing consumers but for those whom we all want to be consumers.

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[Lord Sassoon]

My Lords, I share many of the concerns raised in this debate. Access to financial services and access to lending for individuals and businesses are vital to our society. The question we have to ask is: who should be charged with tackling access issues? The FCA will be a conduct of business regulator with a clear objective concerned with creating the right conditions in which well functioning markets can meet the needs of consumers. Ultimately, the menu of products and services they offer to whom and at what price is a decision for firms themselves. The FCA is there to regulate the market, not to ensure that the market delivers a particular set of services or products.

Where the market fails to provide the services that consumers need, there may well be a case for intervention in the market to promote consumers’ access to financial services. The noble Baroness mentioned that issue in connection with the previous Government’s drive on basic bank accounts. That is rightly the province of government and action needs to be taken. However, I do believe that it is not a matter of regulation. It is a matter of social policy and it is therefore the responsibility of the Government. It is not the job of the FCA to prescribe that there should be universal provision and who should be required to deliver it. That is for the Government.

I will not detain the Committee with the great detail that I could go into of the actions we are taking to promote and extend access to financial services: to boost lending, particularly to small businesses; to nurture and encourage the mutual sector; and to help increase consumers’ capabilities and work with industry to make access to simple products possible. We have touched on some of these issues in considerable detail in the past. There are some areas which my noble friend Lord Sharkey specifically raised, such as bank charges. I draw his attention to the agreement we announced with the banks last November, under which the major personal customer account providers came forward with a new agreement to send text alerts when balances fall below a certain level, and to provide buffer zones and so on. The action there has been significant.

The provision of data is another area which has needed and continues to need attention. It has had some attention. Information is already regularly published concerning lending and the provision of loans and other services in deprived communities. For example, the banks that are members of the British lending task force have publicly committed to continue to publish subregional lending data on an annual basis through the BBA. I could point to a significant number of initiatives. These are things that the Government will continue to work on but they are outside the ambit of the Bill.

[Baroness Kramer]

Is the Minister aware of the mechanism that has been successful in the United States and how much that is tied to action by the regulator under the Community Reinvestment Act? It is the regulator that has driven that process forward, because only when conditions are met does it give permission for the banks to act in ways for which they need the regulator’s permission. Is he abandoning a tool that we know has been successful?

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[Baroness Kramer]

My Lords, I will add only a few words, because of the powerful speeches that have preceded me. After hearing the noble Lords, Lord Phillips and Lord Hodgson, who have spoken with such enthusiasm, the Minister may have the wrong impression that this sector is taking off with great and roaring strength, so why on earth should we worry about the role of the regulator? However, if he looks back at the numbers that have been quoted to him, the amounts of money that are being raised or proposed are extremely small compared to the demand and the need. The regulator needs to act in order to release the energy of this whole sector.

I know that the Government are constantly concerned that no one sector should be favoured above the other, but it is important to recognise that this sector is distinctively different. I draw his attention to one example that may help clarify the matter—and which I have raised with the regulator, which acknowledges that it is clearly a problem. This is based on a communication that I received from someone involved as a financial adviser, who directed me towards a report done by Nesta in collaboration with Worthstone called Financial Planners as Catalysts for Social Investment. The response that they got back in the course of this work made it clear that the regulatory environment is not yet appropriate for this sector. The report contains quotes such as:

“The social investment asset class, due to its early-stage of development lacks the regulatory clarity of other markets”.

That lack of clarity is turning into a real problem. It is not clear, for example, that an independent financial adviser can advise a client on a social investment because the return is a combination of some sort of more traditional manner of financial return, but also of a social benefit—and how is that to be measured? More to the point, how is it to be set within the suitability requirements that financial planners have to observe when they advise clients? The report states:

“Ultimately, there is a need for the FSA”—

which I suppose is the FCA now—

“to establish clear guidelines around suitability to provide financial planners with a frame of reference. Consistency is required, together with a set of understood and agreed practices and procedures”.

That is one small example. Rather than tackle this issue by issue and try to hoe the ground in the most difficult kind of way, we should make sure that the regulator clearly understands that they need to act in a way that would enable this industry to develop to its full potential. That would accelerate the flow of funding, and I believe that as an economy we would only benefit from that.

[Baroness Hayter of Kentish Town]

My Lords, I first apologise to the Committee, because I would like to degroup Amendment 128AA, which is in this group. I know that the Minister has had minutes’ notice of this, but I apologise to others. It is an important issue, and clearly we will return to that.

I support the amendment moved by the noble Lord, Lord Phillips, and I will also speak to Amendment 104ZA. As we have heard, social enterprises are businesses that trade to tackle social problems and improve communities, people’s life chances, or the environment. They make their money from selling goods and services in the open market, but they reinvest their profits back into the business or the local community. So when they make profits, society profits. They do not make profits for the shareholders. In future, perhaps we should adopt the words of the noble Lord, Lord Hodgson, and call them not-for-profit distribution, NFPDs, which may be the new word for them.

Funding is certainly needed to start up enterprises but, just as critical is the need to scale up and sustain them. That means getting access to modest and responsible sources of finance which will grow profits and jobs in this case, and make the local and national economy work. Appropriately funded social enterprises can lead an economic fight-back in the most deprived communities. The more deprived the community, the more likely you are to find social enterprises working there. They reinvest in the community. Indeed, 39% work in the 20% most deprived communities. They employ more people relative to turnover than mainstream small business and are outstripping other SMEs in terms of growth and sustainability. Just as access to funding can unlock the social enterprise sector’s potential, so it is the single largest barrier to the sustainability of this sector. Last year, 44% of respondents to a survey said that they were hampered by the availability and affordability of finance.

I make no apology that our Amendment 104ZA asks the FCA to discharge its general functions in a way that promotes growth and development of social finance and social investment. We ask that it should promote competition. This is, if you like, an emerging market, which needs a little help at the moment. I think that the word “promote” is not too dangerous but if the Minister would accept “enable”, I would settle for that. There is a distinctive difference to this sector. I hope that our regulatory system is big enough to engage with it.

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[Baroness Kramer]

I am sorry and recognise the late hour, but if we let this opportunity go we will not get it back again. I wonder whether the Minister will—even if it is afterwards—sit back and think through this issue. I am a simple person. I come from a banking background where you look at outputs. We know that investors are seriously interested in these kinds of products. We know that there is a need on the far side, whether individuals, small start-up businesses, charities, social enterprises and whatever else. In the middle we have a regulatory pattern of behaviour. If the regulation was not acting as a barrier, surely the outputs we would have would be a thriving community development banking sector, a thriving social investment sector, and a thriving social bond market. We can look at other countries and see these things in far more advanced states of development than we have. The conclusion has to be that the regulator is playing a significant role as a barrier in this process. If we cannot tackle that in this legislation, how on earth can we tackle it?

[Lord Hodgson of Astley Abbotts]

The FSA currently has responsibility for one particular sector of the social enterprise movement—the industrial and provident societies. I suggest that the Minister asks his officials in the morning to ring the FSA and ask how many people are working in the industrial and provident society section. The answer is half.