Financial Services Bill
Lord Sharkey Excerpts(11 years, 9 months ago)
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Lord Flight
My Lords, I rise to speak to Amendment 144K, which is intended to ensure that the non-executive members of the PRA board have relevant experience and expertise. In particular, the board should have the benefit of members who have expertise in the sectors regulated by the PRA.
As others have already said, the insurance industry has been something of an orphaned relative. Indeed, I think that the Governor of the Bank of England is on record as saying that the arrangements do not entirely match his wishes. I believe that the Government’s intention is that this should be the case. It is clearly desirable, however, that the PRA should have appropriate representatives from that industry with the right experience, and, indeed, they should be equipped to contribute if the life industry balance sheets get into a position where there needs to be a temporary suspension of the rules, should equity markets plunge dangerously.
Lord Sharkey
My Lords, I rise briefly to support Amendment 144K, in the name of my noble friend Lord Flight, and even more briefly to support Amendment 144L, in my name, which covers some of the same ground but is more focused on the need for the PRA board to have non-executive members with relevant experience and expertise in the insurance sector. I am sure that neither of these amendments should be at all controversial. It would be very hard to argue that the PRA non-executive members need not have among them people of experience and expertise across the regulated sectors, but I think that it would be wrong to argue that this provision is not needed in the Bill. There is no reason for this to be left simply to the discretion of the Bank and the PRA and every reason why they should have an obligation to act in the way that both amendments suggest.
Amendment 144L in my name focuses on insurance because I am concerned that the PRA—as a subsidiary of the Bank, and with a special financial stability purpose and a number of Bank officials on the board—will be much more explicitly focused on the banks. It is also true, I think, that the Bank of England has no history of regulating insurance. The FSA currently does this, in succession, I think, to the DTI. In order to make sure that the PRA also effectively and properly focuses on the insurance sector it seems right that it should have, among its non-executive members, people with the appropriate experience and expertise in that sector. That is what my amendment and the amendment of my noble friend propose.
Baroness Noakes
My Lords, I support Amendments 144K and 144L, which are driving in the same direction, particularly in relation to insurance. Insurance companies have been the orphans: they have been tossed around Whitehall with the DTI and the Treasury; then they went to the FSA, where they were not the most important part of the FSA’s responsibilities; and now they know that they are being taken, rather grudgingly, into the Bank of England. They are worried that the particular features of their industry will not be given due weight, so the appearance of somebody with the requisite experience at board level is a minimum requirement. Because of the degree of concern in the industry, I do not think that it is enough simply to say, “Well, the Bank will do the right thing”—as I am sure the Minister is going to tell us in a minute. It is right that the Bill should reflect the concerns that exist in the industry.
Lord Sharkey
Lord Sharkey
I will also speak briefly to Amendments 129ZC and 130ZA in this group.
All these amendments address the PRA’s general duty to consult. As the Bill stands the PRA must consult PRA-authorised persons or, where appropriate, persons appearing to the PRA to represent the interests of such persons. This consultation is to be on the extent to which the PRA’s general policies and practices are consistent with its general duties under new Sections 2B and 2G. These general duties include, for example,
“contributing to the securing of an appropriate degree of protection for those who are or may become”,
insurance policyholders. This is a very wide if not universal category, as the noble Lord, Lord Flight, has pointed out. They also include a duty to have regard to the regulatory principles in new Section 3B, which include,
“the general principle that consumers should take responsibility for their decisions”.
In both these cases it is clear that the PRA will need to know what consumers want and need; what their experience is and has been; and, particularly when it comes to the caveat emptor clause, what information consumers need to be able properly to take responsibility for their decisions.
These three amendments simply add “consumers” and “the Consumer Panel” to the list of groups that the PRA must consult or whose representations it must consider. Quite apart from the obvious justice of consulting those who may buy the end products, consulting consumers can also have the beneficial effect of preventing the PRA being totally isolated from the real world and the real consequences of their actions. We can all see from recent events the danger of any part of our financial system, regulatory or otherwise, losing contact with what is actually happening or what people are actually experiencing.
These are simple and clear amendments with a simple and clear purpose. I hope that the Minister will give them sympathetic consideration. I beg to move.
Baroness Noakes
My Lords, I have Amendment 129A in this group and it concerns practitioner panels. With the leave of the Committee, and at the request of my noble friend Lord Northbrook, I shall also speak to his Amendment 130ZZZA and to Amendment 130ZAA in this group. When a Marshalled List has to resort to using the letters “ZZZA” there is something wrong.
My amendments concern consultation with practitioner panels. A number of amendments in this group concern consultation with consumers and the noble Lord, Lord Sharkey, has just spoken to his amendments. I am sceptical about the role of consumers in relation to consultation on prudential regulation. I shall be interested to hear what my noble friend has to say in response, but I shall concentrate on practitioners.
Of course it is very good that the Bill contains a requirement for the PRA to consult in new Section 2K. However, the Bill merely enables—it does not require—the PRA to set up practitioner panels. That is in stark contrast to the existing requirement on the FSA to set up practitioner panels and the very detailed requirements in new Sections 1N to 1Q for the FCA to set up various kinds of panels as part of its consultation arrangements. My Amendment 129A would require the PRA to set up one or more practitioner panels as part of its consultation arrangements.
My noble friend Lord Northbrook’s Amendment 130ZZZA mandates a single practitioner panel, and it goes a little further than my amendment by setting out what it should do—namely, it should be a regular forum for policy debate for the PRA and also consider the cumulative regulatory impact of the FCA and the PRA; that is, it should not merely be reacting to specific concentration exercises by the PRA but should also be involved, on a more in-tune basis, as a conduit for practitioner views. That harks back to the concept of dialogue that we talked about earlier when we spoke of consultation in relation to the FCA.
There ought to be clear advantages for continuing with practitioner panels for the PRA as well as for the FCA. The panels have been a well understood and welcome part of the FSA’s interaction with the financial community, certainly from the perspective of the industry. I believe that they are generally regarded as having worked well.
These amendments are supported by the Financial Services Practitioner Panel. Its chairman, Mr Joe Garner, has written to me to say that his panel very much hopes that this Bill will be amended so that the practitioner panel will be able to continue to help the PRA in future as well as the FCA. He sees its role as making a positive contribution to regulation. I have also heard from several industry bodies and other bodies which also support the continuation of practitioner panels.
I have very great respect for the work done by the pre-legislative scrutiny committee on this Bill, but I believe that it was wrong to reject the practitioner panels as involving regulatory capture. I believe that that misunderstands the nature of the quite detailed and technical nature of the work that is carried on by the panels. The FSA did a lot of things wrong, but I do not believe that one of them was being captured by its practitioner panel. Amendment 130ZAA in the name of my noble friend Lord Northbrook seeks to put that beyond doubt by specifically providing that the PRA is not accountable to practitioners if it rejects their recommendations.
The issue of practitioner panels might be less important if there were confidence that the PRA’s approach to consultation would be carried out well. Unfortunately that has got off to a bad start, with considerable concern about the draft of the PRA’s approach to consultation which was recently issued by the FSA and the Bank of England. As I noted at Second Reading, there has been considerable dismay at the dismissive and patronising language used. If the document which is on the Treasury’s website is representative of the kind of thinking which would permeate the PRA, I believe that it is a problem in the making. I could list the problems with the published PRA guidance at consultation but I am conscious of time today. However, I am happy to give the Minister the litany of problems identified with the draft to date. These problems are serious from the perspective of those who are expected to be consulted.
Even if the shadow PRA had pretended that it really embraced consultation, I do not believe that it would have removed the need to set up in legislation a definite structure of consultation, such as the existing practitioner panel arrangements. However, the evident lack of enthusiasm on the part of the Bank of England and the PRA rather strengthens the case for recognising in this Bill the need to have practitioner panels.
Lord Sassoon
Of course, I note what my noble friend says. She is always very clear and direct. I absolutely refute that the PRA has anything approaching a free-for-all. I have explained the many general and specific requirements it has to consult on, whether they are individual rules or setting things out on an annual basis and so on. Earlier on, I think she promised to send me a letter setting out some of the concerns, which she has just summarised, on the recent consultation. I will be very happy to receive that, and the Treasury will of course look at it as well.
Lord Sharkey
My experience in commercial life has left me with a deep respect for the wisdom of consumers, and a deep conviction that consumer groups, properly constituted and properly consulted, are a source of sound guidance, and a vital way of making sure that decisions are properly grounded in current experience, views and expectations. Critically, this wisdom and this learning is always best delivered directly and not through an intermediary. I continue to think that the Government are mistaken in excluding consumers from direct consultation with the PRA, and I think it is unwise to rely on second-hand unmediated input. I suspect, given the comments around the Chamber this evening, that this is an area we might well return to on Report. In the mean time, I beg leave to withdraw.
Finance: Loan Guarantee Scheme
Lord Sharkey Excerpts(11 years, 9 months ago)
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Lord Sassoon
I can confirm that the scheme will extend to the devolved Administrations.
Lord Sharkey
Is there anything about the design of the loan guarantee scheme that makes it more likely that funding to SMEs, particularly those in deprived areas, will increase?
Lord Sassoon
My Lords, the £40 billion infrastructure guarantee scheme is linked to nationally significant infrastructure projects. Typically, the promoters of those projects will not be SMEs, but of course there will be very many SMEs in the supply chain for the projects that will benefit. SMEs working in the public/private partnership space will also benefit from a possible £6 billion of additional loans that was also announced in this package, as will exporters, for whom a £5 billion export refinancing facility will be extended.
Financial Services Bill
Lord Sharkey Excerpts(11 years, 10 months ago)
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Lord Sharkey
I support Amendment 112 in the name of the noble Lord, Lord McFall. As the Bill stands, the use of “may” instead of “must”, when listing matters to have regard to in considering the effectiveness of competition in the markets under discussion, seems to have two problems. The first is that it makes the competition objective less strong than the consumer protection objective, in which the FCA is given a list of things that it must have regard to. In the competition objective, the FCA is given a list of things that it may have regard to. Why is this? Why is the consumer protection objective definite about what the FCA must have regard to, while the competition objective is not? Surely it would be more sensible to have these objectives on an equal footing and in both cases supply the FCA with a list of things that it must have regard to.
The second problem is that the use of “may”, regarding what the FCA takes into account in considering the effectiveness of competition, seems to render the whole clause without much force or substantive meaning. Why list the factors that the FCA may have regard to if it actually does not have to do so? Either the factors listed are important to consider or they are not. If they are important, surely the FCA must consider them. If they are not important and can be disregarded by the FCA, as the Bill seems to provide, why are they there at all? I hope that the Minister may see the virtue of “must” and might agree to the noble Lord’s amendment.
Lord Sassoon
My Lords, I am infinitely flexible; it depends how long we go on this evening but I can see one or two amendments coming up on which I can be more accommodating than I will be on this one.
I shall start with perhaps the easiest part: the questions from the noble Lord, Lord Tunnicliffe, around Amendment 111A. I am delighted to see the noble Lord joining the fray. We have now had four players on the Front Bench from the Opposition; I wish that we had such depth of reserves on our side. However, I will battle on.
Amendment 111A seeks to bring the activities of market makers into the scope of the FCA’s competition objective. I reassure the noble Lord and the Committee that the activities of market makers are already very much covered by the objective. Put very simply, to operate as a market maker firms will have to obtain permission to deal in investments as principal, and that is a regulated activity. That means that such firms are performing a regulated activity or a regulated service, and noble Lords will see that new Section 1A(1)(e) clearly states that markets for regulated financial services fall within the scope of the FCA’s objective, so the FCA can indeed shine its regulatory light on market makers as on any other part of the sector. For completeness and to clarify, as far as recognised investment exchanges or RIEs are concerned, they can be exempt from the general prohibition under Section 285(2) of FiSMA, but even their activities are brought within the scope of the competition objective by virtue of subsection (1)(b) of new Section 1E in the Bill. I hope that that deals with that.
Turning to Amendment 112, competition can mean many things to many people. To indicate what the Government might want the FCA to look at in deciding how to advance its competition objective, subsection (2) of new Section 1E sets out a number of matters to which the FCA may have regard in assessing the effectiveness of competition in a given market. It is an indicative and, importantly, a non-exhaustive list. The FCA cannot dodge or duck out of its overall competition objective. Had we not put the non-exhaustive list of examples down there we might not be expressing the concern that we have. There would be the simple competition objective and that would be that.
Given the list, let me explain a bit more why there is danger in changing “may” to “must”. That would mean that the FCA would always have to consider all the issues set out in new subsection (2). The FCA should not necessarily have regard to all of that list when looking at particular competition questions. There could be unintended consequences.
If the FCA wishes to take action to promote switching, the consideration of barriers to entry will not be as important as the ease with which consumers can transition between providers and how that is affected by the structures of the market or behaviours of incumbents. To enable the FCA to generate the outcomes that we want under the competition objective it is important that the list is expressed in the terms that it is. This does not make the basic objective of the FCA weaker in this area. It just means that we need to give it a degree of discretion to be able to target the particular issues that they are looking at at any one time.
That addresses the amendments that are being spoken to and I hope that the noble Lord, Lord McFall of Alcluith, will consider not pressing his amendment.
Lord Sharkey
“( ) developments in the markets for unregulated financial services that are in the interests of consumers and businesses,( ) the desirability of establishing a new authorisation regime for direct financial platform providers to protect consumers and providers,”
Lord Sharkey
I shall speak also to Amendment 119. Both amendments are to do with financial innovation and particularly with peer-to-peer lending. They add to the factors the FCA may have regard to—or must have regard to, if the Government eventually accept Amendment 112—when considering the effectiveness of competition. The first amendment would require the FCA to have regard to developments in markets for unregulated financial services that are in the interests of consumers and businesses and to have regard to the desirability of establishing a new authorisation regime for direct financial platform providers to protect consumers and providers.
That means, essentially, that the FCA would have to look carefully at new, unregulated services and would have explicitly to weigh the merits of regulating peer-to-peer lending organisations. Peer-to-peer lending has already passed the $1 billion mark in the United States, where it is regulated, and it is growing very fast in the United Kingdom. Many commentators see peer-to-peer lending as a direct way of dealing with the banks’ failure to lend to individuals and to small businesses. Andy Haldane of the Bank of England has even suggested that these non-traditional lenders could eventually replace banks.
The Government acknowledge the potential of this new lending model and have made £100 million of seed money available. However, this new model of peer-to-peer lending is not covered by existing financial services legislation and that leaves it exposed to very serious dangers. This new industry, unregulated, is extremely vulnerable to rogue players entering the market. All it takes is one rogue player, one big scandal and a lot of losses for ordinary lenders for the model to be discredited and to fail. That would be a very undesirable outcome. We desperately need new and innovative financial services to provide real competition for existing banks and to fund those areas of commercial life, particularly SMEs and start-ups, that the banks are so obviously failing to fund. It is not as though innovative, real-world consumer-orientated financial services are in good supply. In fact, it could be argued that peer-to-peer lending and crowd funding are the only significant financial innovations that are around at the moment and likely to benefit the real economy.
At Second Reading, the Minister said in response to suggestions that peer-to-peer lending be taken into regulation:
“The Government do not think that statutory regulation is appropriate at this point. The sector is very small and such regulation would be a barrier to new entrants and innovation”.—[Official Report, 11/6/12; col. 1261.]
The industry does not agree with that. The leaders of the industry are acutely alive to the danger to their business model presented by a rogue operator. They would welcome regulatory protection for consumers and providers. This protection need not be onerous. Indeed, any regulatory regime should be judged for suitability not only on the protections it provides but on how little of a barrier to entry and innovation by proper operators it offers. In fact, this is one of those occasions when the market, particularly for crowd funding into SMEs, requires regulation in order to expand. We need IFAs to distribute these products if we are to enlarge the market, and IFAs absolutely require regulation before they will consider doing that. We also need regulation that will allow these products to be located inside tax-efficient wrappers.
This is one of those asymmetrical cases where no regulation risks the complete destruction of the sector and some regulation carries only a small risk of discouragement, if any, and the strong probability of encouraging wider distribution and uptake. At Second Reading, the Minister also said,
“this is a matter that we will keep under review”.—[Official Report, 11/6/12; col. 1261.]
That is precisely what these amendments would require the FCA to do. It is important that we have that commitment in the Bill and I hope that the Minister will recognise that the balance of risk and reward here argues in favour of these amendments.
Before I close, I would like to ask the Minister for clarification. It may be that the Bill already brings peer-to-peer lending under regulation. Clause 6(3) amends paragraph 23 of Schedule 2 to FSMA 2000. This paragraph brought into the scope of regulation rights under any contract under which one person provides credit to another if the obligation of the borrower to repay is secured on land. The present Bill amends paragraph 23 by removing any reference to secured on land and substituting the phrase,
“Rights under any contract under which one person provides another with credit”.
Does this change in practice bring peer-to-peer lending under regulation, as it might appear? If it does not, as is probable, despite the apparent clarity of language, then I hope the Minister can give sympathetic consideration to the amendments. I beg to move.
Lord Sassoon
No, my Lords, I am not saying that. There are plenty of different tax treatments for all sorts of regulated and unregulated activities. I see the issues as separate. However, I have indicated a couple of areas in which changing the tax treatment would be difficult and would run counter to some of the broader accepted principles by which we run the tax system. But I would not link the two things explicitly together.
Lord Sharkey
There was a question in the debate about the scope of my suggestion. The amendments were drafted deliberately widely so that they create a “may” or a “must” for the FCA when it considers competition so that it looks at new developments in the market that may be in the interest of consumers.
I have been encouraged by a lot of the debate. There is an almost universal consensus that regulation might be important and might be a very good thing. I think I am perhaps a little encouraged by what the Minister has said, but I will read Hansard carefully tomorrow to check that I am still encouraged. There is one issue here that needs stressing, which is the matter of urgency. It takes only one rogue operator to go bang in a very serious and public way to sink this whole area. The Government should perhaps be a little more alive to that particular problem and the risk of that happening. Having said that, and looking at the clock, I beg leave to withdraw.
Financial Services Bill
Lord Sharkey Excerpts(11 years, 10 months ago)
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Lord Sharkey
Lord Sharkey
My Lords, I shall also speak to Amendment 138A. Amendment 106A adds to what the FCA must “have regard to” when considering the degree of consumer protection. It adds the requirement to have regard to the general duty of providers of financial services,
“to provide those services honestly, fairly and professionally in accordance with the best interests of the consumers in question”.
Amendment 138A adds to the regulatory principles to be applied by both the PRA and the FCA. It adds the principles that,
“authorised persons should act honestly, fairly, and … in accordance with the best interests of consumers who are their clients”,
and that,
“authorised persons should manage conflicts of interest fairly, both between itself and its clients and between clients”.
These provisions, or something very like them, already exist as FSA principles 6 and 8 in section PRIN 2.1.1 of the FSA Handbook, but crucially those are principles and do not have the force of law directly. Perhaps 30 years or so ago, that would have been a satisfactory situation. If the culture and current practices of our financial institutions were robust, morally sound and possessed of a sense of the common good then the amendments I propose would probably not be necessary. However, the culture and current practices of many of our financial institutions are not robust, not morally sound, and certainly not possessed of a sense of the common good.
As the noble Baroness, Lady Liddell of Coatdyke, said an hour or so ago, there have been numerous scandals. There was the mortgage endowment scandal, for example. There was the selling of precipice bonds to pensioners. There was the payment protection insurance scandal. Most recently, there was the mis-selling of interest rate swaps to SMEs. Every day seems to bring news of yet another gigantic scandal. Yesterday HSBC apologised to the US Congress for, among other things, breaches of US anti-money-laundering regulations and poor record keeping. It turns out that 41% of the bank’s accounts in the Cayman Islands had no customer information attached to them at all. Senator Levin described the bank’s culture as “pervasively polluted”.
It is no wonder that confidence in financial institutions has fallen most dramatically here in the UK. The recent Ernst and Young survey on global consumer banking reports that 63% of UK consumers say that their confidence in the banking system has fallen. That is the highest fall in Europe, and higher than in the USA. It seems to be the case that statements of principle promoted by the FSA no longer command either the respect or the compliance of some of our largest financial institutions.
Over the past few weeks, there has been much public discussion of the moral and cultural failures in significant parts of our system. I do not believe that these failures can be addressed by exhortation. I believe it requires legislation to begin to change these moral and cultural failures, and to encourage the emergence of more responsible and ethical behaviour. I do not believe that we can rely on the banks to change in an appropriate and timely way without specifying what some of those changes should be. That is what these amendments are designed to do, by proposing to put into the Bill what is essentially a duty of care—not, perhaps, the most popular concept this afternoon—for the financial services industry in respect of its dealings with ordinary consumers. We may regret that it has come to this, but it has. It is plain that our trust in much of our financial system to behave ethically was grossly misplaced. These amendments try, in some small way, to correct some of that. I beg to move.
Lord Sassoon
To be absolutely clear, the regulators—and the FCA in particular—will have very clear powers to make any further rules on top of those that already exist in the FCA’s rulebook in order to deal with conflicts of interest. I can be completely clear and unequivocal on that point. The powers are there and further rules can be made in this area if the FCA at any point regards them as necessary.
Lord Sharkey
I thank the Minister for his detailed response. I listened very carefully to everything he said, but I was not convinced by the notion that this group of amendments might narrow the FCA’s scope to act in this area. I was equally unconvinced that the general duty to provide services honestly, fairly and professionally was too vague, wide or ill defined, if that is what the Minister was actually saying.
I continue to believe that there is merit in an explicit inclusion of the two principles that we suggest in the list of the regulatory principles common to both the PRA and the FCA. The debate has also shown the high level of concern about this whole area. The detail of the Minister’s response shows that he is alive to that level of concern. I expect that we will return to this matter on Report. In the mean time, I beg leave to withdraw the amendment.
Financial Services Bill
Lord Sharkey Excerpts(11 years, 10 months ago)
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Lord Sharkey
“(d) the deprived communities objective (see section 1F).”
Lord Sharkey
My Lords, in moving Amendment 102, I shall speak to Amendments 118AA and 121. They are aimed at addressing three financial problems in our deprived communities. The problems are significant and so is the size of our deprived communities. The last indices of deprivation report published by the Government notes that more than 5 million people in England lived in the most deprived areas in 2008; 56% of local authorities contained at least one area among the most deprived; and 88% of the most deprived areas in 2008 were also among those most deprived in 2007.
The first problem that the amendment seeks to address is that many individuals in these communities face very great difficulty with financial services. In August 2010 a report to the Treasury called Realising Banking Inclusion: The Achievements and Challenges summarised the situation. The report concluded:
“Efforts on banking inclusion have moved 1.1 million into banking but the benefits appear to be unevenly distributed and barriers to banking remain”.
The report found that penalty charges had been a harsh reality of the banking experience for many. Around half of the newly banked had been hit by penalty fees and individuals who incurred these charges tended to be charged multiple times, averaging nearly six times per year each. Although there had been savings gains for some, the tendency to cash management and the impact of penalty charges had undermined overall gains. Worse, there had been a significant increase in debt among the newly banked, resulting in an overall increase in spending on debt servicing. Perhaps not surprisingly, in view of all this, there has been a relatively high degree of account failure. Net account failures are close to one in five. The report concluded that there is a case to be made that a penalty charge system constitutes an effective market failure in the provision of banking services to those on low incomes. This market failure is the first problem which the amendments seek to address.
The second financial problem in our deprived communities relates to the funding of SMEs. It is generally accepted that the health and supply of SMEs is critical to the health of our economy, but there is even more to it than that. Data from the Kauffman Foundation study published in July 2010, The Importance of Startups in Job Creation and Job Destruction, suggest that the role of start-ups is absolutely critical among SMEs. The study found that, on average, and for all but seven of the 28 years between 1997 and 2005, in the USA, existing firms were net job destroyers. All net new jobs came from start-ups and job creation in start-ups during recessionary years remained stable while net job losses in existing firms were highly sensitive to the business cycle. This is probably true for the UK too, and is undoubtedly why the Government announced its start-up loan scheme, four weeks ago, offering loans of £2,500 to people aged between 18 and 24. It is a clear indication of both an unmet need and a failure of the banks to supply this need.
This is all very small-scale stuff and marginal. The fact is that the SME sector as a whole has significant funding difficulty. The Breedon report of March this year estimates that, by 2016, there will be a shortfall of between £26 billion and £59 billion in finance needed by SMEs for working capital and growth. As the latest quarterly report from the Federation of Small Businesses shows, the situation is not improving. It is not just that the banks are not helping; they may actually have made the situation worse. We now know that they have mis-sold hedging products to around 28,000 small businesses. Andrew Tyrie said that the FSA’s investigation into this mis-selling is a damning indictment of the banks’ behaviour, that such products took advantage of small businesses and that this behaviour is completely unacceptable. This is just the national picture: it would conceal areas where there are more significant problems. The deprived communities will suffer more. According to a 2012 report by the Centre for Responsible Credit, only 4% of all lending goes to businesses in deprived areas. It is clear that the banks are failing in this area and this is the second problem the amendments address.
The third problem addressed by the amendments is related to the other two. It is not possible, at the moment, to have an accurate picture of what the banks are actually up to in our deprived communities. The data provided by the largest banks concerning their lending to SMEs are provided on an aggregated basis. This means that there is no information to allow local economic development agencies, including local enterprise partnerships and community development finance initiatives, to enter into an effective dialogue with the banks. There is no way of assessing performance, suggesting improvement, or of knowing which banks are performing better than others; there is no way of telling the terms on which credit is being made available in these deprived areas or of telling the extent, if any, to which banks are supporting the third sector to take advantage of their new rights under the Localism Act. We need access to disaggregated data and postcode level data so we can see clearly which banks are doing what in the deprived areas. This is what our amendment proposes.
Lord Sassoon
No, we are not abandoning a tool; partly because in this country, of course, we do not have the tool. However, I think it would be perfectly feasible for the Government, essentially as a matter of social policy, to decide on any number of actions that might require the regulators to play a part in implementing them. I do not believe that anything in the Bill would rule that out. That is quite different.
The American example shows that the right way to go is through a focused decision by the Government or a specific piece of legislation that tackles this issue, which may then impose responsibilities on the regulator. That is quite a different matter from giving the FCA a very general power to take on itself a responsibility that is rightly the responsibility of the Government.
It will not surprise the Committee if I say, in respect of Amendments 102, 118AA and 121, which seek to give the FCA this new deprived communities objective, that for the reasons I have given I do not think they are appropriate and I cannot support them.
Amendment 104AA also seeks to ensure that the FCA has regard to the issue of consumers’ ability to access affordable and appropriate products that meet their needs. It does that by seeking to add access to the list of matters to which the FCA must have regard in discharging its general functions. The “have regard” provisions that are currently listed there include only financial crime and the regulatory principles. That is why I cannot support the amendment. I cannot agree that the FCA should be required to have regard to something that it is not responsible for. This is the important distinction between financial crime, for which the FCA is responsible and which is listed in proposed new Section 1B, and access, which is not.
Amendments 108A and 108B seek to ensure that the FCA considers access when advancing its consumer protection objective by adding,
“the ease with which consumers can access regulated financial services that meet their needs”,
to the list of matters to which it must have regard in assessing what constitutes,
“an appropriate degree of protection for consumers”.
I have already set out why I cannot support these amendments, which seek to give the FCA a formal role in promoting access, but I will remind the Committee of the kind of considerations that the FCA will take into account when advancing its consumer protection objective to help consumers. The FCA must have regard to consumers’ differing experience and expertise and to their needs for timely, accurate and fit-for-purpose information. The FCA must therefore consider whether vulnerable or marginalised consumers engaging with financial services may need additional information, protection or support. The FCA’s consumer protection operational objective provides the mandate for the regulator to design a regulatory regime that delivers this.
Amendment 117A seeks to make sure that the FCA takes into account consumers’ ability to access financial services in advancing its effective competition objective. Again, I cannot accept this as I am absolutely clear that it is neither necessary nor appropriate for such a have regard provision to be added to the competition objective.
I turn to Amendment 118A. I have explained why I do not think it right to give the FCA an access mandate. Where there may be a case for action beyond the FCA’s objectives, this is a matter for government, but that does not mean that the Treasury should be able to direct the regulator on how it should interpret and indeed advance its objectives, as Amendment 118A seeks to provide. This would fundamentally go against the Government’s intention that the FCA should be an independent regulator and would, I suggest, blur the boundaries between regulatory and social policies. I also do not think it would be appropriate to have a power in statute, as proposed here, to allow the Treasury to give the FCA greater powers to act in an area that is rightly a matter for the Government to deliver, or indeed to give the Treasury the power to impose requirements directly on industry. We would be blurring the lines of responsibility. As I have explained, there is a lot we can do and are doing to advance some of these important social policy issues. If it came to legislation that impinged on the regulator’s prerogative, it is right that any powers in this area should be considered as part of that legislation and Parliament should consider the consequences for the regulator at that time.
Finally, Amendment 112A seeks to add “and products” to the regulated financial services for which the FCA will promote effective competition. I will briefly try to reassure the Committee that this amendment is not necessary. We agree that products are important. In fact, the focus on the design and governance of products will be one of the key ways in which the FCA will be different from the FSA. The Bill contains enhanced powers for the FCA to regulate products and I look forward to discussing in due course the new product intervention power, which is provided for in Clause 22. However, the outcome which this amendment seeks to deliver is already reflected in the Bill. A product in the context of financial services is ultimately an agreement under which one person agrees to provide a service of some kind to another person, so products are captured in the definition of “regulated financial services” as used in the Bill.
In summary, we are sympathetic to the aims of my noble friend’s amendment and to a wide range of the concerns that have come up in this debate. We are taking action on a significant number of fronts in this area. However, these are not matters for the financial regulator in the way that they have been drafted and I ask my noble friend to consider withdrawing his amendment.
Lord Sharkey
I thank all those who have spoken in support of the amendments in my name or in support of their general intent. At the beginning of his response the Minister said that the FCA is a conduct of business regulator. I say to him that it is precisely the inadequate conduct of the banking businesses that we want the FCA to regulate. I note that in the Bill the FCA is already required to take account of the needs of different consumers. All the amendments do is make this more explicit and more directed. I am disappointed by what seems to me to be a very narrow perspective in the Minister’s response. I do not agree that responsibility for helping funding into deprived areas is not a matter for this Bill. I will withdraw my amendment but I will return to the matter on Report. I beg leave to withdraw the amendment.
Economic Policies
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Lord Sassoon
We are working extremely hard on the reforms that I have talked about to make sure that we have sustainable public finances and a more balanced economy.
Lord Sharkey
My Lords, the latest report from the Federation of Small Businesses shows, in the second quarter of this year, an increase to 73% in the number of small businesses finding access to credit difficult and an increase to 41% in refusals of credit applications. Given the Government’s efforts to provide funding for the banks to lend to businesses, can the Minister explain why this is so?
Lord Sassoon
My Lords, even though the latest business surveys show that private sector employment is significantly up and that manufacturing and service sector sales continue to grow, it is certainly the case that that is happening in the face of very tough financing conditions. That is why, among other things, the national loan guarantee scheme and the announcements from the Chancellor and the governor about the new funding for lending scheme, details of which will be put out in the coming weeks, were very important.
Financial Services Bill
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Lord Sharkey
I shall speak briefly in support of Amendment 35, in particular the inclusion of the requirement to promote the Government’s objectives for growth and employment. I emphasise the importance of promoting a healthy and flourishing SME sector in achieving those objectives. The report of the noble Lord, Lord Young, last month, Make Business Your Business, noted that 50% of private turnover, excluding financial services, and 60% of private jobs are provided by SMEs, but SMEs still face great difficulty in finding funding.
The Breedon report of March this year estimates that by 2016, there will be a shortfall of between £26 billion and £59 billion in finance needed by SMEs for working capital and growth. The Government need to take direct action further to improve the supply of finance to the SME sector, in particular in our deprived communities. SMEs in those communities attract only 4% of all investment in SMEs and are in areas where unemployment, especially youth unemployment, is likely to be high.
There is another urgent reason for providing finance to the SME sector. That is to do directly with job creation. The Kauffmann Foundation, a highly respected United States think tank, published a study in July 2010 entitled, The Importance of Startups in Job Creation and Job Destruction. I will have more to say about the findings of the report later in the debate, but its most striking findings were that in the 28 years it surveyed, all net new jobs came from start-ups and that during recessionary years, job creation in start-ups remained stable while net job losses in existing firms were highly sensitive to the business cycle.
That surely has lessons for the UK. If the Government are to succeed in creating the right number of new jobs, they must strongly and actively promote not just SMEs but the start-up subsector of SMEs. To have the appropriate effect, they must do that particularly in our deprived communities. Without such strong and directed promotion, the growth and employment objective is in danger of remaining just that—an objective.
Lord Blackwell
My Lords, I apologise to the House that I was unable to contribute to the Second Reading debate. The fact that all these amendments recognise the interlinking of financial stability policy and the wider economic objectives is a major step forward. However, the amendment proposed by the noble Lord, Lord Eatwell, is mistaken in its wording. It is a fallacy to believe that monetary policy and financial policy can be conducted orthogonally, independently of general economic and fiscal policy. The two inevitably interact, and it is fallacious to believe that we can have a government Chancellor of the Exchequer in one corner deciding on a fiscal policy and an independent bank deciding on monetary policy in complete isolation—and, if necessary, disagreeing and conducting an alternative economic policy.
We are in this situation only because the previous Government separated monetary policy from the independence of the Bank of England in 1997. Until that point, the assumption was that the Chancellor of the Exchequer and the Government were accountable to Parliament and to the electorate for economic policy in the round. The Governor of the Bank of England certainly had a crucial role in advising the Prime Minister and the Chancellor of the Exchequer on monetary policy.
At the end of the day, however, a common policy was agreed that ensured that monetary policy and fiscal policy were aligned to the same objectives. They might be the right objectives, they might be the wrong objectives, but at the end of day the Government and the Chancellor of the Exchequer were accountable to Parliament and to the electorate for those decisions. The idea, as the noble Lord said, that at times you want a Bank of England or a financial policy committee to pursue a policy that is at odds with government policy is mistaken and misrepresents the way in which these functions ought to work together.
I therefore much prefer the wording of my noble friend’s amendment, Amendment 35A. Although I agree with much of what the noble Baroness, Lady Kramer, has said, my noble friend’s amendment has the great advantage of simplicity, and I support him in that.
Economy: Deficit Reduction
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Lord Sassoon
My Lords, the debt figures that the noble Lord, Lord Barnett, recited precisely illustrate the structural deficit challenge that we inherited from the previous Government. We have already reduced the current budget deficit from 11% to 8% of GDP in two years, but there is much more to do, and we will do it. We will be reducing borrowing by £155 billion a year by 2016-7, compared to what it otherwise might have been under another Government. We will keep on with that task.
Lord Sharkey
My Lords, the Oxfam report, The Perfect Storm, published two weeks ago, says:
“The combination in the UK of economic stagnation and public spending cuts is causing substantial hardship to people living in poverty”.
In view of this, could the Minister tell the House what plans the Government have in place to mitigate the effects of their deficit reduction programme on our most deprived groups and communities?
Financial Services Bill
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The Lord Bishop of Durham
I shall speak to the amendment in my name, which is in this group. The noble Lord, Lord Eatwell, and others, have commented that the governor’s powers under this Bill are extraordinary. In fact, in the internal running of the Bank the governor will become totally dominant and virtually unchallengeable, as it will the governor who sits on all the relevant key committees. By virtue not only of sitting on them but of chairing them, the governor will have power over the agendas and the conduct of business. That will enable the governor essentially to control the direction of the PRA, the MPC and the FPC completely.
The purpose of the amendment is to pick up some of the points that the noble Lord, Lord Barnett, made so well a few moments ago and which had been made earlier. It seeks to balance the powers in the committees so that the deputy governors have control of their own special areas and are capable of ensuring that the committees focus on the areas that they know well. Noble Lords are aware that in the crisis of 2008, part of the problem, which has been brought out in subsequent inquiries, was that the governor’s focus was inevitably on one area and that others were overlooked because they were not the governor’s principal concern at the time. It is therefore necessary to try to balance the internal powers to create a robust and demanding internal discussion within the Bank long before it comes to the oversight or review of what might have gone wrong in the past—in other words, to stop things happening before they happen rather than afterwards.
Government Amendment 13, which is a fascinating, interesting and useful amendment that will be discussed later, seems, with respect to the noble Lord, to be retrospective rather than prospective. There is quite a lot of closing the stable doors after the horses have left. We do not want another run on the banking system; we want people to stop one. It is the old pink elephant problem: how do you prove that the system has stopped pink elephants being around because you never see one? We will be looking backwards, not forwards, with Amendment 13. It is useful in helping us to understand what has gone wrong but not what happened at the time.
My other concern in trying to balance out these major three committees, two being chaired by a deputy governor, is to try to make the FCA slightly less of the runt of the litter. At the moment, with one person having so much control, the FCA, which is the only committee of the big four that the governor does not chair, ends up being overlooked, I fear. Will the Minister comment on whether he agrees with the point made forcefully earlier that the most rigorous models of governance today should be those that are modelled on the Bank, which include ways of ensuring that it is a learning organisation before rather than after disasters happen. What further action can he suggest to ensure that the FCA’s voice is heard clearly, given its widespread impact on consumer finance across the whole nation and not only in the major financial institutions in the City of London?
Lord Sharkey
My Lords, I support Amendment 9, to which the right reverend Prelate the Bishop of Durham spoke. On Second Reading, several noble Lords commented on the powers that the Bill gives to the Governor of the Bank of England. The noble Baroness, Lady Liddell, made the same point half an hour or so ago. It is clear that such a concentration of power calls for robust checks and balances. To an extent, the Bill recognises this, and some of the government amendments recognise it even more. Perhaps necessarily all the proposed checks and balances are formal and procedural, and many are backward-looking. This is necessary but not sufficient.
Financial Services Bill
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Lord Sharkey
My Lords, I shall speak about two aspects of the Bill regarding two areas that it needs to cover but does not. I think that it is commonly accepted on all sides that a significant problem facing the economy is the question of lending to small and medium-sized businesses. It is generally accepted that we have been unsuccessful in getting sufficient lending to take place. The Bank of England confirms that the UK’s biggest banks failed to meet last year’s lending targets. The five banks that signed up to Project Merlin lent £1 billion less to SMEs than their 2011 target—and the Merlin deal has of course not been renewed. The Bank’s trends and lending report for April this year reports that in the three months to February 2012 the stock of lending to small and medium-sized enterprises continued to contract, and had in fact been negative since late 2009. In January this year, BIS published a report on SME access to external finance. Among its findings, the report states that 21% of SME employers that sought finance from any source did not achieve success, which was a significant increase on the 8% seen in 2007-08.
These figures are bad enough, but they conceal areas where there are more significant problems. The effects of the financial crisis are being most keenly felt in those areas of the country that have long been the most deprived. Workless households are concentrated in the old industrial areas of the north of England, the Midlands, Scotland and Wales, as well as in a number of seaside towns and inner-city urban areas. We urgently need to stimulate demand for SMEs in our deprived areas and to make finance available to help them develop. At the moment, according to a 2012 report by the Centre for Responsible Credit, just 4% of all lending to SMEs goes to businesses in the most deprived areas.
The only data provided by the six largest banks concerning their lending to SMEs are produced on an aggregate basis. This means that there is no information available to allow local economic development agencies, including local enterprise partnerships and community development finance initiatives, to enter into effective dialogue with the banks with a view to assessing and improving performance, nor any way of knowing which banks are performing better than others. Similarly, the current dataset provided by the banks tells us nothing about the terms on which credit is being made available to SMEs. There are other indications that the shift by banks from term lending to overdraft lending will probably lead to a significant increase in financing costs, but we do not know how much or where. We also do not know to what extent, if at all, the banks are supporting the third sector to take advantage of the new rights under the Localism Act. The Act provides for local communities to take over the running of local authority services to build new homes, businesses, shops, playgrounds and meeting halls.
All this requires planning and funding. That means the active involvement of the banks. We need access to information to show us what the banks are doing, area by area, bank by bank, to support this agenda. All this can be achieved by making a couple of simple amendments to the Bill. I believe that we should consider adding a fourth operational objective to the three set out for the FCA. This new objective could be called something like “the sustainable economic growth objective” and could be defined as ensuring an appropriate level of financial services provision in disadvantaged areas by having regard to the needs of SMEs and third-sector organisations in deprived communities for affordable loans, savings and insurance products.
Lord Forsyth of Drumlean
How are the banks expected to provided more lending at the same time that they are being required to make greater provision for capital and liquidity purposes? Surely that is asking them to do two contradictory things.
Lord Sharkey
I had a more minimalist objective: to make it plain that that is the case with the banks at the moment. We need to make sure that we know that they have an obligation to support SMEs and third-sector organisations in deprived communities. I add in passing that the need for some growth objective is evident not only in this part of the Bill, but in the objective set out for the FPC itself. Stability is a necessary objective, but stability without growth is, at best, a recipe for stagnation.
The existing objectives for the FCA include a competition objective. This competition objective includes the statement that the FCA may have regard to,
“how far competition is encouraging innovation”.
Apart from noting that the word “may” should read “must” if the paragraph is to have any real meaning, I also want to note that this is the only time that the word “innovation” appears in the 330 pages of the Bill.
That brings me to the second area that I want to address. Innovation in the provision of traditional retail financial services is obviously important. The Breedon report, commissioned by BIS and delivered in March this year, estimates that by 2016 there will be a shortfall of between £26 billion and £59 billion in finance needed by SMEs for working capital and growth. In their response, the Government acknowledged the problem and said,
“The Government welcomes the development of new and innovative forms of finance such as peer-to-peer lending and recognises the potential of these models to have a positive impact on the SME lending market”.
Currently, the total amount of peer-to-peer lending in the UK is small, but growing rapidly, and even more rapid growth is projected. The Government are encouraging growth in this area with a £100 million investment. Earlier this year, Andy Haldane, head of policy at the Bank of England, even suggested that these non-traditional lenders could eventually replace banks, but if these new models are to succeed in providing real and substantial competition for the banks, they need more help from the Government than £100 million in pump priming. At the moment, the non-traditional peer-to-peer lending sector is unregulated. As the Daily Telegraph said two weeks ago,
“if it is serious about encouraging the growth of a genuine long-term alternative to bank lending for SMEs, the Government also needs to address the thorny question of regulation. At present, alternative funding providers are not regulated by existing financial services legislation, leaving both borrowers and lenders vulnerable to rogue players entering the market”.
Alternative funders are in favour of regulation. They recognise the dangers to their business model of a scandal generated by some rogue entrant to their market. This is not a theoretical danger or a distant prospect and is certainly not a trivial problem. There is nothing to stop such an event occurring and permanently destroying confidence in the peer-to-peer model. As the Daily Telegraph also said:
“SMEs desperately need a genuine alternative to borrowing from banks and those using alternative funders must be protected so that both they and the market can flourish”.
The Government need to take action now, and this Bill provides the perfect opportunity.