Financial Services Bill

Lord Eatwell Excerpts

Committee stage & Committee: 1st sitting (Hansard) & Committee: 1st sitting (Hansard): House of Lords
Monday 22nd February 2021 Grand Committee

[Lord Eatwell (Lab)]

My Lords, in considering this Bill, we are all placed in a somewhat odd position. The Treasury is, right now, conducting a financial services future regulatory framework review. Indeed, phase 2 of consultation on that review concluded just last Friday. While I fully understand that some parts of the Bill before us are associated directly with the UK having left the European Union, other parts are not associated in that way. It is quite likely that we will be back here in a few months’ time debating the same issues all over again when the Treasury decides on its response to the consultation and brings forward legislation to implement the future regulatory framework.

It would be comforting if the Minister could assure us that we are not wasting our time but, of course, she cannot do that, because none of us knows what the final outcome of the regulatory framework review will be. None the less it would be helpful if, when she sums up, the Minister could assure the Grand Committee that the Treasury will treat debates on this Bill as, at the very least, an enhanced consultation to which the Treasury will have full regard when reaching its final conclusions.

Let us get down to business on the amendments in the names of my noble friend Lord Tunnicliffe, the noble Baroness, Lady Bowles, and myself. Every first-year student of financial markets knows that markets in retail products—financial products sold to individuals, households and small businesses—are seriously inefficient. One important reason why they are inefficient is due to asymmetric information, as the noble Lord, Lord Davies, said just now. To put it simply, the seller of the product typically knows much more about the risks involved in making a particular investment or other financial transaction than does the hapless investor. An extreme example of this is to be found when the chief economist of the Bank of England, Andy Haldane, confessed that he did not understand the pension that had been sold to him.

As the Committee will be aware, if it is the FCA’s strategic objective to ensure that the relevant markets function well, to do so in the presence of asymmetric information it has two broad operational options. Either it should regulate each individual financial product to ensure that the investor is properly informed or it could adopt the principle of Amendment 4—and, indeed, Amendment 1—and make general rules, including the power to introduce a duty of care owed by the authorised persons to consumers. Up to now, the FCA has adopted the former option and dealt with each issue as it arises. By its own admission, this has not gone very well. From its consultation entitled Our Future Approach to Consumers in 2017 through to the feedback statement published in April 2019, the FCA has wrestled with the issue of duty of care, and is still wrestling today. Yet it still persists with its failing approach of regulating each product, and that simply cannot go on.

Action is really imperative, for two main reasons: first, because of the persistent appearance of new products, such as the buy-now, pay-later schemes, which we will discuss later—persistent innovation, which the FCA meets with persistent delay. It is always playing catch-up to introduce the new rules, after taking time for appropriate consultation and so on, to deal with the new threats to the consumer.

The second reason is the now-ubiquitous sale of financial products via the internet, as referred to by my noble friend Lord Blunkett. How many of the Committee have ticked the box verifying that they have read the terms and conditions of internet sales, without a thought of ever doing so? It is the dense and incomprehensible text of those terms and conditions that is so often the electronic embodiment of asymmetric information: the very factors ensuring that the relevant markets do not function well and that the FCA does not perform its strategic objective.

Amendment 4 provides the FCA with the means to end this failure to meet the strategic objective. The enactment of the power to introduce a duty of care would place the responsibility of ensuring that markets function well firmly on the shoulders of those who have the information required to attain that goal. As my right honourable friend Pat McFadden put it when discussing the Bill in another place, with the enactment of a duty of care, financial services providers would necessarily ask themselves the question, “Is this right?” rather than what they ask themselves today, which is, “Is this legal?” That would create a real shift in how business is done. I say to the noble Lord, Lord Blackwell, that this has nothing to do with subsidies and subsidising. It is doing what is right. If the FCA had the power to introduce a duty of care, it could begin to live up to its strategic objective.

I am quite prepared to believe that our drafting of Amendment 4 contains petty infelicities. So what? What is important is the principle that the amendment embodies. I am confident that Treasury officials can always find the appropriate wording. But we are all aware that too many consumers are being treated inappropriately, whether by the mis-selling of products, denial of rights or obstructionist responses to complaints and so on. I am certain that Her Majesty’s Government wish to improve on the consumer protections previously enshrined in EU legislation. The introduction of a duty of care is a safe and sure way forward: a way to ensure that markets function well.

I regret that I cannot agree with the noble Baroness, Lady Bowles, that the duty of care should be extended to the regulator itself. That is unreasonable because it suggests that the regulator should be looking over the shoulder of the participants in every single transaction. That would require regulatory omniscience, and I think it is truly unreasonable. But I would like to say a few words in hearty support of the noble Baroness’s Amendment 72 in this group. Anyone who has laboured as a financial services regulator, as I have, will be well aware of the abuse addressed by this amendment: an abuse that has disfigured the promotion of financial products for far too long.

The failure to deal with this abuse was an important component of Dame Elizabeth Gloster’s investigation into the FCA’s regulation of London Capital & Finance plc. The abuse of promoting non-regulated activities while identifying the promoter—albeit correctly—as a regulated entity must also be addressed by the holistic evaluation of regulated entities, taking into account both regulated and unregulated activities, because, typically, the culture of a firm is not divisible. So, while I support Amendment 72 from the noble Baroness, Lady Bowles, I note that there is more to be done to implement Dame Elizabeth’s recommendations.

[Baroness Penn (Con)]

My Lords, I will start with a word of reassurance to the noble Lord, Lord Eatwell, and others that the Government will consider all the contributions to the debates on the Bill carefully, and in terms of the work they are doing on the future regulatory framework review and the broader regulation of financial services. That is an important point when we discuss these amendments. As the noble Lord just set out, the amendment to introduce a duty of care could be interpreted as quite a different fundamental approach to financial services regulation, which, with that scale of change, might be better considered as part of the future regulatory framework review. However, much work has been done on this subject and I turn to it now.

I will speak first to Amendments 1 and 4, which seek to introduce a statutory requirement for the FCA to make rules requiring authorised persons to adhere to a duty of care when providing a product or service. Amendment 4 would also require the FCA to have explicit regard for vulnerable consumers when discharging its consumer protection objective.

I am grateful to the noble Lords who put forward these amendments, which give the Committee the opportunity to discuss this important issue. I know that it was also discussed during the passage of the Financial Guidance and Claims Act, and the Government pay tribute to the work undertaken by Macmillan, whose “Banking on Change” campaign includes the proposal for a statutory duty of care. I agree with the charity that

“Money worries should be the last thing”


on a person’s mind when they are dealing with cancer, but I emphasise that the FCA is already taking steps to ensure that financial services firms exercise due care and regard when offering products, services and advice to consumers. A statutory duty of care does not add to the FCA’s existing powers in this area, and there are likely to be difficulties in applying a single duty consistently and proportionately to the wide variety of products and relationships in financial services. The Government do not believe that an additional statutory duty of care, as proposed by these amendments, is necessary.

Financial services firms’ treatment of their customers is governed by the FCA through its principles for business, as well as specific requirements in the handbook. The principles for business require firms to conduct their business with due skill, care and diligence, and to pay due regard to the interests of their customers and treat them fairly. The FCA has recourse to disciplinary action against firms that breach these principles.

The FCA has also announced that it will undertake work to address any potential deficiencies in consumer protection, in particular by reviewing its principles for business. The coronavirus pandemic has caused the FCA to delay the next formal stage of this work to allow firms to focus on supporting their customers during this difficult period. However, it remains committed to progressing this work and has announced that it aims to consult in the first quarter of this year.

I reassure the Committee that the Government believe that the FCA already has the necessary powers to ensure that sufficient protections are in place for consumers, and has the will to act, without the need for a statutory duty of care or expansion of the consumer protection objective. The Government will continue to work closely with the FCA to keep the issue under review.

Before I turn to Amendment 72, I reiterate the Government’s sympathy for London Capital & Finance bondholders. In May 2019, the Government directed the FCA to launch an independent investigation into the events relating to the FCA’s regulation and supervision of LCF. Dame Elizabeth Gloster’s investigation was provided to the FCA on 23 November 2020. It concludes that the FCA did not effectively supervise and regulate LCF during the period. She makes nine recommendations for the FCA, focusing on how it should improve its internal authorisation and supervision processes. The Government laid the report, along with the FCA’s response, before Parliament on 17 December. In that Written Ministerial Statement, the Government welcomed the FCA’s apology to LCF bondholders and its commitment to implement all of Dame Elizabeth’s recommendations. Dame Elizabeth also made four recommendations for the Treasury, which the Government have accepted in full.

Turning to the specifics of the amendment, through its rules and guidance the FCA already requires financial promotions to be clear, fair and not misleading. As part of those rules, authorised firms are specifically required to ensure that if they refer to their authorised status in the context of any communications relating to unregulated activities, they make it clear that those specific activities are not regulated. Misleading statements by a firm may involve a breach of the FCA’s existing rules and the FCA has broad powers to enforce against such breaches. Depending on the severity of the breach, it may also be an offence under Part 7 of the Financial Services Act 2012.

The Treasury has committed to keeping the legislative framework underpinning the regulation of financial promotions under review. As part of this, the Treasury is actively working with the FCA to consider whether paid-for advertising on online platforms should be brought into the scope of the financial promotions regime.

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I take very strongly the position that we must not put any regulator, even a strong one, in a position where it is basically being told by the objectives that it can, without parliamentary intervention, set out regulations to match the weakest practice evident internationally. We also have to remember the other recommendations for accountability the Bill puts forward. A lowest common denominator strategy is not acceptable. Very unfortunately, this language, combined with the lack of parliamentary accountability in other parts of the Bill, would allow one to happen. We have to take a very strong stand.

[Lord Eatwell (Lab)]

My Lords, I will begin by speaking to Amendment 102 in my name and that of my noble friend Lord Tunnicliffe. It is a probing amendment and seeks to persuade Her Majesty’s Government to spell out their priorities as a participant in international discussions on the direction and detail of financial services regulation. After all, at the very heart of the Bill is legislation covering a wide range of aspects of international financial regulation.

Her Majesty’s Government being clear about their priorities would greatly assist the Committee. After all, the Bill is about incorporating the conclusions of the Basel Committee on Banking Supervision into UK legislation. What could be more international than that: submitting British law to the decisions of a committee of which Her Majesty’s Government are not a member? That is a rather exotic interpretation of taking back control. It is also about the travails of equivalence and, as amendments in the group testify, the relationship between financial regulation and international competitiveness.

Yet we lack a clear statement of Her Majesty’s Government’s approach to international financial regulation, particularly on its future now that the UK has left the European Union. What are the Government’s regulatory priorities? What are their future plans? In the documents associated with the regulatory framework review, we are given some insights into the Government’s goal for the institutional responsibilities for regulation, but what is the policy framework, not the institutional structure, that will guide their proposed reforms? This probing amendment provides Her Majesty’s Government with the opportunity to clear some of the fog. If noble Lords are to scrutinise satisfactorily the Bill and the outcome of the regulatory framework review when it comes before the House, they need this comprehensive insight into the Government’s thinking.

If we look for the core of Her Majesty’s Government’s international regulatory policy, it is obvious from the Bill that much is to be found in the analysis developed by the Basel Committee. Yet, as is well known, it is European Union directives that most closely follow Basel proposals—exactly those directives from which the Government declare independence and their desire to diverge. However, divergence from EU directives will inevitably involve divergence from Basel. So what is it to be: acceptance or divergence? It would be hugely helpful if the Minister, in summing up, could clarify the position.

Then there is the role of the G7. Ever since the G7 Halifax summit in 1995, following the Mexican financial crisis of the winter of 1994, financial regulation has been an ever-present item on the agendas of G7 meetings. By the way, it is Halifax, Nova Scotia, just in case the people of Yorkshire think they missed something. Given that the UK is to chair the G7 this year, how will Her Majesty’s Government approach questions of post-pandemic regulatory reform now that the UK has an independent voice in these matters? What lead will Her Majesty’s Government provide as chair to our G7 partners on financial regulation?

The issue of country-by-country reporting referred to in the amendment is primarily a question of the taxation of large multinational entities, but there is an important echo of the country-by-country issue in the section of this Bill that deals with insider dealing and money laundering. At the heart of the problem of financial crime is the question of beneficial ownership: an area of regulatory policy within which, as the noble Lord, Lord Callanan—the Minister for Climate Change and Corporate Responsibility—admitted, our framework is “attractive to exploitation”. He is right. Knowledge of beneficial ownership is as fundamental to the prevention of money laundering as it is to the prevention of tax avoidance and evasion. I will return to this issue later in our deliberations. The important point that arises at this time is that this is but one more example among many of the lack of clear policy perspective on behalf of Her Majesty’s Government. I hope that the Minister will be able to respond to the probing amendment and outline that policy perspective.

I now turn to Amendments 2, 3, 6, 7 and 8, all of which deal with the relationship between regulation and international competitiveness. I find myself somewhat out of sympathy with these amendments, primarily because the manner in which the issue of international competitiveness is addressed in the current version of FSMA is about right. In it, competitiveness is already an operational objective of the PRA and the FCA. Given the performance of the City of London over the past 20 years, this objective would seem to have been comprehensively achieved. It may be that the proposers of these amendments fear that the competitive position of our financial services industry will be undermined by the UK having left the European Union, and they are now desperately trying to repair the damage. Let us all hope that they are mistaken. Of course, the key point in FSMA is that competitiveness is subordinate to ensuring that markets function well, as in the case of the FCA, and subordinate to the promotion of the safety and soundness of PRA-authorised persons, as in the case of the PRA. That is surely right.

Similarly, with respect to the attempt by the noble Baroness, Lady Neville-Rolfe, to insert by means of Amendment 7 a competitiveness objective into the Bank of England Act, I cannot agree that Her Majesty’s Government should be ready to rank competitiveness equally with the bank’s statutory objective: to protect and enhance the stability of the financial system of the United Kingdom. Should they be happy to pursue international competitiveness while putting family finances at risk? Should they be happy to pursue international competitiveness by putting the soundness of our financial institutions at risk? I believe not. The current hierarchy of regulatory objectives signals clearly where this country’s regulatory priorities lie.

Let us remember that one of the most overpowering advantages that can accrue to any international financial centre is the reputation that it is well and securely regulated. That is an accolade not to be sacrificed. As has been said already, the danger in these amendments is that of the lowest common denominator. For all the reference to high standards, it is international competitiveness that will be a primary statutory objective, equal to or even above the stable operations of the money markets or the financial risks to which the British people are exposed. That would be unwise.