Lord Flight
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Financial Services Bill
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Lord Flight
Lord Flight
My Lords, I have previously raised the issue of the potential costs of the regulatory regime, which will ultimately fall on clients. I have also raised the common sense aspect. I suggest in part a reply to the very fair points raised by the noble Lord, Lord Eatwell: why on earth should both regulators have to be involved with the approval of a bank? Approval of a bank is fundamentally about its capital, the soundness of its shareholders and the propriety of its directors. The approval stage is not really about whether what it intends to do meets all the potential consumer interest elements; it is about its safety and its propriety.
In essence, the amendments in my name would remove the need for the PRA to consult the FCA over the authorising of a bank. The subsequent amendments make corresponding alteration to the regulatory actions, such as variation of permission, cancellation of permission and imposition of requirements.
I think that I may be the only Member of this House present today who has been through a bank application process with the FSA, having had responsibility for steering the Metro Bank application. That is an issue on which I could speak in greater depth. I was surprised to have someone from BIS contact me and ask whether they could come along and talk to me about it. In many ways, the crisis was at its height at that time and one can understand the FSA being extremely cautious and changing its approach, but taking a year and a half was quite excessive. There is already much improvement in the way in which the FSA is looking to deal with banking applications, but involving another organisation that does not have prime responsibility for banking safety is unnecessary from the perspective both of costs and of the delay and complication involved in meeting the key elements required for approval of a banking licence.
Lord Sassoon
As my noble friend Lord Flight has explained, his amendments would remove the requirement for the FCA to consent to authorisation decisions taken by the PRA relating to banks and other deposit-takers, including the decision to grant or remove permission. I should say at the outset that I cannot accept this group of amendments.
My noble friend spoke about his direct personal experience, of which I am aware, of going through an authorisation with the FSA. He will understand from that that, when the FSA approaches the authorisation of a bank or other deposit-taker, it now looks both at matters that will be within the ambit of the PRA and at matters that will be within the ambit of the FCA. As he will understand, if it was to be a matter only for the PRA, it would be an authorisation process that dropped a certain amount of what is done at the moment. I know full well that the FSA’s authorisation processes were becoming very slow. I am glad that my noble friend acknowledged that it has worked hard at improving them because it is important that the barriers to new entry are lowered as far as possible.
However, I should explain why I believe that it would be unsafe to drop the FCA leg of the authorisation process. Yes, the process should be improved in the way that is happening already, but half of it should not be dropped. The PRA will be responsible, as we know, for the prudential regulation of deposit-takers, including banks, but with the FCA being responsible for the conduct regulation of such firms. The authorisation process for a deposit-taker will be led by the PRA, but the FCA’s consent will be required before an approval can be granted and before a firm can acquire permission for any new activities once it has been authorised. It will be a dual authorisation and regulation process, as we know.
It is right that these matters should be looked at before a firm starts to get into business, rather than leaving it, as my noble friend suggests, to afterwards, because it is going to be much more costly to address issues within firms following authorisation if they were to engage in activities that the FCA believed to be inappropriate in any way. This is particularly important for the FCA, which is going to be looking at many more firms than the PRA. It is not only for the safety of the system but it will ultimately lower the cost in terms of the regulatory burden on firms and, as my noble friend says, in the end on the users of financial services if problems can be nipped in the bud or sorted out before they become an issue.
One only has to look at and think about the example of PPI. I know that it is not precisely the point that my noble friend makes, but PPI shows, lest we forget it, that deposit-takers can put consumers as much at risk as any other part of the industry, if their conduct is not appropriate. The FCA will have a significant role in the authorisation process, in assessing the range of products being proposed by the applicant, its systems and controls, and its processes for treating customers fairly, including dealing with complaints, ensuring that the business is not being used for a purpose connected with financial crime and promoting effective competition in the interests of consumers.
The Government believe that these issues need to be addressed up front as an absolute requirement. As a practical matter, if we went down the route that my noble friend suggests, dealing with problems as they came up afterwards, it not only would be to the detriment of consumers but would ultimately be more costly in terms of the regulatory burden. I hope that with those explanations my noble friend will be able to withdraw his amendment.
Lord Flight
My Lords, I suggest that the areas that the Minister referred to are already in the rulebook and in the legislation. Anyone going into business knows that they have to be good boys and behave appropriately. Authorisation of a bank at the beginning is concerned with the essentials: is there enough capital, is the banking plan safe and are the proposed directors proper people? That is what the FSA has now pulled itself back to looking at. I do not think that the FSA—while it still exists—is looking at all these other issues; it is looking at the fundamentals of a bank.
In my view, there is a muddle between the ongoing regulation and what matters up front. I remain of the view that there is a very strong common-sense and functional case for limiting the approval and granting of licences for banks to the PRA. I will add that I have found that a number of heavies, from both the regulatory world and related territories, strongly agree with this point and perceive dualling it up as adding to both costs and complications. However, I am sure that we can return to this matter on Report and hope I may persuade the noble Lord to think again on this point. On that basis, I beg leave to withdraw.
Lord Flight
“(3) The PRA and FCA must, in relation to dual-authorised persons—
(a) specify in rules those functions carried on by authorised persons which are significant-influence functions;(b) set up and maintain joint arrangements to exercise their power under section 59(3)(a) to approve holders of any significant-influence function.(4) The FCA must, in relation to FCA-authorised persons—
(a) specify in rules those functions carried on by authorised persons which are significant-influence functions;(b) set up and maintain arrangements to exercise its power under section 59(4)(a) to approve holders of any significant-influence function.””
Lord Flight
My Lords, I think it is self-evident that in gaining the advantage of twin peaks and what I hope will be a much better regulation of the safety of banks comes the cost of the requirement for elements of dual regulation and involvement. Rather contrary to what I had to say earlier about the authorisation of banks, when it comes to the authorisation and approvals of holders of controlled functions my amendment proposes, in essence, joint responsibility on behalf of the PRA and the FCA to approve holders of significant-influence functions for dual-regulated firms. Generally the industry has concerns that the proposed process for approving holders of controlled functions covered in Clause 12, which amends Section 59 of FiSMA, appears unnecessarily complex and might not have been fully thought through. From the drafting, it is unclear which regulator will be responsible for designating and approving some functions. The only straightforward, common-sense approach would be a joint responsibility on the part of the PRA and the FCA for granting approvals. Whatever system is put in place, it is important that it is run jointly in order to be as efficient as possible.
The draft MoU between the PRA and the FCA gives further details of the proposed system, but this makes it clear that there is an assumption that certain roles—for example, the CEO and the chairman—are inherently prudentially focused and so should be approved by the PRA, although with FCA consent. The holders of these senior roles are as much responsible for ensuring that the firm meets conduct standards as prudential standards; in the case of many businesses, the conduct standards may be more fundamental than the prudential standards.
I would like to hear the Minister’s comments on this territory, but one approach that might make life simpler is to have joint responsibility for the more senior dual-registered holders.
Viscount Trenchard
My Lords, I support my noble friend Lord Flight in his amendment, principally because it reads much better and is much easier to understand than the equivalent part of the Bill, which is confusing to say the least. I further agree that there is a very considerable risk that approved firms, having to apply to two regulators separately, is going to reduce the attractiveness of London and lead foreign firms to consider establishing in other centres businesses that could be established in London. There is already a perception that it is extremely cumbersome to obtain approval for significant-influence persons and that it is more difficult to do that here than in other financial centres around the world, so I definitely believe that my noble friend’s amendment would represent a significant improvement.
It is also important to ask my noble friend the Minister whether, if joint responsibilities are to be agreed between the PRA and the FCA, that would mean a single procedure. If the two regulators are made jointly responsible but operate slightly different procedures that with time become more different, it makes it much more time-consuming and expensive for regulated firms to comply with the requirements.
Has my noble friend also thought about customer-dealing functions? His amendments deal perfectly with the significant-influence functions, but the Bill as drafted also deals with customer-dealing functions, and I see no reason why these should not also be dealt with in an extremely simple and understandable manner using a form of words similar to his.
Where joint responsibilities between the two regulators are agreed, will this lead to the avoidance or elimination of the duplication of staff between them? If you have two regulators doing the same thing, you have double the people and you may have even more people who are responsible for talking to their equivalents at the other regulator. Where joint responsibilities under the memorandum of understanding or elsewhere are agreed and put into force, can that be done in a way that reduces rather than increases the number of persons necessary to carry out the process?
Lord Sassoon
My Lords, I can assure my noble friends that these matters have been carefully thought about. To some extent, the somewhat tortuous drafting is entirely to achieve a simpler and more cost-effective result, even if the drafting of the Bill is more complex than my noble friend has suggested, although I do not think he is doing it to make the drafting more comprehensible.
As with our earlier discussion about the authorisation of firms, we need to recognise that there are already difficulties in this area. My noble friend Lord Trenchard quite rightly points out how aspects of the authorisation processes in London are of concern to firms, particularly from outside Europe. I understand that. As he and I have discussed over a long period, different aspects of this go over many years. Whether it is the FCA or the new regulators, there is an ongoing challenge to make sure that the system is sensitive, appropriate and efficient, quite regardless of the new architecture. He makes an important point, but I suggest that it is a different point from the narrow but equally important one here about where best to do it in a dual-regulation, dual-supervision environment.
Amendment 165A would establish a different system for designating significant-influence functions, or SIFs. For dual-regulated firms, the PRA and the FCA would jointly make rules specifying which functions are SIFs and then put in place joint arrangements for approving individuals to perform them. For FCA-only firms, this would be done by the FCA alone. I can see the attraction of the approach which my noble friend Lord Flight is proposing. The language and the on-the-face-of-it approach perhaps appear simpler than the arrangements in the Bill at present. However, the arrangements in the Bill have been thought about, and we believe that they are preferable because they put one regulator in charge of leading the process for approving those who wish to carry out roles involving significant influence over the conduct of affairs of an authorised person. In most cases, this will be the relevant prudential regulator, although the FCA will be able to designate SIFs in dual-regulated firms where the PRA has not done so. For example, the FCA will have a greater interest than the PRA in the chief anti-money laundering officer, so it may wish to designate this function in the absence of the PRA.
We certainly do not think that the administrative process should be excessively difficult or lead to log-jams. The Government expect the two authorities to run a single administrative process for SIF applications, taking into account the statutory timeline. Indeed, the draft memorandum of understanding, published by the Bank and the FSA, makes clear that that is exactly what they will do: run one administrative process. I cannot answer my noble friend’s question about whether there will be more or fewer people. All I can say is that they have already documented a process to make it as efficient as possible.
With the explanation that this has all been very carefully thought out and that, although there is no perfect way to do it, we believe that the basis in the Bill as drafted will work better in practice for firms and for the regulators, I hope that my noble friend will withdraw his amendment.
Lord Flight
My Lords, I appreciate that this is a tricky issue to solve to the optimum, whichever route you choose to go down. I would just comment that, particularly as the drafting of the legislation is less than clear, I hope the Minister might give an undertaking that the two new regulatory bodies would issue codified statements for people wanting to seek approval as to where they should go as a first port of call, depending on their functions. This would make life easier, particularly for non-UK parties. With that proviso, I beg leave to withdraw the amendment.
Lord Flight
“( ) In section 72—”
Lord Flight
My Lords, this group of amendments is concerned really with the same issue: the designation of the competent authority in the Bill. When FiSMA was introduced, it was straightforward to transfer authority to the LSE as the definition was of competent authority. The Bill as redrafted clearly makes the definition the FCA itself. These amendments seek to revert to the previous arrangement as an insurance policy against a potential, albeit unlikely, wish to change the listing authority in the future, so they are designed to retain all existing references to the competent authority in the FiSMA, to change the designation of competent authority to the FCA and all existing references to the authority to the FCA, to retain existing provisions relating to the duties and powers of the competent authority and to retain the existing ability to transfer the designation of competent authority to another person.
I am aware that the Treasury’s position has been to want to put beyond all doubt the fact that the FCA would remain as the listing authority, and I understand that point. There had been some discussions about merging the listing function with the Financial Reporting Council, although the consensus of consultation was against it. There is a practical argument in favour of leaving things defined the way they are, to enable changes to be made in the future without having to revert to primary legislation.
Lord Sassoon
I am not the first noble Lord to have jumped up a bit fast this afternoon but will probably not be the last—apologies for that.
On the amendment, we need to go back over a little of the history, which is all to do with the question of who was going to be the listing authority at the time FiSMA came in. My noble friend Lord Flight refers to the past couple of years, but as I understand it—and I remember a little of this—it was unclear at the time FiSMA was enacted whether the FSA would undertake the listing functions on a permanent basis. As a result, Part 6 of FiSMA was prepared as a self-contained part of the Act and included some provisions—for example, those relating to fees and penalties—that are included elsewhere in FiSMA to apply to the FSA in its general capacity.
I suggest, on the point about the listing authority having a special status and being more flexible in order to be moved around in the future, that that would not have been considered at all if it had not related to the circumstances a decade or so ago. Since then, not only was the listing authority with the FSA through that period but, as my noble friend said, the Government considered the question, at a very early stage of the work leading up to this Bill, of the appropriate future home of the listing function. As my noble friend recognises, as a result of that consultation in July 2010, which was essentially about whether the listing function could be merged with the Financial Reporting Council, the clear view among the vast majority of respondents was that listing should be with the FCA, along with other parts of market regulation. FiSMA also includes provision for the possible transfer of the competent authority functions to another organisation.
Clause 14 gives effect to that decision. I say again to my noble friend that if it had not been for the particular circumstances of uncertainty going back a decade and more, there would not have been this anomaly. We are now tidying it up and making the listing function a core part of the FCA, as with all other major parts of its activity. I hope that, on the basis of that explanation, my noble friend will withdraw his amendment.
Lord Flight
My amendment was there to raise the matter for discussion and I am satisfied with the Minister’s response. I beg leave to withdraw the amendment.
Lord Flight
Lord Flight
My Lords, it is widely known that there are some concerns within the industry that in a more interventionist and judgment-based regulatory environment, the ability to challenge the regulators’ decisions should be strengthened rather than weakened. My amendments in this group essentially seek to retain the current provisions. I am obviously aware that the Government’s Amendments 184 and 185 go a long way to alleviate the underlying concerns here. Under them, the regulator will be obliged to issue another decision notice, not a final notice, when the tribunal gives a direction to the regulator to reconsider a non-disciplinary case.
However, if I have understood it correctly, the Government’s amendments enable the tribunal to substitute its opinion only in disciplinary cases and not in judgment-led decisions. I am not clear why judgment-led decisions should not be included, because they are the most sensitive and perhaps the most appropriate for further consideration. I look forward to hearing the Government’s case for tabling amendments on this issue. I beg to move.
Lord Sassoon
My Lords, I am happy to speak next. In doing so, I will first need to go through the analysis of my noble friend’s amendments and the effect of the Government’s amendments in the group. I invite the noble Baroness to break in at any stage if it would help her.
The starting point is that the experience of the last few years has shown that we do not want a regulator with broad responsibilities that is too much focused on narrowly policing compliance with rules. We are still dealing with the consequences of that approach. The reforms, in particular those in this clause, are about giving the new regulators the right focus and mandate. They are also about judgment, and empowering the regulators to use their knowledge, experience and expertise to take difficult decisions, often on a proactive and preventive basis. The changes to the arrangements for appealing firm-specific decisions set out in Clause 21 play a key role in making this happen.
I will be clear about what our changes will mean. Clause 21 carries forward the rights of those who are dissatisfied with a firm-specific decision of the FCA or PRA to refer the matter to the tribunal, and preserves the ability of the tribunal to reconsider the matter afresh on a full-merits basis. There have been no changes to the grounds on which the tribunal will consider references. It will continue to consider references on a full-merits basis. In addition, for disciplinary matters or references under Section 393 of FiSMA that relate to third-party rights, the ability of the tribunal to substitute its opinion for that of the regulator remains unchanged.
What has changed is the nature of the directions that the tribunal will be able to give in the case of references that do not fall into the above category. In these cases, where the tribunal decides not to uphold a decision, it will not be able to substitute its decision for that of the regulator. Instead, it will be required to remit the decision back to the regulator, giving directions that it considers appropriate. The directions will be limited to findings relating to matters of fact or law that should or should not be considered by the regulator, and whether or not there were any procedural deficiencies. This is an important part of the move to judgment-led regulation, which recognises that it is the regulator’s job to take regulatory decisions, while providing a mechanism for judicial scrutiny of the fairness of those decisions.
I have already set out why the Government attach significant importance to the new arrangements for appealing non-disciplinary decisions. However, we must also ensure that we provide a fair regime for firms, and give certainty and clarity around procedures. That is what government Amendments 184 and 185 seek to do. Where a non-disciplinary reference is made, the tribunal remits the matter to the regulator. The regulator must then reconsider the matter in accordance with the tribunal’s directions. These amendments seek to provide clarity about what happens next. They require the regulator to issue a second decision notice rather than moving straight to a final notice, as would be the case under the Bill as drafted. Once a final notice has been issued, the firm’s or individual’s options for further challenge are strictly limited. A final notice can be appealed to the High Court only by way of a judicial review, on more limited grounds and at the risk of higher costs and lengthier delay.
Amendments 184 and 185 would require the relevant regulator to issue a second decision notice in all such cases once it has considered the tribunal’s direction and reached a new decision in accordance with the tribunal’s findings. This means that the firm or individual could challenge the second notice, for example if they do not think that the regulator has properly considered the tribunal’s direction in reaching its new decisions. There will be a second hearing before the tribunal, which will be able to consider the full merits of the matter and deal with the case more speedily and, because it will already be familiar with the case, at lesser cost to the firm and the regulator.
The amendments will increase fairness for firms and substantially strengthen the new arrangements. I hope that I have done enough to convince my noble friend. I think he already recognises that the government amendments go a considerable way toward allaying his concerns. Having heard the further explanation of how the process is intended to operate, I hope that he will feel able to withdraw his amendment.
Lord Flight
My Lords, I thank the Minister for his explanation of a rather complicated territory. Certainly I think it is as much as we are likely to get here. There is still a slight question in my mind about whether tribunals should be able to overrule judgment-led decisions. However, it seems that a reasonably fair system has been set out for members of the industry. I beg leave to withdraw the amendment.
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.
Baroness Hayter of Kentish Town
My Lords, I am sorry that we do not have the other amendments in order to be able to have a long discussion about “may” and “must”, but such are the events of the evening.
There are two major areas of concern for us in this set of amendments, and I am afraid that they are found in the amendments tabled by the noble Lord, Lord Flight. Unsurprisingly, one involves the so-called toxic products powers, and the other financial promotions. We have already congratulated the Government on their initiatives in this Bill on both of these issues, so it will come as no surprise that we would not support any weakening of their well chosen tools. Product intervention powers are absolutely key. They will allow the FCA to take prompt action to prohibit the sale of a particular product or to counter a product feature either on a temporary or permanent basis. There has been widespread mis-selling of endowment mortgages, PPI, interest-only mortgages and self certified mortgages; we all know the list. It demonstrates that the FSA failed to act swiftly enough to prevent widespread consumer detriment. It is highly unlikely, despite some of the lobbying that I know we have been receiving, that the retail distribution review would have had an effect on any of those, and nor indeed the TCF initiative. After all, treating customers fairly was always a part of FiSMA.
Product intervention needs to be seen as more than just a decision on whether to ban a particular product. It can also be used to control the way banks vary the terms or other specifics. Many products are not in themselves toxic. Even PPI was a very good product for a certain group of people, as were interest-only mortgages. The issue arose over the way they were sold—their packaging and their terms. That is what made them toxic. We would not want to see any weakening of what the Government have already put in the Bill.
With regard to the new and, I think, long overdue powers on financial promotion, these will allow the FCA to publish details about misleading adverts once they have forced their withdrawal. It seems extraordinary that that is not already the case. Surely if an advert is found to be misleading, every consumer who might have seen it or been influenced by it should know that it was not all that it sounded. Making public the findings on financial advertisements will also encourage other consumers to report anything that they think is a little suspicious. The power to publish will provide a real incentive for firms to improve standards and, I think, to be wary of allowing their marketing departments to push the boundaries. Research by Which? shows that many adverts for financial products have been in breach of consumer law. The organisation asked consumers about this, and two-thirds responded saying that they want the financial regulator to be proactive in taking misleading financial adverts off the market. We know some of the numbers in this area. Which? asked the FSA how many adverts it had removed. In 2010 the authority removed 262 misleading adverts, and last year it removed 327, which is almost one for every working day. However, we do not know what the adverts were because no details are available to us as consumers. So the fact that in future the FCA will be able not just to take action but to publicise it is a power that we welcome. We would not want to see it diminished in any way.
We are sympathetic to the quite different amendments spoken to by the noble Lord, Lord Sharkey, and the noble Baroness, Lady Kramer, and again we look forward to the Minister’s response.
Lord Flight
My Lords, I congratulate the Minister on embracing such a broad range of issues, which have been grouped together here. I would like to add only the following. I am pleased to hear what he had to say about the publication of directions relating to promotions, which was really the main point of my amendment. Regarding the issue of the Limitation Act and the 15-year longstop, I am also very pleased to hear that the Minister is focusing on this. As things stand, RDR is likely to result in many thousands of financial advisers ceasing to be in business, with other major problems that can be dealt with at another time in another place. It will be a much bigger issue than it is at present in terms of all these people who are, if you like, retiring and going out of business, and it seems fundamentally equitable that the general law of limitations should apply to all transactions without any special treatment for financial services claims or ombudsmen’s complaints. I wonder whether the judiciary should be advising about this, at least as well as the regulator.
The general issue of promotions will be an interesting double-edged sword for the regulator. I am a commissioner of the regulator that was the first to ban split-level investment trusts at a time when I think the regulator over here was rather slow in being aware of the problems and issues. The very full powers given to the FCA will put it in the limelight to get there in good time and do it right. As I said at the outset, I am certainly not opposed to the power. There has been an obvious need to be able to deal with “wrong” products quickly and effectively. I am still slightly concerned that the framework of the FCA using those powers is pretty broad and I suspect that the FCA itself may want to have a more defined framework for fear of criticism.
Those are the main thoughts behind my amendments in that area. I thank the Minister for his response, which essentially satisfied the points I raised.
Lord Sassoon
My Lords, my noble friend has made the first point that I would make. The noble Lords, Lord Davies of Oldham and Lord Davies of Stamford, talked as if we were debating provisions that related to all listed companies, but my noble friend is completely right that this section does not apply to great global companies such as Vinci and others. Although it relates to an important group of companies, it is related essentially to authorised persons.
The Bill allows regulators to make rules regarding the role of employees in relation to remuneration committees and, in theory, the requirement that remuneration consultants be appointed by shareholders if they think that such rules would advance their objectives. However, I accept that, in practice, it is uncertain that that test would be met, particularly in the latter instance. In any case, other appropriate processes are already in place to consider these questions in the context of wider corporate governance reform—which, again, is precisely the point that my noble friend makes. This is a wider series of issues.
It is important to be reminded that, in January this year, the Department for Business published its response to its consultation on executive remuneration, which considered among others, the possibility of giving employees a say on remuneration. Although I do not want to be drawn into a wider debate—we should focus on financial services—the consultation responses nevertheless illuminate what would be appropriate or, as I would say, inappropriate for financial services businesses alone.
The Government’s view is that, while there will be qualified and enthusiastic employees willing to take on such a role, there are strong arguments against this proposal, including—on this I agree with the noble Lord, Lord Davies of Stamford—that members of the remuneration committee need to be full board members if they are to understand the overall financial strategy and the wider business and economic context which impact on remuneration policy; that introducing external representatives on a single committee risks obscuring directors’ collective responsibility, as well as potentially creating additional tensions, which might reduce the effectiveness of the UK unitary board model; and that the level of responsibility of employee representatives and the possible conflicts of interest they might face would need to be resolved.
As a result of the BIS consultation on executive pay, the Government have decided to proceed with some key reforms, such as the introduction of a binding shareholder vote on remuneration, but the case for requiring companies to include employees on remuneration committees has not been made, and the Government are certainly not going to make or accept it in the narrower context that we are discussing today.
Lord Flight
When I sat on the remuneration committee of a financial services business, we already received substantial directions from the FSA as to what we were supposed to do, what we should do, how much we could put up pay and all sorts of things. I find it somewhat strange, but the direction is there and functioning already.
Lord Sassoon
Again, my noble friend is ahead of me and I shall not make that point—I am addressing some very narrow and specific matters—but he is completely right that we could debate whether the interventions already being made are appropriate. He may say that that they are excessive; I would say, “Well, that is for the FSA and there are important issues”. But, yes, the FSA is very active in this area, specifically on remuneration consultants.
The suggestion that remuneration consultants be appointed by shareholders was looked at in the consultation but it was not widely supported. I am sorry that the noble Lord, Lord Davies of Stamford, did not spot it, but the proposal has been the subject not only of debate in this House in the past but of the recent consultation. It was not widely supported because of the costs associated with the appointment process and issues to be resolved about the remit and the flexibility of the proposal to accommodate new work. The benefits of the requirement would be uncertain.
However, a majority of respondents to the consultation said that more transparency over the use of remuneration consultants would be beneficial. Suggestions of areas for more transparency included appointment processes, advice provided, fees paid and management of conflicts of interests. The Department for Business is looking at ways in which it can improve transparency in the use of remuneration consultants by companies.
I am grateful to the noble Lord for raising these important issues, which are being taken forward in a wider context. The FCA will have all the powers that it needs to act in this area, as it does already—and as my noble friend pointed out—the FSA. I hope that, on the basis of that information, the noble Lord will feel able to withdraw his amendment.