Bank of England and Financial Services Bill [ Lords ] (Fifth sitting)

Rob Marris Excerpts

Tuesday 23rd February 2016 Public Bill Committees

[The Chair]

For the convenience of the Committee, and with its leave, I propose that we group clauses 26 to 37 and allow remarks on all of them under the clause 26 stand part debate. Is that acceptable to the Committee?

[Rob Marris (Wolverhampton South West) (Lab)]

I have to say, Chair, that taking all those clauses in one group sounds rather cumbersome. I have a series of packages of comments and questions on the different clauses. I do not mean to cause difficulty, Sir, but taking them all as one group might do so. Might we take some of the pensions provisions together, for example?

[The Chair]

If the Committee wishes, I am happy to take all the clauses individually. I propose that we take clause 26 on its own, and then perhaps clauses 27 to 37 as a group.

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[Harriett Baldwin]

It is a delight to be back here, again on a sunny Tuesday, to continue our scrutiny of the Bill under your chairmanship, Mr Brady.

The Government have fundamentally reformed consumer credit regulation, transferring responsibility from the Office of Fair Trading to the Financial Conduct Authority with effect from 1 April 2014. Clause 26 supports the effective operation of the FCA’s regime through minor amendments to the Financial Services and Markets Act 2000 in relation to the regulation of consumer credit. It is a technical clause and concerns the application of provisions relating to the enforceability of credit agreements. It makes it clear that when a person acting on behalf of a lender can lawfully undertake the relevant credit-related regulated activity in relation to the agreement, either by administering the agreement in relation to section 26A(4), or by taking steps to procure the payment of debts under it in relation to section 26A(5), they are also able to enforce the agreement.

[Rob Marris]

It is a pleasure to be here with you again, Mr Brady. I thank the Minister for her explanation—that is great.

Question put and agreed to.

Clause 26 accordingly ordered to stand part of the Bill.

[The Chair]

We now come to clauses 27 to 37. I suggest that we allow all of them to be commented upon as a group.

Clause 27

Enforceability of credit agreements made through unauthorised persons

Question proposed, That the clause stand part of the Bill.

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Clause 36 sets out the territorial extent of the Bill; subject to subsection (2), the provisions apply to England and Wales, Scotland and Northern Ireland. Clause 37 simply deals with the commencement of the Bill. Clauses 28, 33 and 35 to 38 are to be brought into force when the Act is passed; clause 29 will be brought into force by regulations made by the Secretary of State; and all other clauses on the day provided for in commencement regulations made by the Treasury. I hope the Committee agrees that clauses 27 to 37 stand part of the Bill.

[Rob Marris]

I congratulate the Minister on that fluent marathon. I fear that I shall less fluent, but in my defence I do not have quite the same resources behind me as the Minister, and of course I may not have her skill. I warn her that I shall be asking some questions. I hope that her officials will be able to help her and the Committee with the answers.

Clause 27(2), which inserts new section 27(1ZA) in the Financial Services and Markets Act 2000, appears to be a “see no evil, hear no evil” provision. I hope the Minister can reassure me. It says,

“this section does not apply to a regulated credit agreement or a regulated consumer hire agreement unless the provider knows before the agreement is made that the third party had some involvement in the making of the agreement or matters preparatory to its making.”

What has bedevilled legislators, regulators and those providing advice, whether in finance, the law or accountancy, is knowing when to inquire whether there is something else in the picture, to put it rather vaguely—for example, in conveyancing, whether those acting for the vendor of a house need to inquire whether there is someone besides the vendor living in the house, who would potentially have rights under the Law of Property (Amendment) Act 1926. I confess that it is 25 years since I did conveyancing, so that Act may have changed, but that is the general flavour—it is about when, as a professional, one has to make inquiries. New subsection (1ZA) is a great get-out for an adviser or a company entering into a regulated credit agreement, enabling them to say, “Well, I didn’t know.” On occasion, that is not good enough. One ought to inquire.

This is an example of my ignorance, I freely confess, but while I understand that the Financial Services Consumer Panel has said that these amendments are entirely technical—that was mentioned in the Lords by my noble Friend Lord Davies—it does not seem to me to be entirely technical and I cannot quite see why clause 27 is in the Bill. Will the Minister explain?

Clause 28 is headed “Transformer vehicles”. It reminds me of those kids’ toys—are they still around? The Minister is smiling in her usual sunny way, so I think they are still around; they were a little after my time, I have to say. I understand from the debate in the Lords that the Delegated Powers and Regulatory Reform Committee was consulted on the aspect of these changes dealing with hybrid instruments. New section 284A(6)(c) of the 2000 Act will

“authorise the FCA or the PRA to require the Council of Lloyd’s to exercise functions on its behalf (including functions conferred otherwise than by the regulations)”.

Under new subsection (11):

“If a statutory instrument containing regulations under this section would, apart from this subsection, be treated as a hybrid instrument for the purposes of the Standing Orders of either House of Parliament, it is to proceed in that House as if it were not a hybrid instrument.”

As I understand it, the hybrid instrument procedure is there to protect certain private interests. It appears that new section 284A will bypass that procedure—it is very clear, very up front—but that raises a question in my mind about whether, for convenience, the Government are proposing an end-run around protections for private instruments.

That is the least of my worries about clause 28, though. Transformer vehicles, as I understand it, are used for packaging or bundling. Section 284A(2)(b) refers to

“fully funding A’s exposure to that risk by issuing investments where the repayment rights of the investors are subordinated to A’s obligations to B in respect of the risk.”

In lay terms—I stress: lay terms—it is reinsurance; it is laying off the risk. Bookies do it all the time, akin to what sometimes goes on in the City. However, the bundling or packaging of debts, which I understand is what the transformer vehicles enable to be done, was precisely one of the major drivers of the meltdown of the US sub-prime market in 2007-08. To quote my friend and helpful adviser, Professor Alastair Hudson, “The investors then got the return generated by the mortgages. They then brought credit default swaps to provide insurance against the mortgage borrowers failing to make their repayments, or they bought credit default swaps to bet that those borrowers would fail to make those payments.” Ain’t capitalism great? You can have it both ways. In horse-racing, it is an each-way bet, but with an each-way bet in capitalism it is the punter who always seems to lose and the financial company that just about always seems to gain.

Those special-purpose vehicles were created, as I understand it, to bundle up and package sub-prime mortgages—SPVs were not just used for that, but it is perhaps the most notorious example—so that they were off the banks’ books and on somebody else’s books. Then, when things go wrong—as they did—the rest of us pick up the tab. That is the moral hazard. Transformer vehicles and proposed new subsection 284A of the 2000 Act appear to facilitate and encourage that kind of behaviour.

I hope that the Minister will be able to reassure me. It is possible that I have misunderstood what the new section will do and what transformer vehicles do, and that my fear about the risks involved is unfounded. I am not necessarily expecting her to do that now. I hope that she will catch your eye, Mr Brady, and reply to these points after my own marathon, which I have to tell the Committee has only just started.

The third thing that this clause highlights, and I use this as an example for the Government, is the complexity and overlapping nature of our legislation, which makes it difficult for anyone to understand. For example, new section 284A is a mere insertion. Later in our consideration of the Bill, we have all kinds of insertions: new clause 1 deals with a new section 333T; new clause 7 deals with a new section 137FBB; and, from memory, we have somewhere else the insertion of new paragraph (3GA) in a regulation. No wonder people cannot understand our financial regulations and legislation, when Tolley’s now runs to—what?—1,500 pages and we have amendment after amendment on top of scores of previous amendments. Will the Minister say whether the Government have any plans to simplify and/or consolidate the 2000 Act? It is getting incredibly complicated and further complication increases the chances of non-compliance, whether inadvertent or deliberate, because people can use the defence, “I didn’t understand what was in there.”

Turning to the pensions matters, I will take clauses 29 to 31 together. On pensions guidance, I hope that the Minister can say how far down the chain of advice to individuals the Government propose to go. Labour Members want an advice service that helps people to make informed decisions. There is a role for the state in either doing or facilitating that, and we are pleased that the Government recognise that, but we now have protection being built into the Bill for those who are considering selling on their existing annuity in a secondary market. That is set out in clause 29, which would amend section 333A of the 2000 Act. Subsection (2)(b) would insert a reference to

“guidance given for the purpose of helping an individual who has a relevant interest in relation to a relevant annuity to make decisions in connection with transferring or otherwise dealing with the right to payments under that annuity.”

As I understand it, that is principally to do with secondary markets for annuities. Paragraph 152 of the explanatory notes sets out that this would help by giving advice to annuity holders who are

“considering selling the income from their annuities to a third party on the secondary market”.

Today, the Minister mentioned beneficiaries of annuities, which is slightly different from annuitants selling on their annuity or contemplating doing so. How far do the Government propose to go with this? Will the beneficiaries of beneficiaries be able to access Pension Wise? Will the prospective beneficiaries of beneficiaries be able to do so? Will the prospective beneficiaries of annuitants be able to contact Pension Wise? There is a question about how far this coverage goes. When an annuitant sells their annuity on a secondary market and puts the proceeds into another instrument to provide for their pension in place of the original annuity, will Pension Wise, either before or after such a sale, advise the annuitant on that other vehicle into which the annuitant proposes to place, or is considering placing, the fruits of their sale on the secondary market?

I turn now to the report produced by the Work and Pensions Committee. I appreciate that the matter comes under the Department for Work and Pensions rather than the Treasury but, if the Committee will bear with me, I hope I can clarify that it is very germane to what we are discussing. That report was published on 19 October 2015 as House of Commons paper 371, entitled “Pension freedom guidance and advice”. The Government’s response to this report was published on 17 December. Good Government responses tend to go through the report line by line. This response by the Government to the Select Committee report is pretty comprehensive, and it goes through each recommendation suggested by the Committee.

The Financial Secretary gave evidence to the Work and Pensions Committee when it was working on that report, and she indicated that certain performance figures would be put on the Government website—in fact, she may have said that they had already been put on the website. I see her nodding. I have to say that if they are on the site, they are very well hidden. I looked at the Pension Wise website today and I could not find that kind of back-up statistic—not individual statistics, but figures such as the 2.2 million users to which, I think, the Minister referred earlier. Nor could I find the figures on the performance website—I did a search on both “Pension Wise” and “work and pensions”. I hope that the Minister is able to say what has happened to those performance figures.

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[Harriett Baldwin]

I will try to keep my response in order, Mr Brady, but forgive me if I occasionally slip out of order. The hon. Member for Wolverhampton South West started by asking about clause 27, which he described as “see no evil”. I want to reassure him that the change addresses an issue that arises as a result of the transfer of the regulation of consumer credit from the Office of Fair Trading to the Financial Conduct Authority and the consequent application of the Financial Services and Markets Act 2000 to the consumer credit market. The issue addressed by the clause, whether relating to a chain or third party, arises particularly in the context of consumer credit and the activity of credit broking.

We are confident that the change to section 27 of the Financial Services and Markets Act addresses the issue with regard to consumer credit, ensuring that the section is more proportionate on consumer credit firms, without unduly affecting the protections available to consumers in the market. That is in line with our broader policy intent for the consumer credit market, where the reforms that the Government have made balance the need to provide strong consumer protections with ensuring that the burdens placed on a diverse market that includes thousands of small businesses is proportionate. I reassure the hon. Member for Wolverhampton South West that firms remain under a regulatory duty, imposed by the FCA, to take reasonable steps to satisfy themselves that the firms that they deal with are authorised, where that is appropriate. The clause strikes the right balance between protecting consumers and placing a proportionate burden on firms that are lending to consumers.

We share with the hon. Gentleman an aspiration to simplify some of the legislation. I very much welcome his words of support for my dream goal in this post, which is to simplify and reduce some of the complexity not only of this regulation but of the FCA’s own rulebook, which has become quite a significant barrier to entry to sensible organisations that may want to move into, for example, the debt advice space. I welcome his support for any progress I am able to make to simplify some of that.

Clause 27 simply narrows the circumstances in which a credit agreement or a consumer hire agreement is unenforceable. I think that the hon. Gentleman will welcome that. Both he and the hon. Member for East Lothian mentioned transformer vehicles, which are not those fun toys that appeal to consumers but something completely different that, I assure Members, are not for the consumer market. Only sophisticated or institutional investors will be permitted to invest in insurance-linked vehicles.

From a policy perspective, it is important that London have the ability to establish insurance special purpose vehicles. London is the largest insurance market in Europe and is a centre for specialist insurance activity. Whether we like it or not, all Members face risks in their lives—indeed, all businesses face a range of risks. Insurance is a way to bring that risk down to a manageable level. London should be able to compete and innovate in new forms of risk mitigation. If London is able to offer a full range of innovative solutions, insurance entities will continue to come to London to meet their risk mitigation needs. I heartily hope that all Committee members support that.

Insurance-linked securities use a range of specialist skills and services to arrange the deals, including underwriting, risk modelling, brokerage, legal and capital market expertise. Nevertheless, Members are right to express concerns about the transparency and manageability of the risks, as well as about the importance of their being arranged by regulated entities, so it is important that I set out that insurance-linked securities business will be prudently regulated in the UK.

All special purpose vehicles will require Prudential Regulation Authority authorisation. All the wording in terms of the contracts must be clear and robust, and importantly risks cannot be bundled together in the way that the hon. Member for East Lothian feared. We require all special purpose vehicles to be fully funded to cover the full extent of the risk they take on, so we are not talking about the kind of very leveraged structures that he rightly said were so instrumental in the last financial crash.

I have said that only sophisticated or institutional investors will be permitted to invest in the vehicles. Of course, if they are arranged prudently—when someone is able to manage their risks prudently—those transactions will contribute to financial stability. They increase the capacity of the reinsurance markets. They provide investments that are not correlated with the economic cycle, and therefore they provide investors with good diversification characteristics. I hope that I have reassured hon. Members of the importance of clarifying the rules on transformer vehicles, but I sense that the hon. Gentleman has a further question on the issue.

[Rob Marris]

I am somewhat reassured by what the Minister has said. However, I would caution her about her remarks about innovation and the attractiveness of London, because I sat—either in this room or Committee Room 10—on the Finance Bill Committee when her predecessor, Ed Balls, was saying the same thing in 2006 and saying, “We are grateful that London is now the financial capital of the world, over New York, because we don’t have the millstone of Sarbanes-Oxley.” Look where that ended. Therefore, yes to innovation, and yes to London being the major financial centre in Europe, if not the world, but I urge the Government to be careful that we do not go round the same crazy merry-go-round that my Government let us go round in the past.

[Harriett Baldwin]

The hon. Gentleman and I agree on the importance of making sure that we try to strike the right balance. We must ensure that the UK retains the ability to innovate. I am sure that none of us would want to see that ability being reduced, but it should do that within the boundaries of sensible and prudent regulation, so that we do not commit the alternative policy error, which would be to throw up our hands in horror at the kinds of innovations that have happened and so harm consumers by not allowing that kind of innovation. It would harm jobs in the UK if such innovation were not allowed to happen here. I welcome hiss questions—he is absolutely right to ask them—but I hope that I have convinced him that, in this instance, we have got the balance right and that these are simply useful instruments that will be well regulated and certainly available only to sophisticated institutional investors.

Although there are no Government proposals to consolidate the Financial Services and Markets Act at the moment, consolidated versions—for the ease of reference of members of the Committee and members of the public who are following our discussions with such avid interest—are available on commercial databases, such as LEXIS, and the Government statute law database—legislation.gov.uk—is working to make up-to-date Acts of Parliament available free of charge on a consolidated basis to everybody.

I will move on to the questions that were asked about Pension Wise and pension guidance, and the important steps that we are taking to bring pension freedoms to those who are no longer required to buy an annuity but to extend them to people who have bought an annuity and who may decide in retrospect that it was not the right thing for them. We are promoting a secondary market in those pension freedoms.

To be clear, regarding the rules on beneficiaries—I am thinking of a situation where a spouse remains a beneficiary and there is a remaining annuity after the death of the primary annuitant—there might need to be the ability to provide Pension Wise guidance and other support to people in that circumstance. The exact characteristics of who is entitled to use the service will be set out in regulation in due course, as will the definition of a “relevant interest” and what a relevant annuity is.

The hon. Member for Wolverhampton South West asked, sensibly, about the good report produced by the Work and Pensions Committee towards the end of last year, to which the Government responded in the run-up to Christmas, and about the Pension Wise statistics. I understand that those statistics have been put on the performance website on gov.uk. He implies otherwise, so I will have to go back and check; I will write to him about where he can find them, should they be available.

[Rob Marris]

I am grateful. The statistics might be available on the website, but although I am an averagely competent user of websites I could not find them. They are therefore not readily available.

[Harriett Baldwin]

We have made huge strides with the gov.uk website, which is a lot clearer and simpler than it used to be, but let me be the first to agree with the hon. Gentleman that such things can always be made clearer. I have put on the record the most recent example of management information available, which is that 2.2 million people have clicked on the website, with more than 50,000 people having some sort of face-to-face interaction. Also, in the summer Budget last year we extended the ability of people from 50 onwards to use the face-to-face service.

[Rob Marris]

It is 2.2 million plus one, as of this morning.

[Harriett Baldwin]

The website is well used. The feedback on face-to-face interactions has also been positive.

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[Harriett Baldwin]

Clearly, it is regrettable that although we often pass regulations in this House—this is a very regulated area—people still choose to prey on the vulnerable, particularly older people, and do things that are illegal and completely against the regulations. We ought to combine regulation with informing people about the regulations and when they should have their antennae twigged to the fact that something might not be a good idea.

The hon. Member for Wolverhampton South West raised a range of important points about auto-enrolment, the reports in The Times today and master trusts. I can let him into a little secret on that: the Government will bring in legislation on master trusts and on the points he raised as soon as practically possible. We had considered bringing it in as part of this piece of legislation, but we felt that since the Bill had gone through the House of Lords it would be very late on in the legislative process to introduce something as extensive as that. That was my judgment, and I hope that he will support me on that. However, we aspire to find very soon the first appropriate vehicle that could be scrutinised by both Chambers to bring in the regulations relating to master trusts and auto-enrolment.

[Rob Marris]

I thank the Minister very much for that swift response to my plea. It is perhaps one of my first successes, and now she has indeed set my pulse racing.

[Harriett Baldwin]

No comment, Mr Brady, on that. I am making sure that I cover all the points that were raised by members of the Committee. I am shocked—deeply shocked—that the hon. Member for Wolverhampton South West is not aware that the Royal Mint is in Cardiff and that it continues to produce all our coins. Indeed, Wales plays a very important role in the issuance of our currency. It does not play a role at the moment in the production of bank notes. Obviously, that lapsed when the last issuing bank in Wales was taken over by either HSBC or Lloyds—I cannot remember which—and got subsumed into that bank, and the bank lost this ability at that point.

To answer the hon. Gentleman’s other questions about clause 31 and the reason for subsection (7), this provision is included in order to confirm that the amendments to the Financial Services and Markets Act 2000 (Appointed Representatives) Regulations 2001—a very catchy title—can be subject to further amendment by the Treasury if it comes to revise those regulations. That is to say that the fact that this secondary legislation is amended in the Bill does not narrow the scope of the Treasury’s powers in the Financial Services and Markets Act. I hope that that is as clear as day for the hon. Gentleman. I would also like to clarify that the amendments set out in clause 31 are intended to remove any doubt on this question by making it clear that financial advisers who are appointed representatives of authorised firms are eligible to advise on the conversion or transfer of safeguarded benefits.

The hon. Gentleman also asked some extensive questions about what the definition of a bank in insolvency should be. The wider fact is that here we are establishing a gateway for the transfer of what might be extremely sensitive material—non-public information about the financial health of a particular bank—into the Treasury to ensure that the Treasury can fulfil its important public role of understanding where or when there might be a risk to public funds. That is what we are trying to establish here. It is right to probe the word “insolvency”, because what we are really talking about is a bank in trouble. “In trouble” is a rather difficult phrase to define in legislation, but I think we both know it when we see it.

I was also asked whether the Treasury can request information in advance of a bank failing. The answer to that is clearly yes. The only condition would be that the Treasury considers the information to be material to the Bank’s assessment of the likelihood of a bank, building society, credit union or investment firm failing. This assessment would be done in advance. It influences the resolution plan that the Bank adopts in preparation for a possible failure of the institution in future.

I think that I have now touched on all the points that were raised about this section. I hope that I have satisfied hon. Members of the wisdom of these clauses and that they will join me in supporting their inclusion in the Bill.

Question put and agreed to.

Clause 27 accordingly ordered to stand part of the Bill.

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[John Mann]

This is a most excellent new clause, which I hope my hon. Friend the Member for Leeds East and I will be able to use against those who may be doing illegal money lending in sports in the Leeds area. It prompts an interesting question, because the powers on claims handlers—the other side of consumer protection—are not vested in the Treasury. We would not expect them to be. They are vested in the Ministry of Justice, but here we see a power grab by the Treasury. We have the Chancellor versus the Justice Secretary, with the two battling for power. I appreciate that that may cause some concern and divided loyalty. It is essential, in supporting this new clause, that I give my wholehearted support to the Chancellor in his power grab. The Treasury, not the Ministry of Justice, is the best place for powers such as this to be vested in.

Should the Bill become law, I hope that the Minister will go back to the Treasury team and look at other powers that have been grabbed by the Ministry of Justice under previous Governments and used appallingly badly in protecting the people, from my experience—the coalminers’ compensation claim scandal being the prime, but certainly not the only, example. Let us have the Treasury take on those who fleece our constituents out of money, with the full might of the Chancellor, strongly supported by his party’s Back Benches—he is even more strongly supported on some matters these days by the Labour Benches. On this occasion, he has my entire endorsement in his battle against the Justice Secretary.

[Rob Marris]

What a pleasure it is to follow my hon. Friend. It is an historic moment when he is fully backing the Chancellor of the Exchequer.

My hon. Friend talks about power grabs, but I must say that I do not think it is just the Ministry of Justice involved in this area; it is the Department for Communities and Local Government and the Department for Business, Innovation and Skills as well, with which this overlaps. The fact that this is a cross-cutting area is perhaps another reason why it would be logical for the Treasury to have these powers.

Labour Members welcome the stability of funding. I am grateful to John Ludlow, who works in the office of my hon. Friend the Member for Makerfield (Yvonne Fovargue), for giving me some background information, of which I was not fully aware, on the lack of stable funding for the inelegantly named illegal money lending teams. There is one such team based just down the road from me in Birmingham. They work in England and Wales and have a relationship with trading standards, as has been mentioned—hence my reference to the DCLG. I understand that since 2004, when the teams were established, more than 26,000 victims of illegal money lending have been helped, with £62 million of illegal debt written off and 300 loan sharks prosecuted.

I say indirectly to the Ministry of Justice and to the Chancellor of the Exchequer that some of this stuff is rather simpler than is made out, in terms of the relationship with trading standards. Under section 21 of the Theft Act 1968, blackmail is a common-law criminal offence when someone makes “unwarranted demand” for money “with menaces”. The Minister quite properly referred to illegal moneylenders as loan sharks; that is the vernacular, which we all understand. As a description, “loan shark” highlights rather better what almost always goes on: behind illegal money lending is a pattern of people saying, “If you don’t pay up, you’ll suffer a physical injury.” Those are the menaces.

The 1968 Act is an elegantly worded piece of legislation. Section 16 of that Act, which is sadly now gone, is on obtaining pecuniary advantage by deception. Section 1 of the Act, which still obtains, has a wonderful definition of theft. It was a great piece of legislation in terms of its wording. New clause 1 is not quite so elegant. It refers in proposed new section 333T(1) to

“the amount of the Treasury’s illegal money lending costs.”

That is a bit inelegant, because what it means is the amount of the Treasury’s anti-illegal money lending costs. The Treasury has costs associated with illegal money lending, but I hope it does not have any illegal money lending costs. The new clause is inelegantly worded but, to be fair, we know what it means and we have had a helpful explanation from the Minister.

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[Harriett Baldwin]

I beg to move, That the clause be read a Second time.

Government new clause 7 places a duty on the Financial Conduct Authority to limit early exit charges, which act as a deterrent to people accessing their pensions early under the new pension freedoms, thus fulfilling a commitment that the Chancellor of the Exchequer made recently.

The Government introduced the pension freedoms in April 2015 because we believe that people who have worked hard and saved their entire life should be free to spend their retirement savings as they want. At that time, the Government wanted to ensure that everyone who was eligible could access their pension flexibly under the new freedoms, and they therefore strengthened the statutory right of members in defined contribution schemes so that people could, in all cases, transfer their pension savings from one scheme to another.

Following the introduction of the freedoms, it became increasingly clear that other barriers, including early exit charges and long transfer times, were preventing some people from using them. Evidence gathered for the Government by the FCA has shown a small but nevertheless significant cohort in contract-based schemes for whom early exit charges pose a barrier to their use of the freedoms. Some 670,000 people in FCA-regulated schemes face an exit charge, and for 66,000 of them—one in 10—the charge would exceed 10% of the value of their pension pot. In some cases, the charges could be high enough to make it uneconomical for an individual to access their pension flexibly, while in others the presence of an early exit charge could act to discourage individuals from accessing their pension, when that might be the best thing to do in their circumstances. It is therefore clear that the Government’s objective of ensuring that everyone who is eligible is able to access their pension savings flexibly is not being met, and that action is needed to ensure that all consumers are able to make use of the freedoms.

To ensure that the cap benefits current consumers who are eligible to use the freedoms now, the Government will ensure that any cap applies equally to existing arrangements and to those entered into in the future. The Government have not taken the decision to pursue legislation with retrospective effect lightly, and we recognise industry concerns about interference with existing contractual agreements. We have already made it clear that market value reductions should not be subject to the cap on early exit charges. However, in the Government’s view it is unfair that a significant minority of individuals have been deterred from accessing their pensions flexibly because of contractual terms they entered into long before the freedoms were introduced. Indeed, some providers have conceded that industry practices have moved on, and that the introduction of the pension freedoms means that the charges pose a much more significant barrier now than when they were first agreed. Fairness is not determined solely by reference to whether it was acceptable to include a term in a pension contract many decades ago; it should also be assessed in light of the reforms and changes in market practice over time.

In the context of the new pension freedoms, it is unfair that some individuals are being deterred from accessing their pensions flexibly because of terms in contracts from before the pension freedoms were introduced. Those people would not have been in a position to make an informed decision about potential early exit charges when they signed up, and that is why we have introduced the clause, to limit the charges and remove the deterrent.

In giving the FCA, as the relevant regulator, the flexibility to determine the precise level of the cap, we are ensuring that fairness is built into the setting of any cap. The FCA is best placed to determine how best to apply any cap, to ensure that early exit charges are not a deterrent to individuals using the freedoms. The new clause will provide consumers in contract-based pension schemes with genuine protection when exercising the pension freedoms, by ensuring that they are not deterred by early exit charges. Alongside that measure, which will apply to FCA-regulated pension schemes, the Department for Work and Pensions and the Pensions Regulator will work to ensure that any relevant concerns are appropriately addressed for trust-based schemes. We will ensure that all pension scheme members are protected against excessive early exit fees, regardless of the type of pension scheme they are in. I commend the new clause to the Committee.

[Rob Marris]

I am glad that the Chancellor has come on board fully. The Prime Minister did so yesterday; he came on board with Labour’s manifesto commitments on the European Union—good for him. The 2015 Labour manifesto said:

“We will reform the pensions market so that pension providers put savers first, and protect consumers from retirement rip-offs. We support greater flexibility for those drawing down their pension pots, but there must be proper guidance for people to avoid mis-selling.”

We have already discussed pension guidance and the welcome amendments on Pension Wise.

I have several issues to raise with the Minister. Paragraph 2.16 of the Government’s response to the consultation document on pension transfers and early exit charges referred to “further cost-benefit analysis” from the FCA

“in relation to the appropriate level of any cap.”

Can the Minister tell me—my research has not extended this far—whether the FCA has done that research? I gather from her remarks that it has not yet done so, but I may have misunderstood her. If it has done it, when was it done and published? If it has not, when does she anticipate that it will be done?

Can the Minister say something—again, I may have missed this in her remarks—about what she anticipates the level of the cap will be? She referred to the shocking 10% charges that some people have unfortunately been asked for on requesting a transfer. A press release from a couple of weeks ago referred to speeding up the process and to things being done “quickly and accurately”. I do not see any reference in new clause 7 to the timescale, although there is a reference to the cap, so I hope the Minister can elucidate that.

The bigger issue—again, this may be my reading of new clause 7—is that the Government seem to be conflating two things in the wording of the new clause. The Minister’s remarks did not reassure me about that. The first is the penalty for moving. One of the reasons why I signed up to Equitable Life years ago—what a great deal that was—is that it had what was then called an open-market option, which was unusual in defined purchase schemes at that time. It was attractive because it meant that decades down the road I would have the option of buying an annuity from a provider other than Equitable Life. It was not the only provider to offer such a scheme, but it was unusual; it was in the minority. That was back in the ’80s, when I was a very young man. Some schemes had a ban on moving—that has effectively been statutorily overridden—and others had penalties.

The other thing, which I fear that the Government have conflated with the first in their wording—perhaps the Minister can reassure me about this—is what in the trade used to be called an actuarial reduction. In other words, if the normal retirement age for the pension scheme is 65, as it is in the House of Commons scheme, to which many hon. Members have signed up, but someone takes it at 60—above the statutory age of 55; it used to be 50—in round terms they take a 50% reduction in the annual pension. Keeping it simple, instead of getting £10,000 a year from the age of 65, they get £5,000 a year from the age of 60 because they are getting it for an extra five years. It is not exactly 50%, but as a rule of thumb it is about 5% a year for taking it early, so if someone takes it at 55 they lose 50% of their pension. That is not, to most people’s minds, a penalty. Because people get the dosh for longer, they get a smaller annual amount. We could have a debate about whether 5% a year is mathematically accurate, with life expectancy and so on, but in terms of the principle and the concept that people lose pension because they have started to take it below the normal retirement age there is that actuarial reduction.