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5.56 pm

Dr. Vincent Cable (Twickenham): I want to express broad support for the Bill, whose philosophy and whose architecture of financial regulation reflect a broad consensus. I appreciate the extent to which there has been broad and extensive consultation with practitioners and with Parliament, and the fact that the Government have responded to very many of the anxieties that have been expressed.

My reservations--I shall raise them in Committee--relate primarily to the exclusion of mortgages. As the hon. Member for Huddersfield (Mr. Sheerman) has just explained, there are reserve powers in the Bill and that omission may well be rectified; but that omission sends wholly the wrong signal at this stage by defending the rather discredited principle of self-regulation in the one area that is almost certainly of most concern to most of our constituents.

There are broad areas of consensus. I do not believe that any hon. Member present would argue either of the two extreme philosophical positions on financial regulation. No one is arguing for an increasingly severe, more onerous and dirigiste system of regulation. Equally, no one is arguing for laissez-faire. Quite properly, the right hon. Member for Wells (Mr. Heathcoat-Amory) drew attention to the fact that the liberal market approach to financial services involves a rules-based system, not a free-for-all.

There are major market failures, which are broadly recognised. In what are loosely called the wholesale markets, the main aspect that requires regulation is systemic weakness. History is littered with examples of one unsound or corrupt institution dragging down many soundly managed and safe institutions. Regulation is

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necessary to prevent that from occurring. However, as I believe the Government now acknowledge, that should be done on a light-touch basis. In their response to the Joint Committee on Financial Services and Markets and others, they acknowledged the need to ensure that compliance costs are comparable to and competitive with those of other financial markets. I believe that that point is understood and non-controversial.

In many ways, the most important area covered by the Bill is consumer protection. I believe that we all share the view that the biggest abuses often occur in the consumer markets. They occur because of a vast disparity and asymmetry between the bargaining power of people selling complex financial products and that of consumers. Consumers are often ill informed--for a very good reason--about products that can be understood only with a great deal of specialist expertise. Much abuse takes place in those markets.

So strong regulation is needed--strong regulation which retains the principle that, ultimately, purchasers are responsible for their own actions, and which does not increase compliance costs to such an extent that poor consumers are forced out of the market by the additional costs of regulation. I believe that the balance in that area has been roughly struck.

I have not sensed a great deal of philosophical difference between Government and Opposition regarding the Bill.

On the architecture of regulation, I acknowledge the consensus that we do need a unitary regulator, and that it was wasteful and inefficient to have a substantial number of separate regulators and ombudsmen. That is a helpful advance. In the Select Committee, we tested in some detail the argument that the differing requirements of the wholesale and retail markets should be reflected in the structure of the regulator. Some of the academic witnesses argued in favour of having two separate systems of regulation that maintained that distinct philosophy. The issue was pursued to exhaustion and I think that at the end of the process we all accepted that it made much more sense to keep the regulatory structure intact under one roof.

The hon. Member for Huddersfield talked about the many stages of pre-legislative consultation in which the Government were involved. That consultation and involvement was commendable. It is part of a wider process of improving legislative scrutiny. I was severely over-extended as a result of simultaneously trying to participate in the pre-legislative scrutiny of this Bill and in parallel efforts to deal with the Immigration and Asylum Bill and other measures. In passing, I reassure the Conservative spokesman, the right hon. Member for Wells, that in the next Parliament, when Liberal Democrat numbers more accurately reflect our party's strength in the country, he is more likely to be outnumbered than he is to be pining for our company, as he was in this instance.

One of the key issues that emerged in our discussion related specifically to the legal issue in respect of human rights. It is essential that the Government correctly determine that issue. I have been slightly taken aback by some of the comments of those in the City, which in some instances have come near to implying that the London dungeon has been reopened for normal business and that people in the City will be racked for their financial activities. That is hardly what we are discussing.

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Those of us who are non-lawyers have always wondered whether the legal system is far too lenient towards those who perpetrate fraud. Many of us think that on a commonsense basis there is much to be said for testing whether prosecution should take place and thereafter considering whether harsh penalties should be imposed. The somewhat ambiguous wording at the end of the Joint Committee's report on human rights implies an understanding of that dilemma. However, we want fraudsters to be prosecuted and penalised severely. That may conflict with a demanding test of human rights legislation. We understand the dilemma with which Treasury solicitors are grappling.

I have referred to the areas where we enjoy broad common ground. I shall now say a few words about the area in which I think the Bill is deficient and where there lies an important issue of principle, which is mortgage regulation. The Government have been subjected to conflicting advice. The Council of Mortgage Lenders and the Financial Services Authority, for administrative reasons, have been anxious to keep mandatory regulation of mortgages out of the Bill. However, there has been--this should be recorded--substantial pressure in the other direction. The Consumers Association has argued strongly for mortgage inclusion from the outset, as have the Financial Advisers Association and some banks and building societies, which see no reason for being exempted at this stage. I shall set out some of the reasons why I think that the Government are making a mistake in this instance and why they should, perhaps, rethink their position.

First, the Government's position will undermine much of what the Bill is designed to achieve. Instead of unitary regulation, banks--at the early stages, at least--will be responding to two separate sets of regulation. There will be a self-regulatory system and another system for other aspects of their business, which will involve the FSA. The Government's position appears to contradict their confidence that a statutory system of regulation is appropriate.

There are many severe market abuses perpetrated by some of the largest players. I am sure that right hon. and hon. Members are familiar with these abuses, from their postbags. For example, the system of repayment penalties is extremely onerous in some instances. I have nothing against the National Westminster bank and I bank with it, but its system of compensation penalties involves about a third of the loan. Extremely large penalties are imposed on customers who for good reasons wish to pay mortgages early.

As for building insurance--new competitors in the market are pointing this out rather brutally--there is about £1 billion of over-charging as a result of linkage between mortgage lenders and building insurers. Many mortgage protection products offer very bad value. It is reported that on average a 40 per cent. commission is paid on mortgage protection products. There are excessive linkages in endowment policies. That is a longstanding problem with the mortgage industry. There are also arrangement fees.

At the bottom end of the market there is something akin to loan sharking for non-status borrowers that operates with little regulation. That system that should be brought within the regulatory framework as a matter of priority.

In practice, because self-regulation has been put in place, large lending institutions may be happy to see individual financial advisers put into the dock for serious

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mis-selling--for example, the excessive promotion of inappropriate endowment products. However, many of the problems relate to the big lenders. That is why they should be regulated rather than allowing them to regulate their own industry.

Many of the problems in the mortgage market relate specifically to the extent to which it has been demutualised. That is an issue that we shall be pursuing in the Treasury Select Committee over the next few weeks. New forms of banking competition have come into the housing market and as a result many of the players are trying to widen their margins. They have to pay dividends, whereas mutual lenders do not. This is giving rise to many practices that are disadvantageous to borrowers.

In some respects the code is probably not satisfactory. The Council of Mortgage Lenders has done its best to produce one. To take a simple example, there is no league table, as there is for pension funds, of performance. The results of such a simple test should be available to consumers. I hope that the Government will think again. Clearly we shall be examining these matters in Committee. The right signal will be sent--I do not think that there is an enormous gulf between us on this issue--if it is clear to the mortgage lending industry that it will be subject to the same degree of supervision as other players in the market.


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