Financial Services Bill
The Committee consisted of the following Members:
James Rhys, Marek Kubala, Committee Clerks
† attended the Committee
‘particularly to those member of the public on lower incomes.’.
The Financial Secretary to the Treasury (Mr Mark Hoban): It is a pleasure to serve under your chairmanship this afternoon, Mr Howarth. I have three brief points, the first of which seeks to be helpful to the Committee. The Government said in their response to the Joint Committee on the draft Bill that they have asked the Bank of England and the Financial Services Authority to provide a note about the proposed consultation arrangements for the Prudential Regulation Authority. That was published on the Bank’s website last Monday, but I have been informed by House authorities that the Treasury may not lay the note in the House of Commons Library until there has been an explicit ministerial commitment to do so. I therefore make such a commitment.
My second point takes us back to the issue of consumption. We are not entirely convinced that consumption has been defined in statute anywhere, so if we were to insert it, we would need to define it. The rationale behind the phrase,
is that we are following in the best footsteps of the previous Government. They used similar language in the Financial Services Act 2010, with which both I and the previous Government were content. I agree, however, with the hon. Member for Nottingham East that neither “supply” nor “consumption” are ideal words, and we will therefore look at the issue. There we go—the magnanimity of government.
However, I will not give way on the second amendment, because the Money Advice Service has been clear about its remit of providing services to all income groups, and an explicit focus on one group would be to the detriment of that broader remit. I have been keen to ensure that debt advice forms part of the Money Advice Service’s remit, because that sends the clear signal that its role is not limited to providing advice on savings and investments,
Yvonne Fovargue (Makerfield) (Lab): Although I agree that the Money Advice Service should have a role in the co-ordination of debt advice, I fail to see the need for yet another agency to look at the delivery of such advice when there is already an extremely good agency that delivers debt advice on the ground and has a proven delivery model. I do not see the point of setting up a new agency to duplicate that.
Mr Hoban: The hon. Lady was a former citizens advice bureau manager and has particular expertise in this area. She must, however, bear in mind that the Money Advice Service is taking over the function already carried out by the Department for Business, Innovation and Skills of allocating funding for face-to-face debt advice services and others. Under the new arrangements, rather than such services being funded by the taxpayer, as they were under the previous regime, financial services businesses will fund the debt advice, which I think is a measure of fairness. Those who benefit or profit from the provision of financial services should also pay towards educating people and helping them to tackle their debt. That is a well-rounded solution. The Money Advice Service will work with agencies that already provide debt advice, provide funding, and ensure that we get the best bang for our buck.
Chris Leslie (Nottingham East) (Lab/Co-op): It is a positive move for the Minister to say that he will look at the point about drafting, and at whether the consumer financial education function should include
Our amendment proposes the words “supply and consumption of”, but the Minister is unsure about the definition of “consumption”, and I take his point. It might suffice to delete “the supply of” and mention only the advantages of a particular kind of good or service. I feel, however, that we are almost on the verge of some degree of momentous cross-party concession from the Minister. By the way, I think it is a sign of the integrity and professionalism of any Minister on a Bill Committee occasionally to show some flexibility and latitude about the 300-odd pages of a Bill. [ Interruption. ] Well, when I was a Minister I thought it important to show that the Minister in Committee has the authority, if he or she desires, to make a concession in response to a debate. I am sure that the Minister has the authority to make concessions, should he wish to. He has been dangling a carrot before us, and in that spirit I am happy to withdraw amendment 80.
However, I cannot help him so much with amendment 81. It is regrettable that he says that the mention of one group or another would somehow cause detriment. We are talking about members of the public on lower incomes—that is not one group or another; it is the people in greatest need, and the most vulnerable in society. If they have debts or credit arrangements, have been subject to fraud, or are affected by any issue that might come up in a regulatory context, the loss of a few
It is therefore doubly important to put emphasis on the Money Advice Service. I do not say that lightly, because although we wish the service well, it has not yet shown sufficient attention to the most vulnerable people in society. A website-based advisory service does not quite cut it; it should be more focused and detailed. I know that members of the service will be listening to the debate, and taking on board some of the concerns, and I look forward to their doing so.
‘particularly to those member of the public on lower incomes.’.—(Chris Leslie.)
Mr Hoban: The amendments are minor and technical. In the draft Bill published for pre-legislative scrutiny, schedule 3 was split into two parts. That is no longer the case, so amendments 124 and 125 are needed to reflect that.
Paragraph 16 of proposed new schedule 1ZB of the Financial Services and Markets Act 2000 currently includes, in the list of the PRA’s legislative functions, a reference to section 328 of FSMA, which concerns directions relating to the general prohibition against members of professions, such as lawyers and accountants, carrying on regulated activities without permission under part 20 of FSMA.
By virtue of the amendments being made to part 20 by schedule 16 to the Bill, members of the professions will be able to carry on only those regulated activities that are regulated only by the Financial Conduct Authority under part 20. A lawyer or accountant who wants to
Chris Leslie: These are pretty uncontroversial changes. I would, however, just like to repeat how much we regret the fact that the Bill has not been written from first principles, but has essentially cut and pasted large chunks from the Financial Services and Markets Act 2000. I suspect that a lot of the drafting changes come from things not having been spotted in that cutting-and-pasting process.
This is a very difficult Bill to navigate; it does not make for a scintillating Committee experience, and it does not flow particularly well from time to time. However, it is important that we accept the Government’s admission that they have made mistakes, and we are happy to support the amendment.
Chris Leslie: This is a significant clause; indeed, clauses 5 and 3 are probably the two most significant clauses in the Bill. Clearly, there has been a lot of debate about clause 5, including on a significant number of amendments. That reminds me that one can look at a Bill on Second Reading and perhaps take it at face value, but that it is quite possible to change one’s opinion about its strengths or weaknesses having reflected on it and scrutinised it in Committee. However, I have always had misgivings about the Government’s preferred route of twin peaks regulation, as they call it, or a quartet of regulators, which I think is the more accurate way to describe it.
It was incumbent on the Committee to try to improve the drafting and substance of clause 5. We spent time looking at four areas, and at whether the provisions would be passable. First, there is significant concern in wider society about the levels of consumer protection; indeed, the Chancellor of the Exchequer answered questions on that subject at Treasury questions earlier today. Naturally, therefore, we wanted to test the Government’s view on these issues in Committee. We sought to introduce amendments dealing with whether firms would have an obligation to act honestly, fairly and professionally in the best interests of consumers. In particular, we talked about some of the professional competencies and characteristics that we wanted changed in the new regulatory arrangements.
We tabled other amendments to ensure that the regulatory perimeter was drawn in such a way as to catch many of the concerns of consumers in our constituencies about issues such as claims management companies. Another issue, which my hon. Friend the Member for Makerfield knows about, is debt management companies and debt adjustment service companies. In particular, amendment 87 dealt with the transfer of high-cost credit regulation to the FCA. We needed to make improvements regarding the costs of high-cost credit, the duration of its availability and the roll-over arrangements—issues that even the
Although the Minister could not quite make himself say that the FCA would be a consumer champion, the hon. Member for West Suffolk did, and lo, the Chancellor of the Exchequer today also said that the FCA would be a consumer champion. So I hope that the Minister will now adopt the party line and also accept that, if the FCA is to be a consumer champion, its powers and role need to be improved.
One of the most crucial things that is missing from clause 5 is a more explicit extension of the fiduciary duty of care. I assumed that in some aspects of financial services provision, discretionary asset management in particular, the common law arrangement was that the fiduciary duty applied. The Minister could not quite bring himself to confirm that in debates on the amendments. We tried to push that point, hoping that it was not massively controversial, but it was rebutted. We proposed other changes as well.
The improvements that we need to corporate governance and the stewardship of corporate Britain were also raised during the debates on amendments to clause 5. My view is that there is a hole in the clause 5 provisions especially in relation to the Financial Reporting Council stewardship code and the UK corporate governance code. Both could have been brought much more to the fore in a clause that refers to prudential regulation as well as consumer protection, yet the Minister, despite the Prime Minister’s assertions that we had to do something about all these things, and the various books that have been written by hon. Members, has included nothing in the Bill.
The third big omission—we are talking about things that are conspicuous by their absence—related to big society issues. We wanted to be helpful to the Minister. We take with a pinch of salt some of his claims that the Government care for this big society—civil society—and want to see it flourish, but when we tried to get him to take action to make the agencies have regard to social finance and social investment, all our attempts were rebuffed. The Minister said that that would be special pleading and it would be detrimental if we focused on one area at the expense of another. It was a big mistake. Many organisations outside looking at clause 5 are simply saying, “Why haven’t the Government taken the opportunity to make those changes to that arrangement.”
Our fourth area of significant concern is the sheer cost, potential duplication and administrative burden and complexity that the creation of separate agencies might produce. I could go along with the Minister’s architectural logic if he had put in place certain safeguards about avoiding duplication and ensuring co-ordination in the agencies’ work. I am at a loss to understand why the Minister would resist such changes.
So for those four reasons—mostly to do with omissions in clause 5—I am in a dilemma. Do we let this clause go through? I am certainly not inclined to vote for it. Or should we take the opportunity in Committee to put
So I am starting to think that Opposition Members might need to vote against clause 5 just to send the message that it is a substandard clause and it is not drafted correctly. We will wait to see what comes back on Report, but for the time being it has too many problems to leave it as it stands.
Lorely Burt (Solihull) (LD): I want to make a few comments about this important clause. In general, I am extremely supportive and think that it makes great strides forward. I hope, therefore, that the Minister will take my comments as counsels of perfection rather than criticisms of the strides forward achieved by the coalition.
Some of the Opposition amendments relate to payday lending and debt management, and Opposition Members pushed the Minister to accept amendments on subjects that are currently under review by the Office of Fair Trading. I welcome that review, and I am keen for the Committee to see its findings when they are produced. It may be presumptuous to try to second guess what the OFT will suggest in its recommendations, but will the Minister assure the Committee that, where appropriate and after consultation, provision can be made in the Bill to implement any changes that the OFT may recommend?
Secondly, I want to address one small issue of ambiguity that was raised by the Consumer Credit Counselling Service—a valued organisation that provides free debt management services. The issue relates to an intervention that I made this morning and to the function of the Consumer Financial Education Body, now the Money Advice Service. On page 37 of the Bill, proposed new section 3R(4)(f) describes the function of the Money Advice Service as that of
The concern is that that could be interpreted as the MAS offering a debt management service, which it does not. Will the Minister clarify that point for the record and agree that the function of the Money Advice Service is intended to be that of
Thirdly, I wish to mention an issue raised by the Association of British Insurers concerning the PRA’s insurance objective as set out on page 25, lines 14 and 15 in proposed new section 2C. It is right for the focus of the insurance objective to be policy holder protection, but the implications of extending the objectives to cover those who “may become policyholders” are unclear. Although both the firm and the regulators have a clear responsibility to ensure the adequate protection of policy holders, it is not clear that any such duty will extend to the as yet undefined category of those who “may” become policy holders, or what the regulatory implications of ensuring adequate provisions for that class of person would entail. Will the Minister address that issue in his remarks? If the Government consider that to be a valid concern, perhaps a Government amendment could be tabled to leave out the words
My fourth question for the Minister concerns proposed new section 2L and the duty to consider representations. The FSA is required to explain to the panels where it disagrees with any representations made, but I am unclear why the same does not apply to the PRA and why we are not treating the PRA in the same way as the FSA.
Part 2 on page 15 includes amendments to the Financial Services and Markets Act 2000. Does the Minister agree that the legislation should encourage explicitly the FCA to seek to maintain and extend consumer access to financial services that meet their needs? When making regulatory decisions, we want the FCA to assess the impact of them on markets and consumers. It should place value on policy proposals and regulations that increase access to savings, protections and other financial products and also on financial advice. In the absence of such a requirement, there will be a risk that the FCA will always be steered towards a risk-averse regulation. We might see markets possibly being restricted to large groups of consumers to avoid any consumer getting sub-optimal products.
The coalition seeks to encourage the development of simple financial products. If we are to succeed, we must have a regulator working with the grain of the policy rather than acting as an obstacle to it, as appeared at times to be the case in the previous Government’s stakeholder products initiative.
Under part 2, new section 3B “Regulatory principles to be applied by both regulators”, could the Minister consider building into the Bill a requirement that within the regulatory principles, account should also be taken of the competitiveness of the UK financial services industry in setting its rules? We have had several discussions today and previously about competitiveness, but I hope that the Minister will agree that in this context it would enhance the service that the consumer should get by virtue of the passing of this Bill.
Fabian Hamilton (Leeds North East) (Lab): I want to make a brief contribution to this debate on clause 5 stand part. My concern relates back to the FCA as a consumer champion. My worry has been touched on by, among others, the hon. Member for Solihull and, of course, by my hon. Friend the Member for Nottingham East in amendments that were tabled by Opposition Members. I am very concerned about some of the outrageous interest rates that are offered by payday lenders and even by some of the other companies that go from door to door offering loans to some of the poorest and most vulnerable households. The loans can often be at rates of 1,000% or 2,000% APR. The FCA should be the regulator of such loans with their outrageous interest rates. This Bill is a good opportunity to have a cap on that kind of appallingly punitive interest rate, whether it is from the payday loan that goes from one week to the next or from the door-to-door sales people who work for the companies that we all know about because we hear about them in our constituency surgeries. Some are charging up to 10,000% APR interest rates, which surely should be made illegal. Surely the FCA could have a role in stemming that and in ensuring that the consumer is protected from this kind of outrageous exploitation. For that reason alone, I stand with my hon. Friend the Member for Nottingham East in suggesting that we should vote against this clause. I say that not because everything in this clause is bad, but because it is not quite good enough for what we want to try to achieve.
Sheila Gilmore (Edinburgh East) (Lab): We have heard, both on this Committee and, as my hon. Friend the Member for Nottingham East said, at Treasury questions today, about the importance of the FCA as a consumer champion and how that should be an extremely important focus of its work. On that basis, it seems regrettable that some suggestions during this debate for strengthening that consumer role, be that defining more clearly how a consumer panel should be constructed and what different groups should be involved in that, or strengthening some of the other aspects of the work in terms of that end of the market where vulnerable consumers are particularly affected, have not been adopted. That is not to say that the provisions for that body are not good, but that they could be better.
Mr Hoban: Before the hon. Lady gets carried away with her theme, can I repeat what I said when we debated this last week? The Office of Fair Trading will continue to take action in this area, right up until the point that responsibility for consumer credit transfers to the FCA. It will continue to take action on payday lenders and will continue to look at enforcement of the code. There will be no limbo where consumers are left unprotected.
Sheila Gilmore: I am pleased that the Minister is confident that that will be the case. As for the other matters that the clause does not include, because the Minister has resisted them, it is a matter of some regret that the proposal from Social Enterprise to strengthen the representation of that sector of financial services by, for example, having a social enterprise practitioners panel was rejected. This is a field of financial services that we all want to expand. There are a lot of warm words about how it should be expanded, but it may require regulation of a particular kind, and the opportunity was not taken to create a specific provision around a practitioners panel, which would enable the FCA to develop a regulatory regime for that particular aspect of financial services to ensure that it was neither held back by disproportionate or wrongly constructed regulation and could therefore encourage it to expand and play a larger part.
The Minister gave his reasons for not wanting to have the sort of panels that the FCA is going to have for the PRA. It is unfortunate that he has taken that view. Consumers have a strong interest in what happens with the PRA. Many of the practitioners want a practitioner panel in terms of the PRA, and the current panel that exists in terms of the FSA has also proposed that it should form part of the workings of the PRA. The advantage is that they would provide a forum, if we have a consumer panel as well, within which some of the proposals for roles could be pre-consulted on in a more thorough way than can be done simply by a widespread consultation. It is a pity that the Minister has not seen fit to adopt the advice and include it.
I hope that the Minister will not take up the suggestion made by the hon. Member for Solihull to consider making an amendment to the provisions in relation to the PRA’s insurance objective. The suggestion was made that the Minister might want to look at proposals from some parts of the insurance industry to remove the provision that says:
The sector has debated the words “or may become policyholders.” The reason that has been given—by the FSA, I believe—for including the provision is to prevent insurers who have a problem with a product that they are offering taking on similar business in future. I hope that the Minister will not accept the proposal to remove the provision, because it is not true that all insurers and those involved in the business agree that those words should be removed.
The Association of Financial Mutuals, which provides insurance business, supports the provision. It would oppose deleting it from the Bill, because it protects consumers from the continued selling of products that are already known to cause problems. The interests of future policyholders are extremely important. A considerable number of problems in the industry have arisen from the continuation of what amounts to various forms of mis-selling of policies, even after problems have come to light. I therefore urge the Minister not to listen to the amendment proposal. I am pleased that he has not yet been persuaded by the Association of British Insurers and others, otherwise he might have amended the Bill before.
Chris Evans (Islwyn) (Lab/Co-op): I am not one of those people who bash the work of the FSA. I regard this as a continuation of the good work that it has done to clamp down on the scandal of mis-selling that took place throughout the ’90s and in the early 21st century. We are giving the FCA more powers than the FSA had. I hope that the FSA’s good work will be continued, but that does not stop me having concerns about the FSA.
I want the Minister to consider some omissions from the clause that we have not discussed, which relate to a number of financial products. First, are we answering the question: are consumers savvy when they are making decisions about buying products? My hon. Friend the Member for Leeds North East discussed doorstep lenders. When those people come to the door looking to make a sale, are they giving consumers the professional advice that they need? The answer is no.
The flipside is the situation in banks. I am always concerned about commenting on banks, because when I served on the Pensions Bill Committee and said something nasty about them, a number of financial magazines condemned me for doing so and said that I had made a lazy comment. However, I will say this: banks follow a sales model—there is nothing wrong with that. They have to make a profit because they are private businesses. I am worried, however, that people walk into banks and staff are desperate to make a sale because their wages are based on bonuses. Are staff forgoing a duty of care to consumers? Are they more interested in making the sale than in finding the right product for those customers?
Secondly, the hon. Member for Solihull mentioned the OFT investigation. The clause is not strong or clear enough about the roles of the FCA and the OFT. If, as my hon. Friend the Member for Leeds North East said, doorstep lenders and other unscrupulous companies— I say that in fear of journalists watching us and saying something nasty about me—will continue to be under the auspices of the OFT, there will be overlap. Will the Minister explain how we can clear the tension between the work of the OFT and the work of the FCA? It will happen, because they both will be dealing with consumer credit. I hope that, when he replies, he will refer to such issues.
Mr Hoban: Let me clarify matters. There will be a cutover from the OFT to the FCA and, until that happens, the OFT will clearly be in charge of the regulation of consumer credit. The Bill will facilitate that transfer.
Mark Durkan (Foyle) (SDLP): In a previous stand part debate, I cast a no vote because I recognised the need to make new provisions and to learn the lessons of what has happened in the past few years and the lessons of what did not happen in response to emerging problems. However, if my hon. Friend the Member for Nottingham East tests the Committee and presses clause 5, as amended, to a Division, I will vote against it standing part because it is such an inadequate clause—for all the reasons we highlighted when describing the various amendments we tabled to it. Even if the Minister wanted to reject the amendments, he could have acknowledged that adjustment was needed either in respect of the clause or elsewhere in the Bill. If he had picked up several of the points that were made, we could have supported the clause proceeding untested, without it being pressed to a Division.
Clause 5 under the Bill spans 24 pages. It also incorporates many other references not only under schedules, but other legislative provisions. Its content is very wide. Yet it omits significant detail and fails to clarify itself from the point of view of practitioners who will be affected by the activities of the different regulators and in respect of the duties of consideration that would be owed to consumers. Duties should be owed by both regulators, but we have heard from the Minister that they will apply to only one regulator.
If such a brand new vision is about offering us articulated regulation to take account of different market factors and different services and products, I am still at a loss to understand how, within the regime of articulated regulation, the consumer interest counts only in relation to the work of one regulator, when clearly the work of the other regulator will have a significant impact on consumer needs and should work to the benefit of consumer interests. The idea of leaving one regulator to be responsible for what the other regulator does seems to be a recipe for confusion and, indeed, failure. That is
We find under clause 5 and other provisions to which it alludes many other problems, such as requirements for the PRA to have power to override the FCA on various issues, but we do not find a countervailing measure to allow consumer interests to make their way and voice themselves to the PRA, and for it to hear them. That is a fundamental failure, not least given that the PRA will be dealing not just at the high level with matters that are remote and to do only with issues that people will discuss around rarefied dinner tables in the City of London, but with matters that will be close and intimate to people in my constituency, such as credit unions. The idea that it would behave in a way that was completely detached, and that it would have to be protected from any approach by a consumer voice, seems somewhat bizarre.
Someone like you, Mr Howarth, who has served in ministerial office in Northern Ireland, will be familiar with the comforting counsel that, “If you aren’t confused, you do not understand”. However, in relation to the Bill, we should look at that the other way round: people are confused—as am I, as a legislator, not only by the clause but by the Minister’s arguments—but that does not mean that we do or will, in practice, understand. Some arguments made for rejecting amendments to the provisions are almost like a Homer Simpson nightmare: just when we think we have reached the conclusion, we find ourselves back in something completely different and all the old problems and issues open up again. The clause is bad because it offers a model that could be made good, but it needs more work and more specifics to be built into it.
Earlier, the Minister told the Committee that just because regulation is expensive does not mean that such regulation would not be worth it, in relation to what it saves the consumer and the taxpayer and, by avoiding systemic risk, in relation to the public interest. Equally, I say that, just because some of the amendments that the Minister has rejected might have made the provisions slightly longer does not necessarily make them worthless. They would have provided clarification, and they would have offered a basis for confidence for practitioners in the financial services sector, clearer guidance to various professional interests and bodies and a measure of assurance and confidence to consumers. They would have been worth while.
I hope that the Minister agrees that the clause, like other provisions in the Bill, needs more work. More adjustment is needed to take account of existing concerns and the circumstances that are likely to arise. The Minister’s best argument for rejecting amendments has been to say that what the FSA is doing is good enough, but the Bill is meant to be about the replacement of the FSA and ensuring that we do not have to rely on any of its inadequacies or iniquities and all that went with that regulatory regime. It is not enough to tell us to carry on with what we have and what we know. If the Bill is to provide a brave new world of regulation in which everyone will know where they stand and who they should talk to if problems are identified—in which regulators will know when to talk to each other, and everyone will
Clause 8 makes provision for the Treasury to introduce all sorts of new regulatory legislation, including powers to change primary legislation. In all likelihood, some of the provisions about the PRA that will be changed are those in clause 5. On clause 8, the Government’s best defence is that they will need reserved powers for the Treasury to clear up the mess, inadequacies, inconsistencies and incompatibilities built into clause 5. The answer is not to have sweeping powers that can be used capriciously, and will probably create a lot of market uncertainty. The answer is not to give capricious powers to the Treasury, but for the Committee, and the House more generally, to do the job of discharging the Bill as our best legislative effort now, given all that we have experienced and all that people are likely to experience.
Mr Hoban: I was just looking at clause 8 to find out which new sweeping powers we had given ourselves. I am not sure that they were quite as sweeping or as wide as the hon. Gentleman thinks. If we ever get round to a stand part debate on clause 8, we shall probably return to those provisions.
I know that Opposition Members are frustrated at not getting more amendments through. Perhaps I am not as collaborative as they would like, but I remind them that the Bill has been through three rounds of public consultation. We started the process in July 2010. Many of the big issues have been resolved, and many pieces of low-hanging fruit were picked up in debate. The pre-legislative scrutiny Committee did a good job, and we have reflected many of its proposals. The Treasury Committee conducted three inquiries, so there has been a rigorous process. Indeed, the fact that the most excitement this Committee could generate on clause 5 was about who should be on which panel may demonstrate that some of the bigger issues that underpin the clause passed by without much comment.
There are some radical changes in the measure. There are much tougher objectives for the FCA and a very clear focus for the PRA. There are some interesting powers that Opposition Members have not really touched on—to my surprise—but that may reflect a degree of consent for the broad outline of the Bill.
I shall deal with some of the comments. In debates such as this, I always think of the American baseball player, Yogi Berra, who said, “It’s déjà vu all over again.” We have discussed a number of points—
Let me deal with some of the points that are new, or where I feel that some clarification is required. My hon. Friend the Member for Solihull referred to debt management as one of the objectives of the Money Advice Service. Let me be absolutely clear: the provision
My hon. Friend raised a point about the PRA that I am surprised did not have more legs at an earlier stage. She said that the PRA should have regard to representations, and of course proposed new section 2L explicitly provides that the PRA consider the representations made under new section 2K. Those are advisory arrangements and it is right that the PRA should be able to establish its own arrangements for getting the best advice, as the Joint Committee agreed. The PRA will obviously consider the advice it commissions and the representations it receives.
My hon. Friend raised an interesting point about the PRA’s with-profits objective, which the hon. Member for Edinburgh East picked up on too. One of the things we are trying to do across financial regulation is to be forward-looking. We are seeking to replicate some of the forward-looking aspects of the consumer definition that appears in section 425A of the Financial Services and Markets Act 2000. Going back to with-profits policyholders, the reference to potential policyholders reflects the fact that a forward-looking prudential regulator should not just be considering the interests of current policyholders without thinking about how the firm’s treatment of existing policyholders would impact on policyholders in the future. For example, a prudential regulator should not allow an insurer to treat its current policyholders in such a way that in five years’ time, the firm goes bust to the detriment of those who become policyholders in that period.
In the regulation for with-profits policies, future policyholders need to be taken into account when distributions to current policyholders will have a direct impact on the interests of future policyholders. A point that the parliamentary ombudsman raised in her report on Equitable Life was that the FSA did not adequately protect new policyholders, once Equitable Life was in serious difficulty, so it is important that the PRA looks at both existing and future policyholders. I hope that, with that forward-looking approach, the PRA is less likely to make the kind of regulatory mistakes that occurred with Equitable Life, to the detriment of many thousands of people.
Fabian Hamilton: Indeed, and the Minister and I battled each other across the House during the passage of the Equitable Life (Payments) Act 2010. Does he think that if this regulatory arrangement had been in place at the time—this is a very theoretical point—it could have prevented the scandal of the with-profits annuitants who have suffered so much at Equitable Life?
Mr Hoban: It was not only the with-profits annuitants who suffered; anyone who took out a with-profits policy with Equitable Life post-1992 did, according to the ombudsman’s findings. I strongly reject the comment by the hon. Member for Foyle that it is just business as usual, because the Bill gives the regulator powers and objectives for consumer protection that are significantly stronger than those of the FSA. The regulator will have tools to help tackle some of the problems that it would have faced with Equitable Life. For example, if it had identified a flaw in the design of a policy, the product intervention powers—which we may debate later—could have been used to stop policies being mis-sold, in the same way that they could potentially have been used to stop PPI policies being mis-sold.
We have sought to learn and respond to the lessons of the past, while at the same time ensuring that the regime is sufficiently forward-looking to try to deal with the new challenges that we will see in financial services. However, I think that some powers and objectives in the Bill would have helped with Equitable Life.
Mark Durkan: To clarify, in case the Minister misrepresents me, I have not dismissed the Bill as simply being about continuity, FSA, or anything else. What I have said is that the Minister’s argument against all the amendments is that they are not needed, because the FSA has been doing things in a particular way, and that will continue into the future. The contradiction is in the Minister’s arguments and not on the part of those who have been tabling amendments.
Mr Hoban: I hope that my reasons for rejecting amendments tabled by Opposition Members have not been quite as narrow as saying, “The FSA is doing it already and it is okay”. Some amendments have been not been accepted because of a broad set of issues.
Lorely Burt: I understand more fully the reasoning behind this idea about policyholders in the future, but I have a twinge of concern about the area relating to undefined categories of policyholders. We cannot forecast with a crystal ball exactly what is coming down the road. The concern of the Association of British Insurers was that they are being given responsibility for future events that they cannot necessarily predict.
Mr Hoban: We are not crystal ball gazers, and no one has a perfect view of the future, but it is important that in thinking about regulating the with-profits business, we pay some regard to the interests of future policy holders, so that business is not run solely for the benefit of current policy holders. With-profits funds build up over a period of time. They are, obviously, of interest to policy holders, but the businesses are long-term businesses. Anyone running a long-term business needs to look ahead to future policy holders, not just those currently on the books.
On access, to which my hon. Friend also referred, it is important that we see access as a social policy issue and not simply one for the regulator. She made a point about the FCA’s approach to stakeholder products. We need to ensure that proper protection is in place for consumers, but I can advise her that a representative of
My hon. Friend also touched on competitiveness, which we have debated. It is important to avoid the mistakes of the past. There is a sense that regulation has been watered down under pressure to deal with issues such as international competitiveness. It is much better to ensure—this is a point that I make frequently in other circumstances—that regulation is proportionate and that where a problem is identified, the regulatory response gets the balance right between costs and benefits. That should be a key part of regulation and should apply not just to the FCA but elsewhere.
The hon. Member for Nottingham East said that there was nothing in the Bill about co-ordination, but there is quite a lot. Effective co-ordination between regulators will be essential to ensure that they can deliver their statutory objectives in an effective and timely manner. The Government have proposed a number of mechanisms to ensure effective co-ordination between the new regulatory bodies, including cross-membership of boards between the PRA and the FCA, a statutory duty on the PRA and FCA to co-ordinate the exercise of their functions and an obligation to prepare a memorandum of understanding setting out how the statutory duty will be delivered. For key regulatory processes such as rule making and enforcement, the Bill includes hard requirements on legislators to consult with each other.
Mechanisms are in place to ensure that the PRA and FCA will be held accountable for how effectively they have co-ordinated, including a requirement for the MOU to be reviewed annually and for that review to be laid before Parliament, a requirement for the FCA and PRA to include in their annual reports an account of how they have complied with their duty to co-ordinate their actions over the year and, of course, the engagement of the NAO, a significant advance in the regime on financial accountability compared with the regime that we inherited.
Of course, statutory requirements are not enough in themselves. A collaborative working culture has developed between the regulators, as we have seen in the current period of shadow running. The FCA will begin the process of dividing its prudential and conduct-focused responsibilities.
The hon. Member for Islwyn discussed the duty of care. The Bill establishes a new framework in which the regulators—not just the FCA but the PRA—will impose requirements on banks and other firms reflecting consumers’ interests in being provided with safe, stable and appropriate financial services. The concept of a duty of care is the foundation of the regulatory system, and it is recognised at every level in the Bill, from the regulators’ top-line objectives to the specific tools that I hope we will discuss before we conclude our consideration of the Bill in Committee, such as the FCA’s power to ban products. As we debate the Bill in more detail, we will see how that duty ripples through.
Chris Evans: The FCA has a large amount of power, but does the Minister worry that the FCA, and people who look for redress from the FCA, might be confused as to whether the OFT or the FCA is policing the market? I am worried about the level of confusion.
Mr Hoban: The Bill gives the power for the transfer of regulation from the OFT to the FCA, and it will be clear who is in charge up to the point at which the cutover takes place. We will have to go through a consultation process on the transfer to ensure that the regulatory perimeter and type of regulation are right, but from a consumer’s perspective, until that cutover takes place, the OFT is very much in charge of regulating consumer credit.
There have been calls for the FCA to have all sorts of additional powers on consumer credit. The FCA’s current suite of powers will be sufficient to address consumer credit issues, but we should not prejudge the consultation process by introducing powers that are perhaps not appropriate or right.
The hon. Member for Leeds North East referred to capping the cost of consumer credit. Let us be clear, as the Chancellor was earlier, that the previous Government looked at consumer credit on several occasions and each time they rejected a cap on interest rates, because they recognised, as did many consumer bodies, that it could force people into the arms of illegal money lenders, and I do not think any of us want to see our constituents being forced into the arms of illegal money lenders.
BIS has commissioned the university of Nottingham to look at the total cost of credit, but let us not pretend that there is some sudden dividing line between the parties, because the previous Government adopted a similar position. I remember, on Report of the previous Financial Services Bill, a member of the previous Government argued very persuasively against a cap on interest rates.
Chris Evans: Will the Minister clarify his statement on the costs of lending? Will he be looking at early repayment fees, rather than a cap? Companies such as Provident Personal Credit and Shopacheck often have hidden charges as well as high interest rates.
Mr Hoban: A number of hon. Members on both sides of the Committee have raised that point. The review commissioned by BIS is looking at the total cost of credit, rather than looking simply at interest rates.
Clause 5 is an important part of the Bill, and we have addressed a range of issues in this clause stand part debate and in our consideration of the amendments. I remind Opposition Members that the clause has been through a thorough process of public scrutiny, and it has been a thorough process of legislative scrutiny in the past few sittings of this Committee.
My mind is never closed to amendments when a good argument is made. We have suggested that we will consider some of the wording of the clause, but some of the big issues have been resolved in earlier rounds of consultation. Those issues have not really been touched on in the past few sittings, which is a sign of consensus, and I am surprised that the hon. Member for Nottingham East seeks to divide the Committee when no big issues of principle are at stake; he is seeking to divide the Committee on relatively small matters.
Financial Conduct Authority and Prudential Regulation Authority: Schedules to be substituted as Schedules 1ZA and 1ZB to FSMA 2000
Chris Leslie: I beg to move amendment 43, page 174, line 44, leave out from ‘expenses’ to end of line 46 and insert ‘to the Bank of England in respect of the services of the Bank’s Deputy Governor for prudential regulation as a member.’.
Amendment 43 merits a little attention. Committee members will see, at the foot of page 174 of the Bill, paragraph 3(7) of proposed schedule 1ZA to the Financial Services and Markets Act 2000, which states:
of the board of the FCA. The deputy governor will have a financial recompense, according to that provision. The amendment would, I hope, clarify the clause usefully, making it read instead: “The FCA may pay expenses to the Bank of England in respect of the services of the Bank’s Deputy Governor for prudential regulation as a member.” That is important because we want to clarify that expenses are not to supplement the salary of the deputy governor of the Bank because of time he has spent on the board of the FCA, which is part and parcel of the job description of the deputy governor of the Bank. Instead, if there is a recharge mechanism to be returned because of time spent in service of those duties, the moneys will be paid to the Bank of England, not to the individual.
I should be grateful if the Minister said that that is how the process should work, otherwise we get into strange circumstances, with other officials in the Bank
It would be useful if the Minister provided an estimate of what he thinks the expenses are likely to be. What scale are we talking about? The deputy governor for prudential regulation might spend a significant, inordinate or tiny amount of time—I do not know—so the Minister should say what the scale is, because that would give us a sense of whether these are petty cash issues to be returned. Obviously, the deputy governor will be catching the bus to FCA meetings. Are the moneys simply for his bus fare or are we talking about serious multiples of tens of thousands of pounds? What is the scale?
Amendments 42 and 89 reflect two points. In the debate on the previous clause, the Minister spoke at considerable length on various points in respect of clause 5 stand part and claimed that there are lots of ways that the Bill provides for co-ordination between the FCA and the PRA, for example, across membership of boards. We look now at schedule 3, and we discover that on page 175 there is provision for the Bank’s deputy governor for prudential regulation to be on that board, but paragraph 6 states:
So there you have two deputy governors, supposedly sitting on those two boards to aid, as the Minister said, the co-ordination of those two bodies and to have cross membership, yet there is a provision that gags those two individuals and prevents them from getting involved in discussions on certain areas. There may be a rational reason why the Minister wants those two individuals simply to stick to strategic issues but never to discuss operational questions. He will know, because Conservative Governments over the years have struggled with this issue, that the line between strategic and operational is sometimes very difficult to define clearly.
Paragraph 5 on page 175 states that the validity of any act of the FCA is not affected if there is a vacancy in the office of the deputy governor or if there is a defect in the appointment of a particular person to those boards. But if that deputy governor for prudential regulation happens to stray in discussions into areas which relate to a particular person or to a decision on exercising a function, might there not be a serious risk that, on judicial review, a third party could indeed challenge the validity of any act of the FCA, should it be discovered that that deputy governor had uttered a phrase or misspoken in a particular way about a particular person or a particular issue?
I am concerned that there is a danger in fettering the abilities of, or limiting the topics on which, the deputy governors and the chief executive of the FCA can speak. This is not a party political point. It is a standing order point as much as anything else. If we are to enshrine such restrictions on the things that these board members can and cannot utter so that they cannot take part in a decision, would being in a room be so classified? Would every single decision of the FCA and the PRA have to be separated into generic and operational questions? I counsel the Minister that he is writing dangerous rules into this. We do not want a whole series of litigious circumstances coming along to unpick decisions of the FCA or the PRA.
Those are my concerns. It would not be right to fetter internal discussions or try artificially to define some wall in this way between these two players on those boards. It is a reasonable idea to put them on the boards of both organisations, but this half-gagging clause has a number of dangers within it. The Minister should reconsider and I should be grateful if he accepted our amendments.
Mr Hoban: The purpose of cross-membership is to help to ensure that there is effective strategic co-ordination between the two regulators. The CEOs will not advance the interests of their own organisations when sitting on each other’s board except in so far as both regulators have an interest in effective co-ordination. Accordingly, the draft MOU makes it clear that the cross-board role of the CEOs will focus on areas of overlap. The CEOs will participate in discussions around the legislative functions which are reserved to the boards, such as setting policy and making rules. As the draft MOU makes clear, the regulators will consult each other at an early stage when developing policy. Cross-board membership of the CEOs will be useful in supporting this and ensuring that it takes place in an appropriate way. That provides the backdrop to the amendments.
We are thinking about why the CEOs should be on the board: it is to participate in policy making, where there is an overlap of interest, and to assist in areas such as making rules. For those reasons, it is not appropriate for the chief executives to take part in firm-specific decisions by each other’s boards. Such decisions might include petitioning for the insolvency of a particular firm, so at the level of firm-specific operational decisions, the PRA and the FCA must have clearly defined and separate roles, which could be undermined if the CEOs were involved in firm-specific decisions taken by the other body; their remit should be limited to strategic decisions, which is why I reject amendments 42 and 89.
Mr Hoban: Amendment 43 would provide for any fee paid to the CEO of the PRA for work on the board of the FCA to be paid to the Bank of England, rather than to the CEO directly. However, when CEOs of the PRA sit as a directors on the FCA board, they owe their duty as directors, with particular focus on helping to ensure effective strategic co-ordination, to the FCA. The CEO of the PRA is not on the FCA board in the capacity of a secondee of the Bank or of the PRA, as the amendment suggests.
Teresa Pearce (Erith and Thamesmead) (Lab): My understanding is that part of the responsibility of the deputy governor is to be on that body. Is the Minister saying that it is completely separate and not part of the job description of the deputy governor?
Mr Hoban: I am saying something slightly different. As a director of the FCA, he owes his duty to the FCA. That is why he is there. He is not a secondee from the Bank to the FCA, but a director of the FCA. Yes, the role of an FCA director goes hand in hand with being a deputy governor with responsibility for financial regulation, but he is not on secondment to the FCA. He is on the FCA board, taking part in decision making alongside other directors of the FCA, whereas a secondee would have a wholly different set of arrangements in place.
Let me reassure the hon. Member for Nottingham East that the expenses to which paragraph 7 refers are things such as a bus fare, for getting from the Bank to Canary Wharf or wherever, rather than a form of salary. The provision is to cover out-of-pocket costs, which is why it would be paid directly.
Chris Leslie: I am not sure whether the same principle applies, for example, to the Treasury representative who sits on the Financial Policy Committee. Does the Treasury representative get expenses in an individual capacity or get no expenses at all? It is difficult to know, when we are talking about situations that have not yet happened, although they are in shadow form and so must be established at some level. I do not want to labour the expenses point, but it is important to keep an eye on those arrangements.
I am not convinced by the Minister’s justification on fettering discussions between the deputy governors. I understand and expected the point about keeping them to strategic discussions alone, but he must surely appreciate my concerns about how things will be drawn. If paragraph 5 had also excluded the validity of an act being challenged by virtue of something under paragraph 6, it would have been a fair point. Perhaps I can gently suggest that he goes away and looks at that point, because it is a particular worry.
I do not want to press amendment 43 to a vote. There is a point of principle on the two issues, but for the sake of brevity, I shall test only one. If I can press amendment 42 to a vote, I will be happy not to press amendment 89, in the hope that the Minister might look at the point later. I beg to ask leave to withdraw the amendment.
( ) section 345D (whether as a result of section 345(2) or section 249(1)), or’.
Mr Hoban: Part XVII of the Financial Services and Markets Act 2000 makes provision for collective investment schemes such as unit trusts. It includes provision for the FSA—and in future, the FCA—to make “trust scheme
Schedule 13 to the Bill will give the FCA and the PRA a wider range of disciplinary powers over auditors and actuaries of authorised persons. It will give them powers to fine and to censure an auditor or actuary who has failed to comply with a duty, in addition to the power to disqualify the auditor or actuary from acting for an authorised person or class of authorised persons. Government amendment 112 brings the disciplinary powers over auditors of authorised unit trust schemes into line with the new, wider range of disciplinary powers over auditors of authorised unit trusts being conferred on the FCA and the PRA by schedule 13. The remaining amendments in this group are consequential on amendment 112.
Chris Leslie: Again, there are a number of Government amendments. As the Minister said, they relate to auditors of unit trusts and open-ended investment companies. The amendments seem broadly reasonable in their framing, so I have no particular objections to the points that they raise. I think that the Minister is correct in saying that amendment 112 is probably the more important of these changes in respect of failed auditors and how the regulator needs to have certain powers framed to ensure that it can control the activities of auditors for certain other investment activities. Perhaps that is not set out in the Bill as it is currently framed. I think that those are all reasonable points and I am happy to accept the amendments.
Publication of minutes and agendas
10 (1) The FCA shall make arrangements to publish, unless publication would be inappropriate, the agendas and minutes of the meetings of its committees and sub-committees.
(2) When a meeting of any committee or sub-committee of the FCA makes a decision upon any matter of public policy, the minutes of the meeting or meetings that result in that decision shall summarise the considerations which were taken into account, both for and against the decision.’.—(Chris Leslie.)
This amendment is to proposed new schedule 1ZB in schedule 3. On page 183, there are a number of provisions on the appointment of members to the governing body of the Prudential Regulation Authority. Paragraph 10 on page 183 states:
That is a broad-brush phrase. The amendment would add merit, fairness and openness to the principles that the Bank must have regard to in those public appointments. I make no apology for trying to tighten up the framing of the Bill on those public appointments. We are already in a situation where these are public appointments at arm’s length from Government Ministers, although they are still within the public domain. As such, it is important that they comply not only with generally accepted principles, but specifically with the code of practice of the Office of the Commissioner for Public Appointments, which sets out what those generally accepted principles should be.
The difficulty is that this falls into the grey area of what is and what is not a public appointment. In this instance, these are appointments to a company. The PRA will be a limited company, so we are talking about directors of a body corporate. For the avoidance of doubt, rather than the PRA using the orthodox process of nods and winks in some of these appointments, which we have seen too often, we must have open competitions, appointments on merit according to the principles of equal opportunities and of transparency and openness in the arrangements. If we put such arrangements in the Bill, it is important to be more stringent in the terms in which we frame them. We have debated issues such as the sort of person who might be
We must ensure that those who are chosen to serve have the right abilities, experience and qualities to match the job description, and that any appointment process can stand independent scrutiny. Will the Minister explain whether appointments to the PRA will be subject to the code of the Office of the Commissioner for Public Appointments? That is an important first principle. I should also be grateful if he would reiterate who will make the appointments, what the process will be, where the vacancies will be advertised, and so on. Those are the issues that we want to test in this amendment.
Mr Hoban: Paragraph 10 to schedule 1ZB already requires that appointments to the PRA board should take place in line with generally accepted principles of good practice relating to public appointments. The articulation of those principles is the code of practice for ministerial appointments to public bodies, which is published by the Commissioner for Public Appointments. Its aim is to ensure that public appointment processes are fair, open and transparent, command public confidence and result in appointments that are made on merit. The Bill already requires the Bank to run the appointments process according to the principles of merit, fairness and openness, so the amendment is unnecessary.
Chris Leslie: I am grateful to the Minister for confirming that the appointments will be subject to the code set out by the Office of the Commissioner for Public Appointments. That was the assurance that I sought, but it would have done no harm to have had a slightly tighter definition of the provision. He says that there is not enough specificity in our amendments, and that they are too imprecise and vague in their definition, but he refers to generally accepted principles of good practice. It is worth parking that, and remembering that that is acceptable in this context, but not in others. However, I accept the Minister’s commitment, which is very welcome, and I beg to ask leave to withdraw the amendment.
Chris Leslie: This is a relatively short but important schedule. We have pointed out a number of concerns about specific elements, but we will now debate the principle of some of the working arrangements of the FCA in particular. I am sorry that the Committee declined to support our amendment 69 on the publication of the minutes of the FCA. I know that the Chancellor has been challenged on that and that the Treasury Committee has raised concerns about it. I hope that, on reflection, the Minister and his colleagues will return to the matter at a later date, because it is vital that we do not just set up functional standing orders for transacting the business of the FCA and the PRA; the arrangements need to be transparent and open. The two new regulatory
It is a pity that the members of the Treasury Committee who are on this Committee did not—to put it kindly—take the opportunity to press or cajole the Minister, at least in the public domain, about the elements of the workings of the FCA or the PRA that could have been improved. We should have had a greater sense that the FCA was going to be a consumer champion and that it would be subject to far broader consultative processes, so it is a pity that hon. Members did not go down that particular route. We will undoubtedly want to return to such issues on Report. I will not object at this stage to the workings of schedule 3, but I am not particularly motivated to support them either, so I will see what changes the Minister may come back with on Report. The glass is half full on schedule 3 for the time being.
Chris Leslie: Clause 6 contains a set of measures relating to the scope of regulation and the extent of regulated activities. The Bill aims to make a number of changes to the regulatory perimeter, some of which, including the regulation of consumer credit issues and the transfer of responsibilities from the Office of Fair Trading to the FCA, have already been debated by all hon. Members, and those shifts are welcome. However, the Minister will know that serious reservations have already been expressed about the timing of the transfer of responsibilities to the FCA, the resources that the OFT currently has for overseeing some consumer regulation issues, and the extent to which those resources will be transferred or made available to the FCA.
Consumer credit regulation will create a significant volume of extra work, albeit at perhaps a smaller level because of the volumes concerned. Can the Minister set out what that estimated volume change is likely to be? What are the numbers of regulated persons who currently fall under the ambit of the OFT who will now fall under the auspices of the FCA? It would be good to get a sense of the scale of the number of regulated persons and firms that are likely to come under the FCA’s remit. I would also be interested to hear what the situation will be in terms of the regulatory resources. Perhaps the FCA has said how it will expend its resources on such issues. I appreciate that transfer issues are still in train and under discussion, but he must have an estimate of what that is going to be. Although we want coherent regulation, we also want to ensure that the new regulator has enough ability to capture properly some of the concerns that people have.
The Minister knows—we debated this earlier—that the transfer of credit reference agencies regulation is also a positive step. I think there are only three credit reference agencies in the UK: Callcredit, Equifax and Nottingham’s finest, Experian. They are important bodies, currently all subject to licences from the Office of Fair Trading. Certain essential information about those firms needs to be provided to the OFT as part of the licence application process. The agencies are required to provide consumers with credit files at a cost of £2 each, and they need to abide by certain regulatory standards. There are also careful rules regarding the data protection requirements on such bodies. It would be useful if the Minister could say how he thinks credit reference agency processes are likely to be affected by the transfer.
I am particularly concerned about what is known as the credit repair industry. It involves companies that advertise to an individual who has perhaps had a county court judgment or may have had to default on a particular credit agreement, for example by missing the occasional payment. The companies would say, “For a fee or a certain arrangement, we will repair your credit rating.” Will credit repair companies and activities come within the regulatory perimeter? I think they are quasi financial services activities that probably merit attention in the Bill.
I want to check on the status of claims management companies. As I understand it, they currently come under the Ministry of Justice. Due to the large number of financial services complaints that such companies are subject to, would it not be more appropriate to add their activities to the list of regulated activities in the clause?
Mark Durkan: On the Danny Blanchflower principle of equalising before the other team scores, I want to put a couple of questions to the Minister on clause 6 and wider provisions regarding consumer credit, which I would otherwise have done by way of intervention.
Will the Minister clarify whether the provisions and the intended changes from the OFT to the FCA have taken account of the different situation in Northern Ireland? Significant parts of consumer regulation in Northern Ireland are listed as devolved matters, but the OFT has been active on several matters that have straddled devolved and non-devolved areas. We have a situation in which we could still end up with a corner of confusion. After this change in regulatory structures in which many areas of confusion and untoward gaps will be sorted out, we could still end up in a difficult twilight zone in and around aspects of consumer credit. While we know that steps are being taken to sort out some of the outstanding regulatory issues that have affected credit unions in Northern Ireland and prevented them from providing a wider range of services, we can also see that credit unions here are benefiting from some of the new opportunities that have been provided by the passing of the recent legislative reform order. As some
Under clause 6, there are some specific references to dealing with issues that are raised in the context of Scotland. If clause 6 covers the future transfer of responsibility for regulating consumer credit from the OFT to the FCA, we need to know whether the Minister has discussed the implications with relevant Ministers in Northern Ireland. It would be odd to leave a difficult area in relation to consumer credit, with so many products and players operating online and in many different ways and advertising on television. Is there a more sensible and straightforward way of dealing with some of the questions that will arise in the context of Northern Ireland or with some of the activities that may or may not relate to Northern Ireland? Will the Minister indicate where in the OFT’s discussions, in the planning on the part of the FCA, and those who will be undertaking that, and in meetings between the Treasury and the Northern Ireland Executive, particularly in the Department for Enterprise, Trade and Investment, these considerations have been factored in and are the subject of any ongoing planning?
Mr Hoban: The clause facilitates the transfer of consumer credit activities currently regulated by the OFT to the FCA. Let me respond to a couple of points. Over the coming months, the Government will work with the FCA, the OFT and industry and consumer representatives to design a model of FCA regulation that reflects particular characteristics of the consumer credit market and remains proportionate to the different segments of the market. Once that model has been designed, the detailed provisions for the transfer will be subject to impact assessment and approval through the affirmative procedure by both Houses of Parliament. In the meantime, the OFT remains responsible for regulating consumer credit and will continue, as I said earlier, to tackle the current practices that have caused concern to drive up standards in the market.
The exact timetable for the transfer will be subject to the passage of the Bill and the wider changes to the consumer and competition landscape. The amount of resources that the FCA devotes to consumer credit will depend on the nature of the regime. I expect the FCA to be able to raise the fees necessary to cover the additional cost that it will incur.
Of the regulatory firms that could come within the remit of the FCA—a point that the hon. Member for Nottingham East made—80,000 are licence holders at the moment. The precise number to be transferred will depend on the nature of the model chosen. For example, if the appointed representative model is chosen, that will make a big difference to the number of authorised persons. The hon. Gentleman raised the issue of credit repair companies. Clause 6 enables a full transfer of customer credit activities to the FCA, and we plan to bring credit repair companies within the scope of the Bill.
My hon. Friend the Member for Solihull mentioned claims management companies. We need to remember that claims management companies are not financial services businesses. Some of the claims that they deal with relate to financial services, but not entirely. Given that the Ministry of Justice has undertaken a review of claims management companies and their regulation, and is introducing measures to deal with that, it is appropriate to let those measures run their course rather than create more disruption in the industry and move across to the FCA.
The hon. Member for Foyle raised the point about how the measure would apply in Northern Ireland. I will come back to him on that. The correct principle is to ensure that people living in Northern Ireland have the same protections as those living in the rest of the United Kingdom. That is exactly why, for example, Northern Ireland credit unions are being brought within the scope of FSMA. Depositors with the credit unions did not have those protections. Indeed, they did not have some of the opportunities. That is the general principle, but we will come back to him on the detail.
Chris Leslie: Schedule 2 to FSMA 2000 relates to regulated activities. The two changes involve order-making powers and parliamentary control. There are two parts to the clause. One part changes the language in the FSMA provision to relate to the new regulators being put in place. The other relates to parliamentary control. There are new arrangements, particularly relating to the affirmative order-making process. Although the affirmative process makes sense, the Minister will know that we would prefer the Government to table draft orders. We would prefer an enhanced affirmative order process, which would give the House and its Committees a proper opportunity to scrutinise the serious issues involved.
We are talking about provisions that will transfer areas of business and activity that are outside regulatory parameters to the auspices of the FCA or the PRA. As such, it is quite a serious matter that probably merits more than the typical hour and a half rubber-stamping discussion and vote that we tend to get in an affirmative process. It is the sort of thing that, naturally, the Treasury Committee might want to talk about. I think we should establish a financial policy scrutiny committee in the House for proper and rigorous scrutiny.
To get a sense of what we are talking about here, it would be helpful if the Minster could tell us what areas of financial activity will remain outside the scope of the FCA and the PRA. We need to get a sense of what that is to understand what might have to be suddenly transferred to the regulatory ambit, especially under the reasons of urgency elements in the clause. It is understandable that, from time to time, if there are urgent crisis scenarios,
There is a separate issue of co-ordination. How can the Minister be assured that the two regulators will co-ordinate adequately to prevent any confusion in such circumstances? What exact additional powers will be associated with that extra regulatory activity? I want to have a sense of what those issues are. For example, the lead story on the front page of today’s Financial Times is about the LIBOR process; a very interesting story about billions and billions of pounds of trades that are subject to the LIBOR rating. The Financial Times, when considering the regulatory perimeter of particular organisations, raised a question mark about whether the LIBOR process might need to be subject to regulatory activity. I appreciate that there is a process—the British Bankers Association currently oversees the LIBOR arrangements—but it is interesting that that subject has been raised. The Treasury made a prosaic comment on the story. It is a classic example of an area that currently does not fall within the regulatory perimeter, but might need to do so.
I would be grateful if the Minister gave us a sense of what is happening with that particular example, which in many ways typifies where we are on some of these clause 6, 7 and 8 issues about regulated activities—they are very important. Many people who currently do not have to deal with the regulators might suddenly find that they need to deal with them. That might be a perfectly good and reasonable thing, but I would like to have a sense of how frequently the Minister envisages this sort of thing happening, and whether we might be in the midst of a similar issue in relation to LIBOR.
Mr Hoban: Clause 7 is relatively straightforward. It amends paragraph 26 of schedule 2 to FSMA, which relates to the parliamentary control orders made under section 22 of FSMA. Such orders set out the scope of activity of a regulator under FSMA and are known as the regulated activities order. Clause 7 provides that where an order extends the scope of regulation, it must be subject to approval by both Houses before being made. In urgent cases, such an order may be subject to affirmative resolution by the 28-day procedure.
The hon. Member for Nottingham East said that we probably need more than the hour and a half allowed for a normal statutory instrument Committee to discuss amendments to the regulated activity order. I have been doing my job in government and in opposition since December 2005. I cannot recollect a time when we even tested that limit.
It is important to show that, where there is a change to the regulatory perimeter, there is consultation. I remember when the shadow Chancellor was the City Minister. At that time, he talked about light-touch regulation. He did not believe that light-touch regulation applied to travel insurance, and brought that within the regulatory perimeter. Of course, that was subject to quite a full consultation prior to the regulatory activities order being amended in this House. There is a process; it is not done overnight. It is not something that is usually
Chris Leslie: I might have missed the Minister’s point, but I asked him about the LIBOR situation mentioned in today’s Financial Times. Does the Treasury have a view on that story? I would be happy to give way to him if he has a view on it.
Chris Leslie: The Minister does not have a view on that. That makes me worry slightly about what is happening. I hope that some inspiration could strike in time for the clause 8 stand part debate. That also talks specifically about the regulatory perimeter of the Prudential Regulation Authority, which is probably quite appropriate in relation to the LIBOR arrangement. I will ask the Minister again when we get to clause 8.
I understand the need for these provisions. We tested the issue about the super affirmative process previously, and the Minister was pretty implacable on that. Let us hope that in another place or on Report we get a chance to push that point again. I shall not labour the point; I have made the arguments that I want to make; I will not oppose clause 7 standing part of the Bill.
Chris Leslie: Several issues need to be raised in relation to clause 8, in particular, those that came up in the pre-legislative scrutiny Committee report. We are, of course, the servants of the House in that we have a duty to raise with the Minister that set of issues that the pre-legislative scrutiny Committee touched on. One such important recommendation related to whether the regulatory perimeter of the PRA, as set out in the Bill, would properly capture the sort of issues that have been very much in the public domain during the past six months.
The Minister will be familiar with the PLS Committee recommendation in respect of the significant failure of the American brokerage firm, MF Global, which was a large, complex and in many ways controversial organisation involved in repurchase agreements, called repos. It used to fund and leverage various arrangements for profitability, often in circumstances of off-balance sheet arrangements. Some of those complex repos have been described as a wrong-way trade, where the firm was too frequently making its own bets on the bond markets of some of Europe’s most indebted countries.
There were liquidity problems at the firm. The sudden disappearance of so much liquidity in those circumstances caused a major headache and the failure of that company. The PLS Committee had concerns—if that arrangement had happened in the UK, with a parallel company undertaking similar arrangements to MF Global—about whether such repo market agreements would be subject to the PRA’s regulatory perimeter. The Government responded at the time by saying that they would consider whether they need to include issues around the rehypothecation of client assets, but did not see the need to make changes in the Bill. I would be grateful if the Minister said whether the regulatory activity orders should include repurchase agreements markets, and whether that ought to be captured by the PRA’s regulatory powers. If not, why not? It is a pertinent point and I would be grateful if the Minister addressed it. I also hope that he will have reflected on the LIBOR situation and whether it should fall within the regulatory perimeter of the PRA. It is a simple question—yes or no?
Mark Durkan: I referred to the clause earlier during the stand part debate on clause 6, and as the hon. Gentleman said, some of the issues surrounding it are not entirely removed from some of the considerations that also apply to clause 7.
I hope that the Minister will colour in the provisions in the clause a little more. I do not doubt the need for legislation that provides for changing business models, new or rotating products, or different practices or patterns that might emerge and need to be addressed. However, given some of the issues with other clauses, and given that we have said that the Bill is not complete and may give rise to gaps, tensions or difficulties in future, we clearly need to provide for supplementary regulation to amplify or clarify provisions in a given situation.
Some in the industry are concerned that clause 8 gives fairly wide powers to the Treasury—the powers that it can confer in the future either on itself or on the regulators. As it stands, the clause does not even intimate the sorts of situations or reasons that might give rise to the exercise of such powers.
In a sense, the Minister is trying to ensure that he has some sort of bat belt available to deal with unforeseen or peculiar circumstances that perhaps cannot be specified or anticipated at this stage of the legislation. He is therefore right to give himself or the Treasury powers to deal with any issues that may arise, either for the Treasury or for the regulators. However, the current drafting of the clause seems to contain no limit or qualification on the activation or introduction of those powers, and that gives rise to questions about the possible impulsive, arbitrary or capricious use of such powers. Indeed, could there be the threat that such powers might be used? Such a threat could come either from the Treasury
There are questions about the full import of clause 8. I tabled an amendment—albeit a starred amendment—and although it would not have specifically constrained the Treasury, it would at least have indicated some of the considerations or situations that might give rise to the use of the powers, showing that the clause is about dealing with issues that could not be anticipated at this legislative stage and would tackle matters to do with changing products, practices or business patterns that could give rise to various risks, be they competitive, systemic or directly to consumers.
It would be useful if the Minister coloured in some of the possible circumstances that might give rise to the use of the powers. I should particularly like him to say whether clause 8 powers would be used in dealing with prudential regulation by the PRA, but as we know, the powers are not confined to those that might be exercised by the PRA. Does the Minister have it in mind that powers under the clause might need to be used if issues relating to the possible conglomeration of retail financial services and other retail services arise in future?
Many practitioners and others are concerned and saying, “We know that the Vickers report is saying that there needs to be clear separation of retail banking and investment banking and there always needs to be such ring-fencing”, but many are saying, “What’s going to happen in relation to retail banking by, say, a company such as Tesco”, which has plans to expand heavily at the retail banking end and is going all-out with a bank on its own, unlike some other high street names that we know, which, although they issue cards and offer financial services, essentially do so on behalf of other institutions that would be duly regulated.
The issues to do with conglomeration would arise in terms of those who would be in a position, with their dominance on the high street retail market, to move more aggressively and actively into the retail banking market. There would be questions about conglomeration in that regard and about whether there needed to be a differential and ring-fencing. Many hon. Members seem to have tabled early-day motions and whatnot and got exercised about how Google’s use of information in one part of its business supports another part. A company such as Tesco is in a position to know exactly what its customers are buying. It knows what bank and credit cards its customers use, and has a lot of information. How far can it use information and intelligence from its supermarket business to advance its profile and market share in relation to its interest in retail banking?
There will be issues of scale and tipping points can be reached. We want competition and more players coming in, but as with the grocery market, the House is seized with questions about proportionality and sustainability. The same could apply when some major retail providers flex their muscles and exercise themselves in financial services.
We should like to know whether the Minister anticipates any future issues arising in this regard or in respect of another provision. We do not know what those will be,
Mr Hoban: Clause 8 relates to the scope of regulation by the PRA. It creates a new order-making power for the Treasury to specify which of the regulated activities are subject to prudential regulation by the PRA. Such regulated activities are referred to as “PRA-regulated activities” for the purposes of FSMA. The Treasury has published a draft order under proposed new section 22A confirming its intention that the PRA will be responsible for the prudential regulation of deposit takers—if Tesco is a deposit taker, it will be regulated by the PRA on prudential grounds—insurers and some investment banks as designated by the PRA with reference to the criteria set out in the order.
Proposed new section 22B states that the first order made under proposed new section 22A should be subject to the affirmative procedure, as should subsequent orders, which include a statement by the Treasury that the effect of the order is to vary the scope of PRA regulation by either expanding or reducing the range of regulated activities that are subject to prudential regulation. Proposed new section 22B also provides for the use of the 28-day affirmative procedure where the Treasury notifies that there is an urgent need to make the order without prior parliamentary approval.
Let me try to deal with the issue that the hon. Member for Foyle raised. Financial services markets have changed and will continue to change regularly. The nature of the regulated businesses changes. One of the weaknesses of the previous regime was its lack of a mechanism for identifying those changes and the right response to them, so one of the roles we have given the FPC is to horizon scan. It will look not only at the threats to financial stability but at the horizon, to see whether any businesses currently outside the scope of regulation should be regulated and what we need to do to bring them inside the scope of regulation.
That really relates to clause 7, which was more about the perimeter of regulation through the amendment to the regulated activities order. Clause 8 comes into play when a business that is prudentially regulated by the FCA changes its nature so that it clearly puts its balance sheet at risk in pursuit of its business, in the way a bank or insurance company would; perhaps it should then fall within the PRA for prudential regulation. Rather than assuming that the division between what is regulated and not regulated—or the division between the PRA and the FCA—is set in stone, clauses 7 and 8 provide a mechanism for changing the perimeters and the boundaries.
That brings me neatly to MF Global, which the Joint Committee raised. We have touched on the debate about shadow banking before, and we need to understand the issues that arise from the failure of MF Global. The Government, the Bank and the FSA will continue to work in that area. There is a role for the interim FPC, which has a mandate to advise the Government on perimeter issues. As hon. Members will know, no changes
The hon. Member for Nottingham East raised the issue of LIBOR and whether it was a regulated activity. The FSA and other national authorities are investigating LIBOR, which is also being examined by EU anti-trust regulators. The setting of LIBOR is not a regulated activity under FSMA, but the methods used to calculate it are publicly available, as are the data made available to it by various contributors, and the process is regularly reviewed by market participants.
The hon. Member for Nottingham East needs to think about the division between the FCA and the PRA, which will look at the safety and standards of mutual institutions, particularly banks, insurers and certain investment firms. LIBOR is more akin to a product, and is potentially more about a conduct than a prudential issue. As he will recollect from our debates on clause 5, one objective of the FCA that we barely touched on, although it is a key one, is market integrity, which includes the smooth functioning of wholesale markets. I do not want to pre-empt any review, but we should bear in mind—
Mr Hoban: I will, as I know the hon. Gentleman is desperate to crack on and make progress, but we should bear in mind the distinction between the roles of the regulators, and market function comes under the role of the FCA.
Chris Leslie: I am grateful to the Minister for his open thought process on LIBOR, which is a timely one. We are creating two separate regulators, but the assumption that things fit neatly into either a prudential or a conduct box will be tested by the report about LIBOR. It might very well be considered as a conduct issue but, given the multiple trillions of pounds and dollars that are under its auspices, it could also be seen as a systemic question. I can see the Minister’s anxieties about where the subject falls but, if there is a review, will he write to members of the Committee as soon as the Treasury has reached any conclusion, because that matter is relevant to the Bill?
Mr Hoban: A whole host of issues arise almost every day in the Financial Times that provide such a challenge—every day, market issues emerge that require compartmentalisation or pigeonholing—but if any advances are made about which I should advise the Committee, I will happily do so. The clause is about defining the regulatory perimeter of the PRA, and it will strengthen parliamentary approval of that process. If such parliamentary approval flows from our new regulatory structure, I hope the Committee will support it.
Mark Durkan: The Minister has repeated the point that the clause is about the regulatory perimeter of the PRA, but it will also confer powers on the Treasury or either regulator, and the impact of those powers is not confined to the PRA and its activities.
Mr Hoban: If I give a wrong answer, I am sure that I will be corrected. Effectively, if something is brought within the PRA boundary, powers will be conferred on the Treasury in consequence of some companies being regulated by the PRA.
Mr Hoban: No, I am only saying that, by virtue of coming within the PRA’s boundary, the Treasury may have powers conferred on it that arise from a company being regulated by the PRA. No new powers are being envisaged, but existing powers would be extended to new prudentially regulated activities.
Those are sweeping powers. The clause also refers to orders to “provide for exceptions”, which, as I understand from the Minister, would need to be made in changing situations. But the powers do seem to be wider than the Minister says.
Mr Hoban: I will allay the hon. Gentleman’s concerns, perhaps with a short note. Inevitably, when something is brought within the regulatory perimeter of the PRA, there may be situations where consequential amendments are required. I do not see this as a Henry VIII clause, and it if was I think that people would have picked up on it rather sooner. It is all about consequential amendments. I will perhaps just pause for a second—I think that what I have said is correct.
‘(1A) An order under subsection (1) is not to be made unless a draft of the order has been laid before and approved by resolution of both Houses of Parliament.’.
Government Members may want to hear what I have to say and see how long I speak before I get that sort of accolade. I hope that I will start off with something that is relatively brief in moving amendment 141. As people will be aware if they have read it in detail—as, of course, they will have—
Mr Hoban: I am afraid that the hon. Lady has been given a hospital pass by her hon. Friends, because this provision is already in proposed new section 55C of FSMA 2000, so she does not need to move the amendment.
Cathy Jamieson: I thank the Minister for the clarification; it was very helpful of him to do that right at the beginning. I am sure that he is as keen to make progress as I am. However, I just want to make a couple of points about the reasons why we tabled the amendment and then I am sure that he will give us the assurances about where the measure is located in the Bill and why it has been put there, because this is about parliamentary accountability.
Of course, the power for the Treasury to amend, repeal or vary the threshold conditions under schedule 6 to FSMA 2000 already exists without an affirmative resolution. We felt that it was important that we had the opportunity to revisit that in the context of the Bill. In particular, that was to ensure that, in the interests of transparency and accountability, at every stage, the Treasury or Government were indeed able to put as much information as possible before Parliament.
Having heard what the Minister has had to say, I must say that our reasons for tabling the amendment concerned the frequency and circumstances that were envisaged about potentially significant changes that, at present, Ministers would perhaps want to reserve for themselves. What can the Minister say about that in terms of the amendment or of the issue that he says is covered in the Bill? Also, in general terms—we have discussed this issue several times during our consideration of the Bill—does he agree that Parliament should have the power of scrutiny and accountability over such important aspects of legislation? When it comes to anything concerned with financial services, the public want to see at this point in time that everything that we are doing has the maximum possible scrutiny, even to the extent of perhaps going through the Bill not only line by line but sometimes word by word to ensure that we absolutely have everything correct.
So it is tucked away in the Bill and the hon. Lady will see that, in the desire of this Government to enhance parliamentary accountability, there are a number of new measures that are subject to the affirmative procedure, so we will spend more time in Committee, which is surely to the benefit of democracy as a whole.
‘(3) In considering how much weight (if any) to attach to the opinion the UK regulator must have regard to—
(a) the nature and scope of the supervision exercised in relation to the non-EEA firm by the overseas regulator; and
(b) decisions previously made by EU regulatory authorities regarding the overseas regulator.’.
I note that the accolade was rather more muted that time. Perhaps hon. Members are aware that I have slightly more to say on this amendment than on the previous one. The amendment would omit proposed new section 55D(3) and replace it with a provision that contains an additional requirement for the UK regulator to have regard to decisions made before by EU regulatory authorities regarding the overseas regulator. We are concerned that the regulatory environment varies widely across jurisdictions and I have been given examples of such variations.
Angola has a single regulator, the national bank of Angola. Its regulatory environment standards and procedures will probably be very different from those of Australia, for example, where regulation is enforced primarily by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority. Angola’s standards and procedures will also be very different from those in the Chinese system, which is regulated by four main bodies: the China Securities Regulatory Commission; the China Banking Regulatory Commission; the China Insurance Regulatory Commission; and the People’s Bank of China.
I want the Minister to tell us how all that will be taken into account when regulators consider information received from overseas regulators. How will they decide what is an equivalent standard? What tests will they introduce? What consultation will they undertake and with whom? How will they come to their decisions? Will there be guidance on which bodies qualify as overseas regulators? For example, must such regulators be bodies that deal with the equivalent of both business conduct and prudential matters? Are there any plans to change the FSA handbook’s definition of an overseas regulator? I will not succumb to the temptation to read out in detail everything that is in the FSA handbook, but if I wanted to be awkward or to prolong the debate, I might be tempted to discuss some of those issues and the differences between the various bodies. However, I will restrict my remarks and ask the Minister to respond to my questions. This is important. We have to understand whether there will be equivalence and, if so, how will it be decided? Who will make that decision? How will it be communicated to the public and, in particular, the consumers of the various services that will be on offer? I shall give the Minister the opportunity to respond.
Mr Hoban: Our shout of acclamation when the hon. Lady spoke about the previous amendment was to welcome her finding her voice after almost five days of silence in Committee. We are delighted that the baton has been passed to her from the hon. Member for Nottingham East.
Proposed new section 55D provides that the FCA and the PRA will attach an appropriate level of weight to the opinion of an overseas regulator of a non-EEA firm when assessing an application from such a firm. Clearly, it is important for the PRA and FCA to consider the nature of that regulator and its effectiveness and reach their own conclusions. The PRA and FCA, in assessing a non-EEA firm, will consider the firm and how the regulator has assessed it, but will also consider how the overseas regulator has supervised the firm and the regulator’s opinion of the firm in that context. It is important that the FCA and PRA reach their own decisions about the firm; that is what the Bill provides for.
The PRA and FCA will be familiar with the strengths and weaknesses of different overseas regulators, which will help them gauge the degree of reliance to place on the views of that regulator about the applicant firm. Clearly, the reaction of other EU regulators to the overseas regulator might be helpful in that regard. There is nothing to prevent the FCA or PRA from considering what other EU regulators have said about the overseas regulator. However, it is for the FCA and PRA to reach their conclusions about how much weight to place on the opinion of the overseas regulator, rather than being guided or required to follow the judgment of other EU regulators, which would be the consequence of paragraph (b) of the amendment.
Cathy Jamieson: Particularly in relation to how much weight, if any, to attach to the opinion of the UK regulator, people might be concerned if matters were simply dismissed and no weight at all were given. I am seeking some assurance that a process is in place to consider it and that it will be properly decided on, rather than considered cursorily before a decision to take no account whatever.
Mr Hoban: Such decisions are carefully thought through. The FCA and PRA will consider not just the applicant firm but the overseas regulator. My concern with the amendment is that it would require the PRA and FCA to have regard to decisions made by other EU regulatory authorities. The FCA and PRA may not agree with those regulatory decisions, which might have been made in different circumstances. There is a danger in binding or requiring the FCA and PRA to place unmerited weight on the opinion of an overseas regulator simply because a different EU regulator has done so. It could lead to significant adverse effects on UK consumers and depositors.
It is important that a proper process is in place. The PRA and FCA should make up their own minds about what they think of the overseas regulator’s views and should have the freedom to do so. Although they can take into account the views of other EU regulators, they should not feel bound in any sense to place undue weight on those opinions.
The Minister mentioned that decisions might have been made in different circumstances, or that the regulatory authorities here might not agree with what went previously, but I would have thought that it was none the less important to make a conscious effort to consider those decisions, decide either to agree or not agree with them and have reasons for that. That is all that we are seeking in the amendment. We were being somewhat but not entirely facetious. I asked about the different regulatory environments and how we decide which ones are equivalent. That is important in the context of how the process is put in place.
I am disappointed that the Minister has given no indication of anything else, such as guidance that might be issued or anything that can be done in support; I am simply to leave any oversight to the authorities themselves. That appears to be what he is saying. If that is the view, I will press the amendment to a vote. At times when discussing the amendments, the Minister and Government Members might at least have looked as though they were taking some account of the real issues being raised and given some assurances that they would look again, perhaps coming back at a later date with further information or changes to the Bill. Surely that is what we are here to do––improve the Bill, not simply have the Government get absolutely everything through unchanged. Having been a Minister in another Parliament, I understand that that often seems to be the task when setting out, but it is important to listen to the Committee. Given that, I will press the amendment to a vote.
Cathy Jamieson: I want to make a few points about the clause, which covers a wide range of issues. Once again, some of the concerns about the Bill generally are highlighted, such as on co-ordination between the PRA and the FCA and how that will work in practice. One concern is whether we have enough clarity on the application process for firms, and whether it is easy enough. If the
A number of the procedures in the clause are obviously mechanical and technical, but there are some concerns about the draft memorandum of understanding between the PRA and the FCA, which have been rehearsed in earlier debates. There are three brief paragraphs on how applications will work, but the memorandum of understanding provides little clarity for dual-regulated firms on how the process will work in practice. As for practical matters, it might seem to us, who will not have to go through the process, that it is easy enough to write the procedures or to have something in the memorandum of understanding and say that the rest will be clarified in due course. However, for firms that have to go through the process, questions about the applications, how they will be co-ordinated between the regulators, how they will significantly influence functions, how interviews will be carried out and so on are unaddressed so far under the MOU.
There are also concerns about the PRA and the FCA having separate rule books. Where will firms look to receive the clarity that they will require to understand how the process works? Worries have also been expressed about whether the memorandum of understanding is indeed the right place to put the co-ordination of matters between the PRA and the FCA, especially as people have described them as being vague. Perhaps more detailed provisions under a statutory order with oversight from the Treasury would have been more appropriate to make sure that the process works in practice.
I want to express a brief worry about the statutory deadlines to determine applications because they remain unchanged at six months for a complete application and 12 months for an incomplete application. There is concern about a more cumbersome process and whether the regulators will be able to achieve that timescale. I look forward to hearing the Minister’s response to my comments.
Mr Hoban: The hon. Lady asked some detailed questions about clause 9. As she knows, it provides for the regulator’s powers and responsibilities relating to the giving of permission to carry on regulated activities. The Government recognise that, while the legislative framework is crucial, much will depend on the operational delivery of regulation by the PRA and the FCA. Respondents to early consultations highlighted the importance of an efficient authorisation process for maintaining an innovative, competitive and efficient financial sector, and overwhelmingly expressed a preference for an approach in which one of the regulators has responsibility for processing applications and for seeking consent from the other when appropriate.
The alternative of a twin-track process for applications under which an application has to be submitted to each regulator was considered potentially unclear and burdensome. The clause therefore provides for an efficient authorisation process, while delivering a clear role for each regulator, and transparency and certainty for applicants. The clause will replace part 4 of FSMA with proposed new part 4A. Proposed new section 55A specifies that the regulator responsible for prudential regulation of the applicant will manage the application
The hon. Lady asked whether there should be changes in the statutory deadline process. We are keen to ensure that the process of application is not unduly delayed, particularly given the emphasis that we are placing on competition under the Bill. One of the ways of improving competition is by new people coming into the market, so extending the deadline for the application process might delay the entry of new entrants. A dual-regulator firm requires the PRA and the FCA to work closely together on the operational procedures to achieve that result.
The hon. Lady talked about the interviews for individuals and their influence function. Clearly, there are detailed provisions in that respect and who will take responsibility again depends on the nature of the function and who is the regulator. Clarity is important. We talked earlier about the need to ensure that the process, when there are two regulators, works efficiently and effectively not only in the interests of the regulator, but of consumers. I hope that I have dealt with the issues raised by the hon. Lady. If I have missed one, I shall come back to her.
Cathy Jamieson: I thank the Minister for that. Our concerns relate to the practical application of the procedures. I am happy to hear him talk more about some of that. There are still concerns around the statutory deadlines and whether problems will emerge with them, but I hear what he is saying about the need to move on with those. I retain some concerns about the use of the memorandum of understanding. These things, as I indicated earlier, always look as if they are sensible and helpful when they are on bits of paper, but the real test will be on how they work in practice. The dual-regulated firms are still concerned about how that will take place practically. In light of the Minister’s comment at this stage, it would not be helpful to oppose the clause standing part of the Bill, so I will not press it to a vote.
‘(1B) In seeking to ensure an appropriate degree of protection for consumers, the PRA and FCA shall—
(a) require banks to provide clear and prominent warnings to consumers where deposits are not covered by the Financial Services Compensation Scheme; and
(b) make and maintain effective arrangements to consult consumers on the prominence and method of such warnings.’.
‘(14) The regulators shall bring forward recommendations within six months of Royal Assent of this Act applying the Financial Services Compensation Scheme by brand.’.
‘The Treasury shall bring forward regulations to ensure FSCS insured deposits are moved above other unsecured creditors and above floating charge holders in the creditor hierarchy in the event of insolvency or any imposition of losses in resolution.’.
“The PRA and the FCA should seek to ensure that the public understand when a banking group is not subject to UK prudential regulation. Where deposits are not covered by the Financial Services Compensation Scheme the regulators should require banks to make this clear with prominent warnings in branches and on websites. The regulators should work with consumer groups to plan how best to get this message heard and understood.”
In earlier debates, we heard about the issues around consumers and information being made available in a way and in a format such that they not only have access to it but are aware of its existence in the first place. They will then be able to understand the information in plain language—I was going to say plain English, but I will say plain language. Part of the problem, as always, with the language of legislation and of Bills is that it is not easily accessible for people and it therefore has to be translated.
In asking the Minister for his response, can he confirm—he referenced this earlier, but I ask him again—whether this will be a priority for the new regulators? In particular, raising awareness of the FSCS is on the front page of the consumer section of the SFA website. That is perhaps unsurprising, given the prominence of this issue in the recent financial turmoil, when thousands of savers found that their savings in, for example, the Icelandic banks were not covered. People are obviously looking for information.
In the annual FSA survey on the consumer awareness of the FSA and financial regulation, which was published in February, there was not a single mention of the FSCS. That indicates that it is not a real priority for the FSA to find whether consumers understand whether their money falls under a protection scheme. Will the FCA or the PRA fare any better on that?
Cathy Jamieson: I thank my hon. Friend for that question. It is perhaps a point that the Minister will come to. According to the FSA website, there are new proposals that every authorised bank, building society and credit union in the UK would have to display prominent stickers and posters in branches stating the deposit compensation scheme to which it belongs, the country in which the scheme operates and the compensation limit that customers may receive. A similar statement
If the regulators do not start to track awareness and do not have a baseline—again, I would be interested to hear from the Minister what that baseline will be—it will be difficult to know whether the campaign is working. By their very nature, we find out that such things are not working when they are not working, if that does not sound like a silly thing to say. It is when problems arise that people come along and say, “Well, actually, I didn’t know about it. I didn’t see that. I didn’t know where to look. Nobody told me.” So I realise the difficulties.
In reality, however, the PRA’s main power will be to make public its limited role in regulating such firms and to work with the FCA to ensure that consumers understand that deposits in passported banks are not covered by the FSCS. The PRA has said that, where it does not have much information
“A number of overseas banks now offer market-leading savings accounts to UK consumers. Surprisingly…it’s not the ones from far flung destinations, like India, Pakistan and Nigeria you need to worry about, it’s the ones from European.
If a bank is outside European Economic Area have to be fully registered with the FSA to offer savings here, which includes full protection under the FSCS. However, some European banks can operate a ‘passport’ scheme, which means they are regulated, but in the unlikely event of them collapsing, customers would have to claim from the compensation scheme running in the bank’s home country. All European protection schemes now offer the same level of compensation (euros 100,000) but customers may be less confident about speedy redress if they are dealing with an overseas quango, application forms in a foreign language and of course, a country that may itself have serious debt problems. When the Icelandic banking system collapsed it’s own citizens were not surprisingly first in the queue for payouts.”
Amendment 160 addresses depositor guarantees on savings brands. We believe it is important that the FSCS is applied on a per brand basis, rather than on a per institution basis. Consumer organisations, including Which?, support that move. The FSCS’s payout limit should apply to each company within the groups that own them. There are commercial benefits to marketing brand by brand. By branding in a certain way, people will expect the guarantee to follow the brand rather than the institution.
Currently, the way in which the protection applies depends on how a bank is licensed, which is a bureaucratic distinction. With some affiliated banks such as Halifax and the Bank of Scotland, both of which are owned by Lloyds Banking Group, the limit is divided between the companies; and with others, such as the Royal Bank of Scotland and NatWest, the limit applies to each company separately.
A scheme that provides assurances per brand would be simpler for consumers to understand and lead to better appreciation of the protections afforded to the
The issue is being debated in the European Parliament, which has approved per brand protection. I understand that that is now going to the European Council. Negotiations between the European Parliament, the European Commission and the European Council on the deposit guarantee scheme directive have stalled. We believe that that also needs to be kick-started.
This really only affects the UK so it has not necessarily been picked up or pushed by other nations. It is up to us now to decide whether to push the issue further in Europe. To be clear, unless the UK positively pushes for this change, there will not be any. Can the Minister clarify whether the Treasury is adopting a neutral approach to this or is it actively pursuing it? If the Government are pursuing the agenda, what efforts are being made? Our amendment would create what we have described as a domestic back-stop. It would give the regulator the opportunity to bring forward its own recommendations on the FSCS rather than waiting for Europe to act.
“bring forward regulations to ensure FSCS insured deposits are moved above other unsecured creditors and above floating charge holders in the creditor hierarchy in the event of insolvency on any imposition of losses in resolution.”
We support reform to the bankruptcy procedures so that depositors become a higher ranked creditor than senior unsecured credit—depositor preference—and so that the bond holders become exposed to the true credit risk of the bank that they are lending to.
Retail depositors are not well placed to evaluate the credit risk of the bank in which they place their deposits and therefore they are not able to provide the proper incentives to encourage bank management to control risk. We think it is also important to note that the costs of the FSCS levies are ultimately paid for by bank depositors as a whole or by taxpayers. This links to the recommendations in the Vickers report. The issue of depositor preferences was addressed in the ICB report when it stated:
This preference applies in insolvency, but any imposition of losses and resolutions should respect the creditor hierarchy so that insured deposits also rank ahead of other unsecured liabilities and those secured by a floating charge in resolution. In their response to the ICB report the Government said:
Again, can the Minister set out a time scale for how long this analysis and consultation will take? I would not want to be left with the impression that somehow this was being kicked into the long grass, so if we could get some clarity on that it would be helpful. Again, just to be helpful, there are international examples. Depositor preference is already in place in a number of jurisdictions around the world, including Australia, Argentina, China,
Mr Hoban: Let me talk about each of the amendments in turn. Amendment 143 would particularise to a considerable degree the powers the FCA and PRA would have in future to make rules for the financial services compensation scheme and would force them to use these powers. In practice I do not think it is necessary. First, the FSA already has these powers, which are continued in FSMA by the Bill. Both the FCA and the PRA will be able to exercise them where appropriate, including in relation to information about compensation given to depositors, payable by the FSCS.
Secondly, the FSA has used these powers to make rules on the subject and is currently consulting on further changes. The current rules already prescribe what information firms must give depositors where their deposits are protected by the FSCS and impose requirements about their frequency and method of communication with depositors. A firm must also disclose—this is relevant to amendment 160—where it operates under more than one trading name or brand and the effect that this has on the amount of compensation payable. We will touch on this a bit more on amendment 160, but it is important—notwithstanding the outcomes of debates in Europe—that where people are banking with individual brands, they understand that the compensation limit is shared across those brands, rather than having one limit per brand.
The FSA has been consulting since December last year on whether to impose additional disclosure requirements on firms to inform depositors about how deposits are protected, and the limits to deposit protection. Those proposals include requiring deposit takers to display prominently, in their branches and on their websites, standardised notices or stickers detailing deposit protection arrangements. European economic area deposit takers with branches in the UK will be required to produce their own equivalent material, including a mandatory statement that clearly identifies their deposit protection scheme and makes it clear that they do not participate in the Financial Services Compensation Scheme. There is nothing to stop consumers, or indeed, members of the Committee, from responding to that consultation. If they have not done so, however, it closes on 9 March.
I therefore say to the hon. Lady that the powers are in place. The FSA is using them, as the consultation demonstrates, but I agree with her that it is absolutely vital to ensure that people understand what they are covered for and who is covering them.
Amendment 160 brings back happy memories because, on 23 October 2008, during the Committee stage of the Banking Act 2009, we spent a happy morning and part of a happy afternoon discussing these issues, in a debate that I instigated. One issue covered was that addressed by the amendment—the requirement for the FSCS to pay compensation on a per brand basis, rather than on a per authorised institution basis.
Although the matter was debated in 2008, the hon. Lady rightly pointed out that it is currently subject to discussion during the recasting of the EU directive on
New clause 2, as the hon. Lady said, would impose a requirement on the Treasury to ensure that the holders of deposits protected by the FSCS were moved above other unsecured creditors and holders of floating charges in the event of the institution’s winding up. As she said, that was recommended by the Independent Commission on Banking, and of course, as retail depositors will have been compensated by the FSCS in such cases, in effect, the FSCS will have taken over their claims on the estate of the insolvent institution. In practical terms, the main beneficiary would be the FSCS, in the first instance, together with depositors protected by the FSCS who have deposits in their accounts above the deposit compensation limit.
As the FSCS is paid for by the industry itself, an effect of bringing in depositor preference should be to reduce the costs for the vast majority of financial services firms—including banks—that do not fail. It could also encourage other unsecured creditors, such as market counterparties, to keep a closer eye on the banks that they have dealings with.
The Government have outlined their support for depositor preference in our response to the ICB report that was published in December last year. We acknowledged, however, that further analysis and consultation is needed on the scope of depositor preference. That should cover issues such as whether all deposits should be preferred, or only all retail deposits, or only FSCS-covered deposits. That work is ongoing, and we plan to publish details of our approach to depositor preference and other parts of the ICB reform package in a White Paper due in the spring. We remain firmly committed to introducing legislation for all reforms that require it by the end of this Parliament. It is very much on our agenda, and we have acknowledged that we see it as an important part of the ICB’s recommendations. It is something that we need to work through in a bit more detail. I hope that reassures the hon. Lady that the recommendation will not be kicked in the long grass or ignored.
Cathy Jamieson: I thank the Minister for his response, and I am glad that something in the Committee’s proceedings has brought back happy memories for him. He has not looked very happy at various points during the proceedings, and if we managed to cheer him up we will have achieved something. The Minister said that amendment 143 was unnecessary, because the FSA not
Regarding amendment 160, it is important that we see some movement, especially in relation to branding. Consumers and consumer organisations are concerned to ensure that people understand what they are getting into with financial products. We are aware of the work that is being done in Europe, which the Minister referred to, but I was slightly surprised that he did not seem inclined to move ahead and do something now on a domestic basis rather than waiting for Europe to act. If I did not understand him correctly, I am willing to be corrected on that. I take it from the fact that he is shaking his head that he is waiting for Europe to act rather than taking the opportunity to do something domestically.
New clause 2 is important because the Government must move on the Vickers recommendations. We welcome the fact that the Minister has set out a time scale for bringing forward a White Paper, which gives us the opportunity to come back at a later date. I take his assurances that he has no intention of kicking anything into the long grass, and I welcome his commitment to doing something about the matter rather than delaying or dithering. I look forward to the White Paper with interest, and I beg to ask leave to withdraw the amendment.
‘(1C) The PRA shall provide regular reports to Parliament on its duty to co-ordinate with international regulators.’.
Amendment 144 links to similar comments that I have made in relation to other clauses, and we were moved to table it by the suggestions of the pre-legislative scrutiny Committee. We appreciate that the Government noted the recommendation of the joint committee:
We note that appropriate amendments have been made to the Bill. To maintain consistency with the rest of the Bill we have tabled this amendment, which seeks to ensure that regular reports on passporting are provided to Parliament. Again, if we go back to the pre-legislative scrutiny Committee report, paragraph 181 says:
“There is a further way that the PRA’s powers will be limited in respect of firms operating in the UK and the EEA. The Bank of England and FSA state that the establishment of the new European Supervisory Authorities and the European Banking Authority ‘provides an opportunity for the PRA to influence further the supervision of incoming EEA branches’.”
If we accept that that is the case, paragraph 305 sets out how it hopes that the UK regulators will maximise their influence at a European level. The report does point out, however, that the European supervisory authorities will also have powers to direct the PRA and the FCA to act in certain circumstances. For example, the European supervisory authorities will be able to direct the PRA and the FCA if there is a disagreement between two of the EEA regulators in respect of a firm operating in different countries. For example, if the UK and the German regulators disagreed about the requirement that should apply to a bank headquartered in Germany but passported here, or a bank headquartered here but
The PRA will be under a duty to co-ordinate with international regulators and that is an immensely important duty given the international dimension of many of the firms, the failure of which could impact on the stability of the UK financial system. In order that the PRA can effectively be held to account for its duty to co-ordinate with international regulators, we would like to see a further duty to report on its work in this particular area. Again, I would welcome a response from the Minister as to whether he believes that this is an appropriate thing to do, and if so how he intends to take this forward.
Mr Hoban: It is vital that the PRA and the FCA co-operate with international regulators; it is a key part of the job, as we have talked about before. As I indicated in the Command Paper that we published alongside this Bill, we have identified who the interlocutor assessor would be for the two new regulators in the European architecture. I expect that the PRA and the FCA would be as engaged, if not more so, than the FSA currently is with the three European supervisory authorities. The ESAs play an important role in ensuring that there is a common standard of supervision across Europe. They will deal with issues of dispute on the interpretation of detailed European rules, which is important. We saw the EBA in action this year and last year in the context of the European banking crisis. It tried to find some structure around stress testing. It is important that the PRA and the FCA should report on their work to a wider public. As the hon. Lady said, it was a recommendation of the Joint Committee that the PRA should report on its work and engage with international regulators. The Government agreed with that regulation and it has included provision in the Bill that the PRA should include such a report as part of its annual report and the FCA will also be under the same duty.
I draw the hon. Lady’s attention to paragraph 18(1) of proposed new schedule 1ZB and paragraph 10(1) of proposed new schedule 1ZA, which put those requirements into statute. I do not believe that there is a requirement for a separate report to be made to Parliament. There is a requirement under the Bill for the annual reports of the PRA and the FCA to be laid before Parliament anyway.
Cathy Jamieson: I seek clarity from the Minister, because the amendment is essentially trying to ensure that regular reports are provided on the specific duty to co-ordinate with international regulators. Is the Minister satisfied that that will be covered in the annual reports laid before Parliament? If any issues emerge in advance of the annual reports, how will they be reported to Parliament?
My experience is that, because the Treasury is also engaged in a number of these processes and because so much of it is in the public domain, we do not need to wait for an annual report to find that there is a problem. If there was a failure of the relationship between the PRA and the FCA and international bodies, the Treasury would certainly know about it pretty quickly. It would be apparent to the industry and would be a cause for concern. As part of its regular scrutiny of the PRA and the FCA, it is open to the Treasury Committee—we have two of its distinguished members on the Government Benches today—to ask such questions, so the annual report will not necessarily be the sole source of knowledge. I hope that that reassures the hon. Lady and that she is happy to withdraw her amendment.
Cathy Jamieson: I thank the Minister for making clear what can and will be reported to Parliament. At any suggestion of problems, it is important that not just the Treasury knows about it, but that something is actually done about it, that the various people who are required to put in place any action plans can get that moving, and that Parliament is kept fully updated. I heard what the Minister said about the annual reports, and I accept that that would cover this particular issue. I have some faith that members of the Treasury Committee will ask the pertinent questions, but I do not know whether they will follow that through to vote for particular recommendations; do not tempt me down the route of one thing happening in a Select Committee and something else happening in relation to the Bill. To be serious, I have every faith in the Treasury Committee’s ability to probe, to ask questions, to hold Ministers to account, and to ensure that issues are reported. With those comments, I beg to ask leave to withdraw the amendment.
Cathy Jamieson: I need to jump up more quickly. I sometimes feel that I am still getting used to having to catch the eye of the Chair. In my former career in another Parliament, most things were done through the pressing of a button—[Hon. Members: “Terrible.”] It is terrible even to talk of such things in this place. It certainly did not mean that I was always called to speak, but it was somewhat easier than remembering to stand up, so I apologise, Mr Howarth.
I want to comment on clause 10. It is important that we debate passporting and treaty rights, address overseas regulators and get clarity about which regulators will be making consent notifications. It is also important to press the Minister on what he intends to do about
The Minister also gave some information regarding procedures and processes that have been put in place to ensure that the FCA and the PRA will have time to consult and liaise with each other. However, I still have some concerns about the ability to meet the required statutory time frame as set out in EU directives. A whole range of them are relevant in this particular case. I will not go through them all, as I am sure the Minister is absolutely aware of everything, from the markets in financial instruments directive right through to the electronic money directive for approving passport applications, which we have also discussed.
I want to raise one point, and again, the Minister may just want to make some final comment on it. Where the authorised person is a PRA-authorised person, the appropriate regulator is the PRA, but in other cases, the appropriate regulator is the FCA. Where an incoming firm is a PRA-authorised person, both the PRA and the FCA may exercise powers of intervention, and in other cases, only the FCA may exercise those powers.
As we discussed earlier, the FCA must consult the PRA before exercising its powers of intervention in relation to a PRA-authorised person or a member of a group that includes a PRA-authorised person. The PRA must consult the FCA before exercising its powers of intervention in all cases. I am sure that that is as clear to every member of the public as it is to all of us. I say these things simply because it is vital that when firms are passporting into the UK, most of the matters that might be of concern to the UK regulators have to do with the conduct of business rather than prudential issues, because the host state regulator remains responsible for prudential matters. I hope that the Minister agrees that the process needs to be made as straightforward as possible. It needs to be made less confusing and more efficient by giving the FCA the obligation to deal with all passporting matters.
We are not just trying to ensure that the Bill works in practice and provides safeguards for consumers, but to have open and transparent procedures and processes, so that the general public will be able to understand what is happening, whom to go to and where different authorities would intervene when problems arise. That is important, which is why I have raised the issues.
Mr Hoban: The hon. Lady has raised important issues. One of the benefits of the European Union is the ability for firms authorised in one member state to do business in another through the passporting arrangements. It is vital to have clarity about the responsibilities of different aspects of the regulatory structure and to ensure that we know precisely what is happening, given the varying nature of firms.
Regarding the draft memorandum of understanding on co-operation, we have sought to look at passporting in subsection (3), so that we are clear. In situations where an institution passports inward via the banking consolidation and insurance directives, the PRA will be the lead regulator and the FCA may make representations.
To be clear, the FCA will supervise the market conduct and consumer protection elements of any incoming firm’s business. The PRA will scrutinise the safety and soundness of the incoming firms that would normally qualify for PRA regulation, but working closely with the home state supervisor so that they can co-ordinate action when the activities of passporting firms cause a financial stability risk. The reality, as I think the hon. Lady indicated, is that the most prudential regulation of an inward passporting firm rests with the home state, except for the setting of liquidity standards. I think the boundaries are clear.
The hon. Lady referred to the powers of intervention, which are exercisable only when the home regulator has failed to act. One would expect such interventions to be very rare indeed, but it is right that when there is an intervention that might have a prudential impact, the PRA is involved, and that is the point of the consultation.
Mr Hoban: It is almost so rare that I cannot envisage one immediately, but it might be when the PRA believes that there is a threat to financial stability and the home state has not acted. One role of the European Supervisory Authorities, which I alluded to earlier, is consistency supervision, so that should tackle that problem.
‘(8A) In the event of a prohibition order being made, the FCA or PRA shall—
(a) publish an explanatory statement regarding the decision; and
(b) include the individual on an updated list of those subject to prohibition orders to be presented on HM Treasury website.’.
Cathy Jamieson: I hope to be fairly brief, with one eye on the clock. The amendment highlights the importance of transparency and accessibility of information so that it is disclosed and made transparent. That is why we propose to add new subsection (8A).
We believe that transparency is important, and that information such as lists of those subject to prohibition orders should be easily obtainable at all times. Putting that on the Treasury’s website would achieve that aim. We understand that lists of prohibited persons are already published on the FSA website, and we assume that those lists will also be published on the FCA and PRA websites. Indeed, if someone has become prohibited, there should be an explanatory note about why that person has become prohibited, and information should be given an even higher profile through publication on the Treasury website, because we hope and expect that the general public or anyone wanting that information could trust the information published on the Treasury’s own website.
We also need to ensure that the legislation is fit for the 21st century, and that is why we have specifically mentioned the website. That is important, as many people will use that. Of course, not everyone, as has been outlined in earlier discussions, would have access to the internet, but that is where people who are looking for the information would go. It is a fairly simple amendment and I hope that the Minister will consider accepting at least something during the course of our proceedings.
Amendment 145 seeks to change the clause on prohibition orders. I do not support the amendment, because writing the need to publish on a website into law seems to have the problems that we discussed earlier. However, the principle that prohibition orders on people who are not fit and proper persons should be published is crucial. The clause is very important. Prohibition must not only be a sanction for past irresponsible behaviour, but a deterrent for future irresponsible behaviour. That change in behaviour, by ensuring that sanctions are strong enough to change the culture within finance, is written deeply within the Bill and is extremely important. It is one of the key lessons from the financial crisis.
I hope that the Minister will reiterate that the point of prohibition is not only specifically to stop the actions of those who have already committed acts that make them not fit and proper, but to demonstrate the bounds of behaviour that are deemed responsible and reasonable within authorised firms.