Financial Services Bill – in the House of Lords at 3:07 pm on 10th July 2012.
Relevant document: 4th Report from the Delegated Powers Committee.
Clause 3 : Financial Stability Strategy and Financial Policy Committee
Moved by Baroness Hayter of Kentish Town
46: Clause 3, page 6, line 7, at end insert "provided that such a direction does not conflict with the FCA's consumer protection objective"
My Lords, Amendment 46 stands in my name and in the name of my noble friend Lord Eatwell. I shall speak also to Amendments 49, 52 and 67, which similarly stand in our names.
These amendments seek to ensure that when the Financial Policy Committee gives directions to the Financial Conduct Authority in the interests of financial stability, it does so in ways that do not conflict with the FCA's duty to uphold consumer protection, that the Financial Policy Committee must take note of any representations from the consumer panel, and that where such directions, or indeed recommendations, are given, the FCA reports back to the Financial Services Consumer Panel as well as to the FPC.
If we did not know before last week about the detriment that can affect consumers where their interests are ignored, we must surely know now. Consumer trust in this industry has taken a body blow, and it is really important that regulators never for a moment forget the end-user-the saver, the borrower, the lender. The Financial Policy Committee is clearly not a consumer-focused body. It will take decisions that have a huge impact on consumers but it will not have the expertise to do it well. The FCA's consumer panel is meant to represent the consumer interest. Without these amendments, we are allowing the panel to be ignored. We know what happens when the interests of clients are not placed centre stage.
I argued at Second Reading that our regulation must be consumer focused or it will never do the job. These amendments would help to achieve that. The FPC will take decisions that impact on consumers. The Minister knows this. In Committee last week, he said that a direction or recommendation from the FPC,
"could have a serious negative implication for the safety and soundness of individual firms or for consumers".
He went on to say:
"The FPC will not necessarily be aware of those negative implications on ... consumers".-[Hansard, 3/7/12; col. 675.]
Quite so. There will be no consumer input into or consumer voice in the FPC.
The Minister seemed to think that the FCA would be aware of possible impacts on consumers, but the chief executive officer of the Financial Conduct Authority is from the industry. He knows the industry and understands its interests and perspective, but that is not the same as voicing consumer protection issues. Let us consider a possible FPC direction, such as a cap on loan-to-value at 90%. That would trap an existing 95% loan-to-value mortgage customer with a particular bank. That is hardly consumer choice or competition. Just this time last week, at the annual public meeting of the Financial Services Authority, Adam Phillips, chair of the Financial Services Consumer Panel, said:
"We remain concerned about the predicament facing so called 'mortgage prisoners'-those with interest only mortgages and those trapped on the standard variable rate because they are unable to meet the affordability criteria-and have urged the FSA to act quickly to mitigate this situation. We also hope that the lessons learned in this process will be considered by the Financial Policy Committee when developing its strategy for dealing with asset bubbles".
But who will be there to bring such lessons to the FPC if the consumer panel has no access? Similarly, any increased capital requirements decided by the FPC could be passed on to consumers in an opaque way by increasing rates and/or fees. Sometimes, I can almost hear some people in the City saying to us consumers, "Now don't you worry your pretty little heads about this. It's really just for us big boys". Those big boys are exactly the people who have created so many problems for savers and investors.
When the FPC is considering big issues, how will the voice of the consumer be heard against the grain of the industry's interests? Perhaps "grain" is not the correct term. We have learnt this morning that, at the cost of £90 million, there are some 800 lobbyists-one for each Member of your Lordships' House-working to ensure that the financial industry's case is heard at the highest echelons, be they the Bank, the Treasury, this House or another place. Is it any surprise that the still, small voice of the user-whose savings fund this industry, we should remember-are rarely accorded much precedence?
By contrast, these modest amendments are to ensure that not for one moment should the overall regulatory architecture ignore consumer protection. They hard-wire the consumer panel into consideration of the FPC's biggest weapon-direction. Do we really need reminding that unless consumer confidence and trust return, unless the interests of consumers are centre-stage, no amount of shifting deckchairs on the regulatory deck will make a blind bit of difference? These modest amendments will simply help to keep consumers in every decision-maker's eye. I beg to move.
My Lords, I support my noble friend's amendments. I was particularly struck by her parting remark, which concerns a point that has bothered me a great deal during our deliberations up to now. The voices of the financial institutions are being heard loudly and at great length in your Lordships' House on this matter. I do not criticise them for that-they have interests that they wish to see served-but we have interests of a different kind; namely, that we must be dispassionate. In particular, therefore, if the voices of consumers-which means ordinary people-are not heard at all, then something has seriously gone wrong with why we are bothering to try to reform the financial system anyway. If I were asked why we would take the Adam Smith view of everything, I would say that, ultimately, the whole economy exists for the sake of the consumer, and not for the sake of businesses. Businesses exist for the sake of the consumer. To have any doubt of the absolute necessity that the consumer's voice is heard is to be mistaken. I therefore rise strongly to say that that voice should be heard mandatorily, and not if it just suits the body that takes the decisions.
My Lords, this group of amendments, which go to the issue of consumer protection, deals with the Financial Policy Committee's use of its powers of direction and recommendation in relation to the Financial Conduct Authority. These powers are the key means by which the FPC will seek to implement macroprudential policy. I should say at the outset that we wholeheartedly agree with the noble Baroness about the importance of consumer protection, which indeed is why we are creating a dedicated consumer protection regulator in the FCA.
In the case of directions, noble Lords will be aware that the scope of the FPC's power will be determined by the Treasury. Under new Sections 9G and 9K of the Bank of England Act 1998, as set out in Clause 3 of this Bill, the FPC will be able to direct the PRA, the FCA, or both, to implement "macro-prudential measures" that have been prescribed by the Treasury by order, subject to parliamentary scrutiny.
Amendment 46 seeks to limit the FPC's ability to make such a direction if it would conflict with the FCA's consumer protection objective. I understand the general motivation behind this amendment. Indeed, it would not be appropriate for the FPC to issue directions to the regulators without regard for whether they conflict with the statutory objectives of those regulators.
However, let me assure noble Lords that safeguards are built into the Bill to prevent this. Specifically, new Section 9E, as set out in Clause 3 of this Bill, provides that the FPC must, in exercising its functions in relation to the FCA, seek to avoid doing so in a way that would prejudice the advancement of the FCA's operational objectives, including consumer protection.
This provision is contingent on the FPC being able to achieve its own objective for financial stability. That is right, given that financial stability must necessarily take precedence if the new regulatory system is to address the flaws revealed by the crisis. However, this places a clear obligation on the FPC to take into consideration the FCA's objectives before acting, and, in subsection (2), to find a way to minimise any possible conflict. In addition, of course, the presence of the chief executive of the FCA as a voting member of the FPC means that the views of the FCA-and therefore of consumers-will be represented and taken into account.
More generally, I suggest that such conflicts are unlikely to arise often. In practice, it is likely that most of the FPC's directions will be directed at the PRA, so there will not be significant potential for conflict to arise between stability and consumer protection. It is also worth saying that what really is in the interest of consumers is financial stability. If the FPC were to be given a tool, implemented through the FCA, the Treasury would take care to design it in such a way as to minimise the potential for conflict between financial stability and consumer protection.
Amendments 49 and 52 deal with the role of the Financial Services Consumer Panel in relation to directions made by the FPC to the FCA. Amendment 49 would require the FPC to take account of representations from the panel before issuing a direction to the FCA. The FCA will already be required to consider representations from the consumer panel with regard to its general policies and their compliance with its objectives under new Section 1R of FSMA in Clause 5 of this Bill. This duty will continue to apply when the FCA is acting under direction from the FPC, so the panel will have ample opportunity to make its views known.
Amendment 52, which would require FCA-specific directions to be reported to the consumer panel, is rendered unnecessary by the Bill's general provisions for openness. For example, under new Section 9J, to be inserted in the Bank of England Act 1998 under Clause 3, directions must be reported to the Treasury and, where appropriate, laid before Parliament. Under new Section 9R, the record of FPC meetings must specify decisions taken, including the decision to give a direction or to make a recommendation.
Likewise, the inclusion of recommendations within new Section 9R means that Amendment 67 is not necessary either. The amendment would require recommendations made by the FPC to the FCA to be reported to the consumer panel, but the general reporting requirement is already in place under new Section 9R. Even without these provisions, we would expect the FCA to keep the consumer panel-indeed all the statutory panels-aware of relevant decisions made by the FPC. However, the provisions that are already in the Bill provide a guarantee of openness. I therefore hope that the noble Baroness will feel able to withdraw her amendment.
Before my noble friend replies, perhaps I may add my support. The Minister's reply enhances my concern about the depth of work being given to the Bank of England under this Bill. The Minister referred to the FPC, the FCA, the PRA and the MPC. I suggest that the Government look at all the initials that they are using in these clauses. They are somewhat confusing and might even confuse the new Government. The Minister's reply briefly exposes the extent and breadth of this Bill. The reply to one modest group of amendments is, to say the least, somewhat comprehensive. I am sure that it might not be easily understood by many Members, let alone by people outside this House.
We are told now that consumer protection is to be decided by the Treasury and not by the Bank of England, which is being given powers under all those initials. It will be decided by the Treasury. Has it nothing else to do? Will the Bank of England have nothing else to do? The whole Bill needs to be looked at afresh, and I would not be at all surprised if, before we get to the end of it, it is not all withdrawn and started again.
Just to supplement my noble friend's intervention, am I right that the Minister is trying to tell us in a nutshell that there is no problem whatever with consumer protection in connection with these amendments and that everything will be all right, as Dr Pangloss might put it?
My Lords, I am saying that the concerns to which the noble Baroness's amendments go are addressed as the Bill stands.
My Lords, I thank my noble friends Lord Peston and Lord Barnett, who between them have been teaching me economics for 40 years. It is very nice to have their support now. I also thank the Minister for his response. Unfortunately, he does not answer the major question. He says that they will mitigate problems and any decisions. Under this amendment, we were trying to say that consumers should influence those decisions. We keep putting things right when they have gone wrong and we want a voice in those decisions. I do not think that those questions have been answered by the noble Lord; nor has he taken up the point that the chief executive of the FCA, who does not come from the consumer movement, does not have the feel of it. That is fine; it is a different job. I think that we will want to return to this matter, because clearly it is key to the Bill. For the moment, I beg leave to withdraw the amendment.
Amendment 46 withdrawn.
Amendment 47 not moved.
Moved by Lord Flight
47A: Clause 3, page 6, line 16, at end insert-
"( ) An order under subsection (2) may only exclude or modify procedural requirements under FSMA 2000 where the Committee believe that this is necessary due to the urgency of the situation, and where this occurs the order must include an explanation of the reasons for excluding or modifying the procedural requirements of FSMA 2000."
My Lords, this amendment is not of huge importance but the point is this: the power in the new Section 9G(2) enables the FPC to issue directions which will require the PRA or FCA to exclude or modify existing procedural requirements under FiSMA, and this is likely to include the requirements on the PRA and FCA to consult on new rules. While I accept that under certain emergency circumstances it may be necessary and correct so to do, this should clearly not be a common occurrence, and this amendment seeks to limit the power to dispense with or modify these procedures by requiring a subsequent explanation and justification if they are so modified.
My Lords, I was hoping that the noble Lord, Lord Flight, would speak at much greater length on this matter, because I find this whole section of the Bill very difficult to understand. The notes on clauses-I do not know whether noble Lords have bothered to take a copy-are about the worst I have seen in my life. They simply repeat the clauses, with no explanation whatever. Therefore, I would like to ask, via the Minister-I am not sure how one does this in Committee -whether the central point here is to deal with an emergency where the emergency is such that you cannot wait? The noble Lord, Lord Flight, has not given us an example. I have had great difficulty thinking of one. Perhaps he could tell me later what particular sort of emergency he has in mind. The great stock market crash of 1929 is a relevant event from the point of view of financial instability. I am sure the noble Lord, Lord Flight, knows that Irving Fisher, then the world's greatest economist, said at the time that there was no danger whatever of the stock market crashing, it would go on rising considerably.
If that situation repeats itself, our intervention would be too late. That is the problem. The real point is, technically, whether we could ever be early enough. Therefore, I just want to make sure that I fully understand what the noble Lord, Lord Flight, is saying, when he recommends this amendment, which otherwise sounds fairly sensible to me.
My Lords, I would like to add a word to what the noble Lord, Lord Peston, has said, in particular to ask my noble friend Lord Flight about the frequency with which this situation is likely to happen. Would it be an exceptionally rare event, because that may affect the way in which one approaches it?
My Lords, I was simply making the point that if this power is used, and as a check against its improper use, there should be the requirement to explain why.
My Lords, I will see if I can help a bit here. Amendment 47A seeks to prohibit the modification or exclusion of procedural requirements-that is, the requirement to consult-except for reasons of urgency. The reasons for the exclusion or the modification would also need to be included in the order. I should briefly explain why the Treasury has the ability to switch off or modify procedural requirements-the requirement to consult-which apply to action taken by the PRA and FCA on a tool-by-tool basis.
As the Government made clear in their February 2011 consultation document, in the case of some macroprudential tools, directions from the FPC will be very specific, requiring no discretion at all on the part of the regulator to implement them. Noble Lords asked for examples. In these cases-for instance, where the FPC is simply changing the level of a particular lever-consultation or cost-benefit analysis undertaken by the regulator would have little value and would introduce unnecessary delay into the process.
The Government believe that in these cases the FPC's policy statement for the tool and its explanation of how the action is compatible with its objectives will provide much more valuable information about the action and its impact than any consultation by the regulators. However, I reassure the Committee that the Government do not expect to modify or exclude procedural requirements for most tools.
The Government will in due course publish a consultation document with proposals for the composition of the FPC's initial toolkit, which will set out whether procedural requirements will be amended for any tools. In that case, there will be complete transparency regarding whether there has been any proposal by the Government to cut out the normal full consultation processes, and, if so, the reason will be clear. On the other hand, taking the question of urgent cases, if a delay in implementing an FPC direction could pose a risk to financial stability, both the PRA and the FCA already have, under their existing powers, the ability to waive consultation requirements in order to take action urgently.
Therefore, I hope I can assure my noble friend that on the one hand it will not be, in his words, at all common for consultation not to take place and it will be transparently set out; on the other hand, the power in new Section 9H(2) will not be needed in cases of urgency because that is already covered. On the basis of that explanation, I ask my noble friend to withdraw his amendment.