Clause 26

Financial Services Bill – in a Public Bill Committee on 14th January 2010.

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Consumer redress schemes

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 9:00 am, 14th January 2010

I beg to move amendment 70, in clause 26, page 29, line 13, leave out ‘to make rules’ and insert

‘for a scheme to be made’.

Photo of Joe Benton Joe Benton Labour, Bootle

With this it will be convenient to discuss the following: amendment 71, in clause 26, page 29, line 20, leave out ‘make rules’ and insert ‘propose a scheme’.

Amendment 72, in clause 26, page 29, line 38, leave out ‘rules are’ and insert ‘scheme order is’.

Amendment 73, in clause 26, page 29, line 41, leave out ‘making rules’ and insert ‘proposing a scheme’.

Amendment 74, in clause 26, page 29, line 43, at end insert—

‘(11) If the Authority proposes a scheme under this section, it shall apply to the court for a consumer redress scheme order.

(12) “Consumer redress scheme order” means an order imposing a consumer redress scheme on relevant firms.

(13) Any application by the Authority under this section shall—

(a) attach a draft order setting out the rules of the proposed consumer redress scheme in full; and

(b) be notified to relevant firms and be published as required by the Civil Procedure Rules or as otherwise directed by the court.

(14) Upon an application under subsection (11), the court may make a consumer redress scheme order if it is satisfied that—

(a) the making of such an order represents the most appropriate means for the fair and efficient resolution of the liability of relevant firms to pay redress to consumers;

(b) the consumer redress scheme is just and equitable; and

(c) the consumer redress scheme order complies with section 404A.

(15) At any time after the making of a consumer redress scheme order, any relevant firm, the Authority, the ombudsman scheme or any other party permitted by Court rules to do so, may apply to the court for—

(a) any amendment to be made to the consumer redress scheme order, or

(b) clarification or directions regarding the operation of the consumer redress scheme; and upon any such application the court may make any order it considers appropriate (including making any amendment to the consumer redress scheme order).’.

Amendment 75, in clause 26, page 30, line 2, leave out ‘Rules under section 404’ and insert

‘a consumer redress scheme order’.

Amendment 76, in clause 26, page 30, line 41, leave out ‘rules’ and insert ‘consumer redress scheme order’.

Amendment 77, in clause 26, page 30, line 45, leave out ‘rules’ and insert ‘consumer redress scheme order’.

Amendment 81, in clause 26, page 31, line 22, at end insert—

‘404AA Rules of court about consumer redress schemes

(1) Rules of court may make provision about consumer redress schemes.

(2) Such rules shall be designed with the objectives of ensuring, inter alia, that—

(a) applications concerning consumer redress schemes are heard and determined expeditiously; and

(b) notice of such applications is published so as to bring the application to the attention of those who may be affected by the consumer redress scheme.

(3) The rules may in particular—

(a) make provision about applications for or in connection with consumer redress scheme orders;

(b) make provision about the notice to be given to relevant firms regarding such applications;

(c) make provision about the publication of such applications, so as to bring the application to the attention of those persons who may be affected by a consumer redress scheme order;

(d) set out the criteria to be applied by the court when deciding whether to make a consumer redress order (or the terms of such an order including the rules of the consumer redress scheme);

(e) make provision for any other matter relating or incidental to the proper management and conduct of the consumer redress scheme;

(f) make provision for the court to consider whether other means may be more appropriate for the fair and efficient resolution of the liability of relevant firms to pay redress to consumers, and to give directions as it considers necessary.’.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I welcome you to the Chair, Mr. Benton, for the Committee’s penultimate sitting. I wish to make some preliminary remarks about the clause and what it seeks to achieve, which I believe is important. I shall then discuss the amendments. I suspect that it may also be a stand part debate, as I have some detailed questions about other parts of the clause.

When the Financial Services and Markets Act 2000 was introduced, a clear structure was put in place to give adequate protection to consumers. The Financial Services Agency is responsible for regulating the conduct of firms; the Financial Ombudsman Service deals with individual complaints; and the Financial Services Compensation Scheme provides protection in the event of insolvency.

Section 404 of that Act provided a mechanism by which groups of complaints could be resolved. It recognised the fact that although the ombudsman service dealt with individual complaints, a mechanism was needed to deal with instances of widespread mis-selling. We heard examples of that in earlier sittings.

Section 404 provided for a review of past business. It contained important provisions that allowed the Treasury to decide whether there had been a widespread failure on the part of authorised persons. The Treasury could authorise a scheme to determine the nature and extent of that failure, establish the liability of authorised persons to make concession payments and determine the amounts payable by way of compensation. Significant provisions were in place to facilitate collective redress.

The White Paper described the provisions as

“powers to impose redress schemes on a firm-by-firm basis where a large number of consumers are affected.”

The problem is that section 404 has never been used. Indeed, Which? said in its submission:

“At present the FSA is only able to order past business review if it attains an order in Parliament. The process is burdensome, and it is apparent that the industry does not consider the threat of activation to be realistic. Despite numerous episodes of mis-selling by the financial services industry, the powers have never been used. Allowing the FSA to take direct action will create a more credible deterrent.”

We know that the powers in section 404 have never been used, but has the FSA ever asked the Government to exercise those powers?

As section 404 has not been used, there is a vacuum. What happens if consumers make a series of claims about a firm or type of product? The reality is that the vacuum has been filled by the Financial Ombudsman Service, which, effectively, has administered compensation for mis-selling if there has been a significant number of claims. It has been going beyond its remit of dealing only with single claims. That is not satisfactory from the ombudsman’s perspective, nor from the perspective of the industry or consumers.

We need an effective mechanism to allow redress for a large number of claimants. That is the reason for the provisions in clause 26, which replace those in section 404. The proposed new section 404 seeks to modernise the procedure and, importantly, to ensure that it works.

The White Paper, “Reforming financial markets”, states:

“The Government proposes to update FSMA with new powers to make redress powers more effective and capable of use in a wider set of circumstances. One option for achieving this is to give the FSA the power to establish a review of past business failure, without requiring the involvement of the Treasury or Parliament as FSMA currently requires.”

That is the thrust of the new section 404.

The new powers will be far-reaching and easier to deploy, albeit at the expense of Treasury and parliamentary approval and scrutiny. As to where the provisions fit within the architecture, consumer redress schemes should follow where regulation and practitioner schemes fail. I should hope that they would come before collective proceedings, which were the subject of a clause that we debated on Tuesday. We would expect that if a regulator noticed a situation in which there was systemic failure affecting a product or customer, the powers under clause 26 would be used, which would pre-empt the need for consumers to have resort to the courts.

It is right that consumers should have adequate redress where there has been widespread mis-selling. If the current regime is not being used, it is important to try to improve on it. Andrew Whittaker, the FSA’s general  counsel, made some relevant points in giving evidence to the Committee, when he contrasted the old and new powers:

“They involve quite a complex process of an assessment by the FSA, a report to the Treasury, and then a parliamentary process. This is a more direct process involving standard rule-making by the FSA. We think that it will be speedier and more flexible than the process that is currently in the legislation.”——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 35, Q85.]

The old system built in fairly robust safeguards, in that the Treasury and Parliament had to approve the scheme. That set a very high hurdle for the FSA and, I suspect, contributed to the fact that the powers were not used. If we are to give the FSA the new powers, which do not involve Treasury or parliamentary approval, the question is what safeguards are build into the process. We need to bear in mind that the cost of redress, not just in relation to compensation, but in relation to the work that will be needed to review past business and come up with and administer a scheme, could run into hundreds of millions of pounds and affect the viability of a firm. Those are not insignificant sums, and I think that firms and consumers expect a proper process to be in place to protect their interests.

What are the safeguards? First, any scheme would have to undergo the FSA’s usual rule-making process. That is a requirement in new section 404(3). Secondly, the scheme takes on some characteristics of an enforcement process, under section 404A(8)—the rules can include provision for warning and decision notices and an appeal to the tribunal—if the rules under section 404A(1)(k) are made. Those are the rules that give power to the FSA, rather than the relevant firm, to investigate the matter.

There are some safeguards in the process, but the final sanction is, as Andrew Whittaker told us in Committee,

“a judicial review by any affected party on the basis that we had misdirected ourselves about what a court would be likely to decide. That will be quite a high hurdle for us to get over, and we will need to do our best to do so.”——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 35, Q86.]

There is, as the final safeguard, recourse to judicial review, and given the amounts that could potentially be involved, it is clear that firms may choose to resort to that process.

The British Bankers Association has suggested as an alternative:

“Given that the circumstances in which these new provisions might apply will never be clear cut, it seems only logical that an independent party should review all sides of the issue, however this has not been built into the legislation. The FSA will be given largely autonomous powers to draft rules, supervise compliance, consider enforcement action and take potentially retrospective action with no mechanism to challenge its decision, outside judicial review.”

Thus under the rules set out in clause 26 the FSA is in the position of a court. It goes beyond simply acting as a court: it investigates, judges and sentences authorised firms, without an independent check.

Let us be under no illusion about the complexity of the cases. Where there is no legal certainty, the FSA will need to use its own processes to ensure that it is as robust in reviewing a case as a court system would be. One need think only of the case about bank charges  that went through the courts recently. Effectively, it was resolved in the Supreme Court, and the FSA would have to internalise that process in its operations.

My amendments would remove some of the uncertainty and minimise the risk of judicial review by ensuring that there is court approval for a redress scheme. That would act as a safeguard. In the amendments that I tabled on the previous group of clauses on collective proceedings, my objective was to make sure that there were proper safeguards to ensure that orders were used appropriately, and the same thinking is behind these amendments. I want to ensure that there is a proper process and that there is an independent check on the FSA’s actions. The objective is to ensure that people have confidence in the process that the FSA would go through.

What are the benefits of court approval for a redress scheme? A requirement for court-based approval would ensure that decisions were taken by legal experts with complete impartiality and no risk of conflict of interest; that interactions with the Human Rights Act 1998 were fully taken into account when such decisions were made, thus providing an equitable justice mechanism; that we had full and impartial consideration of a firm’s arguments, based on their legal merits, rather than the narrow test applied on judicial review, which might not allow sufficient scope for challenge; that there was a full and impartial legal assessment of the arguments and the evidence presented by all parties to the proceedings; and that the court could give direction where required, subject to the scheme coming into force.

The amendments would permit consumer redress schemes to be put in place swiftly, but with an important procedural safeguard: the requirement for the scheme to be approved by the court. That would provide for greater certainty and independent oversight of the scheme. Indeed, when we quizzed Mr. Whittaker on the application of the consumer redress proposals, he said:

“a process of this kind could be useful after a court decision.”——[Official Report, Financial Services Public Bill Committee, 9 December 2009; c. 35, Q87.]

He was referring particularly to the bank charges case.

Amendments 70 to 73 would replace references to rules with references to scheme orders. Those orders are covered in more detail in amendment 74, which defines an order as being primarily the rules under which a consumer will be compensated. There is also a requirement to notify relevant firms and an opportunity to make an application to the court to amend the order. The basis on which the court should approve a scheme is that it would be the most appropriate form of redress, would be fair and would comply with new section 404A.

Amendment 81 provides for new rules for the court to use on receipt of an application for a consumer redress scheme, mirroring the provision in previous clauses that provided that court rules would be put in place to enable the collective proceedings order to work. The amendment also outlines the criteria that the court should use to approve the scheme. In addition, to ensure that matters are resolved quickly, proposed new section 404AA(2)(a) includes the criterion that cases should be heard and determined expeditiously.

The amendments should improve the new provisions and give us the best of both worlds. We need to ensure that new section 404 is made more relevant and up to date so that the power can be used by the FSA and represents a credible deterrent and a credible process for compensating consumers, while ensuring that proper safeguards are in place. That is the thrust of the amendments.

I want to refer to a number of questions that have been raised about new section 404, but which are not covered in my amendments. At the moment, new section 404(1)(a) applies if

“it appears to the Authority that there may have been a widespread or regular failure by relevant firms to comply with requirements applicable to the carrying on by them of any activity”.

What is missing is a reference to the authority having evidence, and a reference to the relevant firms not having complied with the requirements of the authority’s rules. We are worried that the FSA will be able to instigate a consumer address scheme without evidence of a widespread regulatory failure by firms.

As the Bill is drafted, the power will significantly reduce the burden of proof required to establish a review of past business. It would enable the FSA to oppose past business reviews on firms and implement compensation schemes for whole classes of customers, even if it had little or no evidence of consumers having suffered significant detriment. That would be costly to providers and offer no benefit to consumers. If the clause was more tightly drafted to required evidential standards to demonstrate that the firm has not complied with the requirements of the authority’s rules, it would make it clear in what circumstances the powers would be used and demonstrate that there was clearly a reason for such action.

I come now to new section 404(1)(b) and the words “or may suffer”, which mean that the new section could be invoked purely in the belief that consumers may suffer loss or damage. Such a belief is speculative. Neither the fact nor the quantum of such a loss or damage could be established until it had actually occurred. What is the purpose of including “or may suffer” in the provision because it seems to be going beyond the situation of those who have actually suffered loss?

New section 404(7) states:

“If the firm determines that the failure has caused (or may cause) loss or damage to consumers, it must then”.

That would require a firm to speculate whether—and if so, to what extent—any action on its part might have caused loss or damage to consumers or may cause loss or damage at some point in the future. Neither the fact nor the quantum of such a loss or damage could be established unless and until it had actually occurred. Should we not be in a position when the power is applied only to the extent to which there is evidence of loss or damage having been suffered by consumers as a direct consequence of the actions of the firm and within the firm’s control? We need to be clear about what the Government are trying to achieve with such loose wording under the proposed subsection.

New section 404A(1)(b) states that rules may make provision

“setting out, in relation to any specified description of case, examples of things done, or omitted to be done, that are to be regarded as constituting a failure to comply with a requirement”.

It has been suggested that the use of “examples” provides too much latitude and uncertainty in the scope of the scheme, which could extend beyond the examples actually cited. It might be appropriate to tighten the wording and perhaps, rather than paragraph (b), have something along the lines of “setting out, in relation to any specified description of case, things done, or omitted to be done, which constitute a failure to comply with a requirement of the Authority’s rules.” That would tighten up the scheme’s rules so that we know exactly what the firm has done.

My next point concerns the role of the ombudsman, about which I have a later amendment. In new section 404B(4), there appears to be a double jeopardy. A complainant can not only be covered by the consumer redress process but can also make a complaint to the ombudsman. If consumers are covered by the redress scheme, they should be able to apply only to that scheme and not also be covered by the ombudsman service.

The Bill says that a consumer who is subject to the consumer redress scheme can make a complaint to the ombudsman. My later amendment deals with the parameters around which a complaint can be made. However, if a consumer is unhappy with the redress scheme, given that it has been proposed by the FSA, should not the complaint about the application of the scheme be made to the FSA rather than to the ombudsman, since the scheme is being made under FSA rules? The argument might be that the complaint ordinarily goes to the ombudsman when a consumer is unhappy with what a firm has done. That is the normal process. Where a firm is applying a scheme established by the FSA, it is odd that the complaint goes to the ombudsman and not to the FSA as the originator of the scheme’s rules. In such a case it would be appropriate for the complaint to be made to the FSA rather than to the ombudsman.

Finally, there is a definition of the meaning of “consumers” on page 32 of the Bill. One can understand that someone who has entered into a transaction should be covered by the redress scheme, but what happens when people have merely “contemplated” a transaction? How should they be covered by the redress scheme? For instance, I might think about buying payment protection insurance. It has been offered to me, but I did not take it up because I thought it was a complete waste of money. However, the fact that I contemplated taking it up might mean that I had a complaint under the redress scheme, so I am not clear why those who might merely think about buying a product should be covered by the redress scheme. It should be focused on those who have actually bought a product. Can the Minister clarify the inclusion of “may have contemplated” in new section 404D(1)?

Photo of Joe Benton Joe Benton Labour, Bootle 9:15 am, 14th January 2010

Before I call the next speaker, may I say to the Committee that the question of clause stand part has already been extensively referred to. It might be appropriate if we include discussion on clause 26 in the  next group of amendments, so will members of the Committee bear that in mind? The vote on clause 26 will be put direct to the Committee.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I, too, welcome you to this penultimate sitting, Mr. Benton. I will explain to the Committee in general terms the importance of the new power for the FSA to make rules requiring firms to establish consumer redress schemes.

Given your instructions, Mr. Benton, I will start by explaining broadly the purpose of the clause, which it is twofold. First, we believe that it will provide better routes to redress in cases of widespread mis-selling or other scandals, contributing to the restoration of consumer confidence in financial services. Secondly, it will provide a regulatory alternative to large numbers of consumers bringing claims before the ombudsman or the courts.

The FSA already has powers to impose redress schemes on individual firms, but its power to deal with a widespread failure is insufficient. The hon. Member for Fareham pointed out that the existing power in section 404 of the Financial Services and Markets Act 2000 has never been used, and I can confirm that the FSA has not approached the Government with the intention of doing so. That is partly because the scope of the power is limited to compliance with regulatory rules, whereas failures often involve a mix of breaches of general law as well as FSA rules. The power also requires the approval of both the Treasury and Parliament, which sets a high threshold for action, as he noted.

It is a shame that the hon. Member for Chichester is not here. I admit that I have not taken the opportunity to review the debates from 2000 on the Financial Services and Markets Bill, so I do not know whether he warned us at the time that the powers involved an incredible hurdle and would never be used. The practical reality is that we probably did not get it right in the Bill in 2000 and made the power unlikely ever to be used, thereby creating a gap. That emerged clearly in the responses to the consultation.

Clause 26 provides for the FSA itself to make rules requiring firms to establish and operate consumer redress schemes. It will be able to act in cases of widespread failure by firms to comply with legal or regulatory requirements. Consumer redress schemes will involve firms investigating their past business, assessing their liability in accordance with the rules governing the scheme and making redress where it is due. The clause will therefore enable firms and the regulator to deal quickly and efficiently with large-scale cases of mis-selling or other failures that have caused detriment to consumers.

The amendments tabled by the hon. Member for Fareham would alter the basis on which the FSA could act by requiring the FSA to apply to the court for a consumer redress order, passing on decisions about whether to introduce a consumer redress scheme from the FSA to the courts. The courts would apply certain tests before approving a scheme. Anyone would be able to appeal an order to a higher court or go back to the court that made the order to seek an amendment.

I am simply not persuaded that the court is the best party to take a decision that is the preserve of the regulator. The decision to establish a scheme is an extension of the FSA’s normal regulatory remit, and in my view, it is properly the role of the regulator, not the  court, to make such decisions. The court does not have the same degree of specialist knowledge as the regulator; its established role is to check whether the FSA has exercised its powers lawfully and in line with its FSMA responsibilities. Courts should not be asked to make an ex ante assessment of the merits of regulatory action. I believe that the amendments would lead to a significant departure from the current regulatory and judicial framework and relationships.

We envisage that under clause 26, where the FSA believes that there has been widespread legal or regulatory failure by firms, it should have the power to require firms to carry out an investigation. The FSA itself will not, in general, carry out investigations or determine liability; it will be for the firms to do so in accordance with the rules made by the FSA. That seems a purely regulatory matter.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

In the Minister’s view, where there is uncertainty whether there has been a breach of regulation or law, what safeguard in the process will give certainty?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury 9:30 am, 14th January 2010

I will come on to safeguards in a moment. The hon. Gentleman will be aware of judicial review processes that can already be applied.

Involving the court is likely to be burdensome, and the likelihood of firms appealing adverse decisions or applying for amendments to orders will work against the speedy facilitation of redress for consumers. It is important to remember that the schemes are intended for the most serious and widespread cases of mis-selling or other failures by firms in order to provide a viable alternative to individuals taking claims to the Financial Ombudsman Service or the courts.

The hon. Gentleman is right to say that other avenues should be explored first. We hope that, in the first instance, the regulations are right, so that there will not be mis-selling, but the ability to have the schemes means that there is no need for recourse to the courts through individual cases or collective proceedings, which we have discussed. Without that power, there is an overall weakness in the system.

I take the hon. Gentleman’s point, however, that the regulator should not have unfettered powers to impose decisions without adequate oversight or appeal mechanisms. The FSA has a responsibility to act reasonably and proportionately, as he knows. He will be aware that clause 26 proposes a number of safeguards. Let me list them. First, rules made by the FSA under this power will be subject to a public consultation, including a cost-benefit analysis. The FSA must have regard to any representations made to it, and a further cost-benefit analysis must be provided if the issued rules differ significantly from the consultation draft, along with an explanation of the differences.

Secondly, the new power is limited so that the only failures that a redress scheme can address are breaches of legal or regulatory requirements, as opposed to a subjective assessment of the reasonableness of a firm’s actions. Thirdly, where the power allows the FSA itself to take over an investigation by a firm and to take decisions relating to the firm’s liability, firms will be able  to appeal those decisions to the Financial Services and Markets Tribunal. Fourthly, firms will be able to challenge the FSA through judicial review, as I said, and the High Court will be able to review the reasonableness of a decision to require firms to establish redress schemes. It will correct any errors of law made by the FSA in setting out the terms of a scheme.

As the hon. Gentleman is aware, the Financial Services and Markets Act does not provide a right of appeal against the FSA’s other rule-making powers, other than through judicial review. That is because judicial review is the right way to challenge rules that apply on a general rather than an individual basis. They do not involve consideration of the facts of individual cases. That is exactly what we propose here today.

I have serious reservations about whether the amendments would be workable. I am concerned that they would provide for applications to the court seeking changes to a decision that the court has made. That would in effect be a disguised appeal mechanism. The amendments would create a risk that a regulatory decision to launch an investigation would be delayed, perhaps by years, through legal challenges about the meaning of words, and we are trying to provide swift and appropriate redress for consumers.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The Minister talks about the safeguards and refers to a situation in which rules have been made under new section 404A(1)(k), in which the authority takes over the investigation and there is then the potential for appeal to the tribunal. He will be aware of just how long that can take in slowing down the process. In a recent case, it has taken several years for enforcement action to go through all the steps of warning notices, decision notices and then the appeal to the tribunal. Therefore, even the mechanism that the Minister proposes as a safeguard can involve quite significant delays to the process.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

The hon. Gentleman helps me to make my point, because that is an instance in which the FSA is stepping in and taking actions with regard to an individual firm, as opposed to making general rules. Where it makes general rules, the general rule has been that those can be JR’ed. However, where it is taking action against a specific firm, if the firm has a dispute with what the FSA is doing, having a mechanism in such a case is not unreasonable. Yes, that may take some time—we would all like things dealt with speedily—but it is appropriate that for that to be done in an individual case. That does not detract from the general principle I was outlining. The requirement for prior court approval places an unnecessary hurdle in the way of swift and effective action. The point of new section 404 is to make court action a last resort, for the benefit of firms as much as for consumers. The amendment thwarts that objective, which is why it should not be agreed.

The hon. Gentleman talked about a situation in which there is uncertainty in law. Our intention is for the FSA to use the power where the law is sufficiently clear, for example if there had already been a test case in the courts. The FSA does not want to act when the law is not sufficiently clear. It would always be open for the FSA to seek a declaration from the court, but that would be the exception rather than the norm.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Is that safeguard of the FSA acting only if there is certainty built into the measure? If so, where?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

As I said, we anticipate the FSA acting where the law is sufficiently clear. We have talked about collective proceedings in previous debates, when it has been made evident that the reason why collective proceedings might be entered into is because the FSA has not felt able to act because the law is not sufficiently clear. I am happy to put that on the record.

May I go through the points made by the hon. Gentleman about the more general issues relating to clause 26? First, on new section 404(1)(b), he raised the specific issue of the phrase “or may suffer”. The purpose of that phrase is to ensure that cases of contingent loss are captured, such as a person who has been mis-sold a pension scheme but who may not have suffered any loss at the close of the scheme. Another example, endowment mortgages mis-selling, demonstrates why the provision is needed. The consumer has been incorrectly sold an endowment mortgage, which is an inappropriate product, but the detriment will not be felt until the clock stops ticking and we find that the money to repay the mortgage when the endowment expires is insufficient. That is why “or may suffer” is included.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The Minister raises an interesting issue, because in a number of the cases of mis-selling around mortgage endowment, we do not know what the outcome will be until the policy matures. What is the expectation for such schemes? If a scheme comes to an end and we are not clear whether a loss had crystallised, what provision will there be in the rules for consumers to be compensated for a loss that may not have crystallised or may never crystallise?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I am not sure that I want to get into the detail of the hon. Gentleman’s specific case of a general nature. What we are trying to do with consumer redress schemes is clear. In effect, they require companies to put things right and ensure that there is appropriate compensation. It will be up to companies in the first case to review their operations and to make their decisions on what they think is effective redress. The FSA, as a regulator, will want to oversee the actions companies take in that respect. The hon. Gentleman said that the FSA could act—he did not say on a whim, but without there being widespread evidence of a problem.

I come back to the fact that the FSA is under a duty to act reasonably and proportionately. It must have a reasonable basis for deciding to use the power. I do not believe that the test is too weak. Nor do I believe that new section 404A(1)(b) needs to be tidied up, as the hon. Gentleman suggests. However, I shall reflect upon that, and if there is a particular problem with the wording we can come back to it on Report. Similarly, I am not persuaded of the risk of double jeopardy in new section 404B(4), but again I undertake to consider the point.

New section 404D defines consumers. The hon. Gentleman referred to subsection (1)(a). The definition covers those who may have contemplated using the relevant services. He asked why. It will enable the FSA to establish a scheme, if there has been widespread discrimination, ensuring redress for those who are unlawfully  denied access to a service. The FSA can require firms to establish consumer redress schemes only if there is legal liability, so there is no room for spurious claims.

I hoped to have clarified matters, but I see that I have not.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The Minister has not. I am not sure what is meant by discrimination in the context of financial services. Is he saying that there may be a breach of equality rules—that a service has been denied by virtue of race, gender or sexual orientation? Does he mean that sort of discrimination?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

It will certainly cover that, but I am not sure whether it covers anything else. The provision covers those who are unlawfully denied access. The hon. Gentleman mentioned some obvious ways in which someone might be unlawfully denied access, but there may be others.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

If there is discrimination on those counts, are there not other means of taking action that do not require a regulatory response? I am not sure how it would fit in with the FSA’s rules. I would expect prosecutions to be made under the Equality Bill when it becomes law. That would be the way to deal with the matter, rather than giving the FSA that remit.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

There may well be other avenues to pursue a remedy. It might, however, be appropriate and best for financial services products if we get the company to sort it out. Indeed, the law provides for that to happen. That is why it is sensible to include such a measure in the Bill.

I hope that my clarification has helped. If further clarification is needed, we will seek to provide it. I hope that I have answered the points raised by the hon. Gentleman. It is not right to ask the courts to deal with such matters. The regulator is responsible for taking action on those matters. I urge the Committee to resist the amendment.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am grateful to the Minister for taking the time to make those general remarks and for his response to the amendments and the questions that I asked. I am concerned about the process that the FSA will have to go through in order to establish the redress schemes. I do not think that there is any disagreement between us that there is a necessity for a proper consumer redress scheme to come into play. In some of the discussions that I have had prior to the outcome of the Supreme Court case on bank charges, it was indicated to me that, at that point, there was not a proper mechanism in place to deal with the back-book of consumer complaints if the case had gone in the OFT’s favour.

Clause 26 contains a vehicle that would help to deal with the determination of historic cases involving bank charges, if that determination was deemed appropriate. It would give certainty to the industry and consumers alike that complaints would be resolved, so I have no doubt about the merits and necessity of that action.

Clearly, the previous measure—section 404 of the Financial Services and Markets Act 2000—has not worked. The fact that the FSA has not even sought to  engage in this process demonstrates that we got it wrong in passing the original measure. I gather that it was structured that way to ensure political engagement when there was a mis-selling case, and I suspect that, over time, politicians and others have decided that these matters are best left in the first instance to regulators, rather than being subject to a political decision. It is therefore right that there be a general framework.

What concerns me is the circumstances in which this new scheme could be used and what the process is to ensure that proper safeguards are in place. Where there is certainty that there is a breach of the rules or the law, that is a good starting point for using this process. Where that certainty does not exist, I am not sure that the safeguards are adequate for firms regulated by the FSA. There may not be a clear-cut case and, if so, how do we achieve certainty in such a process? Also, we are asking the FSA to internalise in its thinking some of the processes that a court may go through in establishing certainty. At the moment, there is not adequate provision in the clause to protect firms where there is no clarity or certainty about whether a rule or the law has been breached.

There may well be an opportunity, either on Report or in the other place, to find a way—perhaps by introducing a procedure—to deal with what happens when there is no certainty that rules have been breached. That might just strengthen some of the safeguards. There is opportunity for more thinking to be done between now and the later stages of the Bill’s passage. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I beg to move amendment 78, in clause 26, page 30, line 48, leave out from beginning to end of line 2 on page 31 and insert—

‘(4) Matters may not be set out in a redress scheme order as a result of subsection (1)(d) if a court would not grant such relief in the circumstances specified.’.

Photo of Joe Benton Joe Benton Labour, Bootle

With this, it will be convenient to discuss amendment 79, in clause 26, page 31, leave out lines 3 to 5.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Amendments 78 and 79 are obviously amendments to clause 26 and to measures set out on pages 30 and 31 of the Bill.

Amendment 78 seeks to leave out subsection (4) of proposed new section 404A of the Financial Services and Markets Act 2000. Amendment 79 seeks to remove subsection (5) of that proposed new section.

Again, the question is, what sort of remedies can the FSA grant in connection with the losses that a consumer might suffer? Amendment 78 says that the only remedies the FSA could consider are those that a court might grant in comparable circumstances, so that there is a more robust basis to what the FSA can do, rather than its simply doing what it considers to be just in relation to the description of a case. That tighter definition would give people more confidence about how these powers will be used in practice.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

We want to ensure that the redress offered to consumers is the most appropriate for them. Payment of compensation or another remedy available  in court is not always the best outcome for the consumer or the firm. I can give two examples of that from recent experience. First, in the case of personal pensions, there may be tax reasons and consumer protection reasons to require redress in the form of a top-up to the personal pension, rather than as a cash payment. During the pensions mis-selling of the 1990s, many consumers were wrongly advised to transfer out of an employer’s occupational pension scheme into a personal pension. The pensions review went beyond the legal redress that would have been available to consumers. It required firms to negotiate with the employer’s occupational pension scheme trustees to reinstate the consumer into that scheme. That would put the consumer back in the position they would have been in without the mis-selling. If that was not possible, the firm was required to top up the personal pension rather than pay compensation, thereby preserving tax benefits. Alternatively, it could provide a guarantee to do so in future if the customer’s pension experienced a shortfall on retirement. Cash compensation was the last option.

Secondly, in the case of the mis-sale of a single-premium payment protection insurance policy, the legal remedy for misrepresentation would normally be rescission of the contract. The premiums would be returned to the consumer with interest and the policy would be cancelled. However, it might not be in the interests of consumers to forfeit their protection. It might be preferable to keep the insurance cover, which may now be more expensive, or impossible, to obtain. The firm could be made to convert the single premium policy into a regular premium policy, and pay back the difference in cost. That approach might also cost firms less.

We are trying to provide more effective forms of redress for consumers than those available through the courts. Although I would expect the FSA to be largely guided by the type of relief a court would grant, the examples I have provided show why it is important to be able to depart from them. Clause 26 provides that the FSA can do so where it is just, having regard to the nature and extent of the loss or damage. We are trying to ensure the best outcome for consumers and firms. I hope that that explanation has been helpful, and that the hon. Gentleman will withdraw his amendment.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The Minister makes a good explanation of the circumstances in which the powers can be used. The steps that can be taken to put consumers back in the right place are to be welcomed in this situation. It would have created more certainty if the language in subsection (4) had been a bit clearer. Part of people’s concern about this issue is that they are not sure what it means in practice. The Minister’s explanation has clarified the purpose behind subsections (4) and (5). I do not know whether any further changes to the drafting can be made to ensure that his explanation is more closely reflected in the Bill. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I beg to move amendment 80, in clause 26, page 31, leave out lines 21 and 22.

Subsection (9) of proposed new section 404A states:

“Nothing in this section is to be taken as limiting the power conferred by section 404.”.

Proposed new section 404A does not strike me as exhaustive, which means that the rules under proposed new section 404 may make provision. Therefore, subsection (9) seems slightly redundant. Perhaps the Minister can say why it needs to be in the Bill.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

If I heard the hon. Gentleman correctly, he has answered his own question. Proposed new section 404A is not intended to be exhaustive, so we need subsection (9) to make the point that we are not limiting the powers to make rules. There may be other circumstances that are not covered in the provisions, which are, as he says, illustrative. We therefore require subsection (9) for exactly the reason he gave in his question.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Subsection (1) says that proposed new section 404 “may make provision”, so it is clear from the outset that it is not prescriptive or exhaustive. The language suggests that the rules can include certain matters; it certainly does not say that the current matters are the only ones that can be included, so subsection (9) seems redundant. It is clear that section 404A is permissive and does not set a limit on what can be done, but if the Minister feels that subsection (9) is necessary, I will not divide the Committee. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I beg to move amendment 82, in clause 26, page 31, leave out lines 32 to 38 and insert—

‘(2) If a consumer considers that a relevant firm has failed to make an accurate determination in accordance with a consumer redress scheme, the consumer may, in respect of that determination or failure, make a complaint under the ombudsman scheme.’.

This goes back to proposed new section 404B, which concerns complaints to the ombudsman. Subsection (2)(a) tells us that a consumer who

“is not satisfied with a determination...under a redress scheme” can complain to the ombudsman’s service, but it is not clear what is meant by “is not satisfied”. This is not the most tightly drafted clause in the Bill. I am not sure what the usual definition is of “is not satisfied”. However, subsection (2)(b) is much clearer in referring to a situation in which the consumer believes that the relevant firm has not made

“a determination in accordance with the...scheme.”

The amendment would place much clearer limits on the circumstances in which a consumer can make a complaint to the ombudsman by saying that they can do so only where they believe that the

“firm has failed to make an accurate determination in accordance with” the scheme rules. So we are not necessarily talking just about the calculation of a loss or of the amount to be paid to the consumer. The amendment would cover circumstances in which the firm has decided that the consumer falls outside the scheme. The wording of subsection (2)(a) is a bit loose and flabby and could do with tidying up.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I am interested in the hon. Gentleman’s view that this part of the Bill is in need of a little tidying up. I am not sure that that is the case, and there is a  problem with the amendment, which would limit the circumstances in which a consumer can complain to the ombudsman to cases where

“a consumer considers that a...firm has failed to make an accurate determination in accordance with a...scheme.”

It does not cover a situation in which a firm has failed to make any determination, in breach of the scheme rules, which is something the Bill does allow for. The amendment would therefore remove a valuable protection for consumers, which is why it is defective. However, I will look at the Bill’s wording to see whether it needs tidying up, although it not currently my view that it does.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Will the Minister tell us what he thinks is meant by “is not satisfied”?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

My understanding is that it is fairly standard legal terminology. Section 404B gives the FSA the authority to introduce a scheme. We are not trying to limit a consumer’s right to complain to the Financial Ombudsman Service, but the service will have to look at complaints in the light of the scheme rules. Therefore, provided that the firm has complied with the rules, the complaint will not be upheld. That should cover the hon. Gentleman’s point. Again, I do not think the amendment would achieve what he intends. It would remove a valuable protection from consumers, so I hope he will withdraw it.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 10:00 am, 14th January 2010

I am still not clear in my mind about the meaning of the expression “is not satisfied”. Perhaps I can provide my own definition, by pointing out that I am not satisfied with the Minister’s definition of it. That might take us part of the way there. It is not very clear, to my mind, and it is not clear to a number of people who have considered the Bill from a legal perspective and raised concerns with me. I welcome the Minister’s reassurance that he will re-examine the point, and on that basis I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I do not propose to move amendment 83, because it reflects an amendment that I tabled in relation to collective proceedings, and I expect the Minister’s response will be exactly the same as previously. His response to amendment 84 may well also reflect his response to an earlier amendment that I tabled on relief.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The Minister says from a sedentary position that it does, and given that we have had the debate once already I do not propose to detain the Committee with another run around the tracks, so I shall not move amendment 84.

Clause 26 ordered to stand part of the Bill.

Clauses 35 and 36 ordered to stand part of the Bill.

Schedule 2 agreed to.

Clauses 37 to 39 ordered to stand part of the Bill.