New Clause 3

Financial Services Bill – in a Public Bill Committee at 10:00 am on 14 January 2010.

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Securing consumer protection

‘(1) The Financial Services and Markets Act 2000 is amended as follows.

(2) After section 5, insert the following new section—

“5A Securing consumer protection

(1) This section applies where the Authority becomes aware that any feature or combination of features of a financial services market, product, service, or provider in the United Kingdom is or appears to be significantly harming the interests of consumers.

(2) The Authority must take such action as it considers reasonable and practicable to remedy, mitigate or prevent any detrimental effects on consumers resulting from or relating to the feature or features of a financial services market, product or provider.

(3) The Authority must ensure that action taken under subsection (2) shall have regard to the need to achieve as comprehensive solution as is reasonable and practicable.

(4) Action under subsection (2) may include action by the Authority itself and recommendations on the taking of action by others where the Authority can not by itself meet the requirements of subsection (3).

(5) For the purpose of subsection (1) the Authority becomes aware in the event of any of the following—

(a) its own research, reviews, monitoring, supervision or enforcement work;

(b) on a referral by the scheme operator of the ombudsman scheme or the Office of Fair Trading; or

(c) Following acceptance of a request from a designated consumer body made under subsection (6).

(6) A designated consumer body may by presenting evidence of apparent or likely significant harm to the interests of consumers request that the Authority takes action under this section.

(7) The Authority shall within 90 days of a request under subsection (6) publish a response stating—

(a) whether it accepts or rejects the need for action; and

(b) the reasons for its decision.

(8) For the purpose of section (5)(c) “designated consumer body” includes—

(a) a body designated by the Secretary of State by order under section 11 of the Enterprise Act 2002;

(b) the financial services consumer panel; or

(c) the consumer financial education body.

(9) The Authority shall prepare and publish a report within one year of any of the events set out in subsection (5) setting out the action it intends to take and the reasons for its decisions.

(10) In this section reference to a financial services market, product or provider refers to regulated activities as defined by Section 22.”’.—(Mr. Love.)

Brought up, and read the First time.

Photo of Andrew Love Andrew Love Labour, Edmonton

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

As always, Mr. Benton, it is a pleasure to serve under your chairmanship. New clause 3 responds to concerns that the Financial Services Authority has not always dealt with consumer problems effectively or in a timely fashion. The new clause would ensure that the FSA becomes much more of a consumer champion, as I think we would all like it to be.

The concern arises because, in reality, the FSA is very producer-oriented. Its funding comes from the financial services industry, and that is unlikely to change. It is staffed mainly by people who have worked in the industry for many years. To be honest, many people, particularly in consumer advocacy bodies, think that the FSA’s links to such bodies and to consumers is far too weak. The new clause is an attempt to strengthen the consumer focus and redraw the balance between producer and consumer interests within the FSA.

The new clause sets out clearly that the FSA’s enhanced role in protecting consumers should not be just about redress, as it is at the moment. The FSA must be able to spot growing or potential problems and halt their spread, and it should prioritise prevention and mitigation as well as redress. The new clause reflects those important issues. Although the FSA has wide powers to set rules, enforce its decisions and deal with consumer detriment, it does not have a duty to agree a time frame for action or to provide a comprehensive solution to problems that emerge. Although the FSA has, in essence, a consumer protection objective, it often does not deal with specific problems that emerge in the market, and there is nothing specific or explicit in the Financial Services and Markets Act 2000 to trigger the objective, so there is no real guarantee that the production of evidence of problems in the marketplace to the FSA will ensure that an investigation takes place.

Many would say that the FSA has been robust in the action that it has taken and is defending consumer interests, but that has not always been the case. The new clause would ensure that we never go back to some of the problems that emerged in former years. For example, the saga of payment protection insurance has been a scandal in the financial services market for a considerable period. In 2005, the FSA carried out a review. After the review, although evidence was produced by a number of bodies, including Citizens Advice, the FSA gathered evidence of its own.

A super-complaint was launched with the Office of Fair Trading, but even after a year of intense activity, very little had changed. Subsequently, the FSA has  changed the rules, banned certain products in the marketplace and strengthened complaints handling in the insurance market. However, no one would say that we have finally resolved all the problems relating to payment protection insurance.

I can also take the case of mortgage arrears. That was brought to the FSA’s attention by, again, a number of consumer-oriented bodies. It took the FSA two years to produce what is an excellent report in the “Mortgage Market Review”, but we still have outstanding problems of charges. Concerns are still expressed widely in the marketplace. We do not seem to have got to the heart of all the problems in the mortgage market.

Although the FSA is doing much better than it did previously, there is the lingering concern that we may return to the era of light-touch regulation. That would not be in the interests of consumers. New clause 3 is designed to provide protection for the consumer that could withstand any change in the environment in which the FSA operates. The new clause would enhance consumer protection in two ways. It would ensure that problems were dealt with appropriately, quickly and effectively, and it would do that by ensuring that there was a comprehensive solution to the problems brought before the FSA. In the words of the new clause, it is designed

“to remedy, mitigate or prevent” consumer detriment. That is a very important aspect of the new clause. It would do that in a number of ways, but within a certain time frame, because the new clause states that the FSA must act within one year of becoming aware of the particular problems in the marketplace.

The new clause sets out the circumstances in which the duty would be triggered. It would be triggered when the FSA was made aware of an issue. Making it aware could happen in three different ways: something could emerge from the FSA’s own research; bodies such as the OFT or the ombudsman could draw their research to the FSA’s attention; or a designated consumer body could also bring a matter to the FSA’s attention, and we would need to decide which were the designated consumer bodies. Under the new clause, the FSA could not delay dealing with an issue until its next review in that particular part of the marketplace. That has happened in the past and the new clause is designed to change that. The FSA would have to respond directly and promptly when evidence was brought to its attention.

I will not go into the wording of the new clause. It is long and detailed, and I expect that my hon. Friend the Minister will have something to say about the wording, but it is drawn specifically from the Enterprise Act 2002. Let me give an example. When I talk about a designated consumer body triggering action, that is very similar to the super-complaint procedure in section 11 of the 2002 Act.

As with the 2002 Act, there would be various protections against frivolous or vexatious complaints. We understand that there is a lot of anguish among individual consumers and various consumer bodies. However, we need to protect the integrity of the FSA, and that would be done under the new clause, because the FSA would not be compelled to act in every single case. That would be especially evident in relation to individual complaints. It would normally require groups of consumers or sub-groups of consumers to trigger such an investigation.  They would have to make a reasoned case, which would have to include evidence of detriment. That detriment or consumer harm would have to be, in the words of the new clause, “significant”, and the action required to be taken by the FSA arising from the triggering of an investigation would be limited to “reasonable and practicable”. Protections for the FSA are included, but in essence the new clause would strengthen its consumer protection objective, ensuring that it must act in a robust and timely way when evidence of consumer detriment is brought to its attention in the way specified in the new clause.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 10:15, 14 January 2010

The hon. Member for Edmonton has done us a great service. New clause 3 highlights the concerns of a number of people over how the FSA has dealt with some aspects of the conduct of business in recent years. It also raises the question of there being an increased focus on individual products, as opposed to regulating only the sales process.

The hon. Gentleman gave a couple of examples. If an issue has caused the regulator concern for a long time and has been flagged up with the sector, but little is done by the sector to respond to that concern, it may get to the point where the scale of the problem, which is relatively minor in itself, becomes quite significant. The hon. Gentleman mentioned payment protection insurance, which is a good example. If more effective action had been taken in 2005, the industry may have been able to avoid having to make the large payments in compensation that it now has to make as a result of the work done by the FSA.

The question is whether we should expect the FSA to act as a consumer champion. If so, will that affect how it regulates the sector? Will it become much more proactive, much more interventionist, and more heavy handed at an earlier stage? Every time we hear of a regulatory failure by the FSA, particular if a number of people have been involved, it undermines people’s confidence in the sector as a whole. The complexity of financial services products and the huge imbalance of knowledge between the consumer and the provider all make it harder for people to engage in the purchase of such products.

The consumer finance education body, set up under the Bill, will give consumers more confidence in engaging with financial services businesses, but consumers will need to know that an effective regulator will always be standing behind the purchase or sales process. I am not convinced that the FSA has done that job as well as it should. That is why, in our white paper “Plan for Sound Banking”, we talk about the need to set up a new regulator—in the white paper we call it a consumer protection agency. It will adopt a new approach to the regulation of financial services when it comes to the conduct of business. We expect it to be much more proactive, and to take earlier action.

Although the hon. Gentleman did not talk about the detail of the new clause, we share an interest in some of the elements that have been raised. I am particularly interested in the mechanism for ensuring accountability. Under subsection (7), the authority should be more transparent in the way that it responds to matters that have been raised by consumer bodies. Under subsection (9),  the authority would be required to produce reports within a year. Again, that would ensure that there would be much greater transparency about the steps that the regulator should take to tackle some of the issues that have been identified in the retail financial services sector.

So I have a great deal of sympathy with the hon. Gentleman’s new clause. It reflects the widespread concern that exists about how effective regulation of the retail financial services sector actually is under the FSA, and it sets out an approach that could yield dividends, not only by improving outcomes for consumers but by acting in the interests of the industry itself, in trying to take earlier action to avoid these large-scale cases of mis-selling that do so much to undermine consumers’ confidence in what is an important sector of the economy.

Photo of Colin Breed Colin Breed Shadow Treasury Minister

I agree entirely with the hon. Member for Fareham (Mr. Hoban) and I support the aims of the new clause.

During the period of time that the FSA has been in operation, two things have happened. First, of course, it was set up and brought together all the regulation. That was a very good thing; it was a good body to bring together regulators. Secondly, during that period of time, the so-called “light touch” that it took and its encouragement of new products, innovation, new business and everything else was also very good, but the FSA relied very much upon what was perhaps perceived to be an inherent integrity within the financial services sector. Regretfully, that inherent integrity was not perhaps as strong as we all might have expected.

Over time, there has been a certain amount of confusion among consumers about what the FSA’s role is in relation to them. I think that many consumers, when they have confronted the FSA with a problem or anything else, have often looked upon it more as a trade association of the financial services companies rather than as a body that looked at matters from their point of view, as people who are basically lay people and who feel that they have been wrongly advised, wrongly sold a product and everything else.

The new clause is very valuable in that it places a much clearer emphasis on what is now a necessary role for the FSA. Perhaps that role was not quite as necessary when the FSA was set up. However, given what we have seen subsequently, including the various events of the  past few years, there is a need for clarity and some real understanding, so that consumers can look at the FSA in a way that is much more acceptable to them, rather than seeing it as a trade association, and so that, if the FSA is not a consumer champion, at least it can be seen to look at things much more closely from the viewpoint of consumers.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I am sure that we all agree with the intention of the new clause, which is to ensure that the FSA takes appropriate action to protect consumers. However, I must say to my hon. Friend the Member for Edmonton that, although I congratulate him on its ingenuity, I am not sure that it is the right way to achieve that aim of protecting consumers.

As the Committee knows, the FSA has a number of regulatory objectives, including consumer protection. Indeed, the Bill adds a further objective in relation to financial stability. In discharging its general functions, the FSA is required, under section 2(1) of the Financial Services and Markets Act 2000, to act, so far as possible, in a way that is compatible with its regulatory objectives and that it considers appropriate for meeting those objectives. Those general functions include making rules and giving guidance.

In discharging those functions, the FSA must also have regard to a number of other matters, including whether any burden or restriction that it imposes is proportionate to the benefits that are expected to result. As I think the Committee is aware, no attempt is made in FSMA to rank the FSA’s various regulatory objectives. Effectively, new clause 3 would promote the FSA’s consumer protection objective above its other objectives, such as financial stability, where it is not subject to a corresponding duty.

To some extent, the argument about new clause 3 is the converse of the argument about amendment 41 to clause 5, which was tabled by the hon. Member for Fareham and which we discussed some time ago. Amendment 41 was a probing amendment that proposed giving the FSA a new financial stability objective and making that objective a priority. At that time, we discussed the need for the FSA to be able to exercise judgment and discretion. Those same arguments apply here.

The Chairman adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at One o’clock.