Clause 5 - The new Regulators

Financial Services Bill – in a Public Bill Committee at 9:30 am on 1st March 2012.

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Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 9:30 am, 1st March 2012

I beg to move amendment 51, in clause 5, page 15, line 34, at end insert ‘, fairly, efficiently and transparently.’.

Photo of James Gray James Gray Conservative, North Wiltshire

With this it will be convenient to discuss amendment 40, in clause 5, page 16, line 15, at end insert—

‘(c) the international competitiveness of the UK markets in financial services.’.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I had hoped that you would be more amenable in many ways, Mr Gray, but as you have said that you will not be, I shall say simply that it is a pleasure to serve under your firm hand and strict guidance. We now come to clause 5, and I am conscious of the progress that we have made in relation to our allotted hours. Clearly, we do not have as many sittings on the Bill as we would like, but it would be good if we could make rapid progress today.

Hon. Members will see that at line 34 on page 15 of the Bill, there is provision about the Financial Conduct Authority. Under the first group of amendments, we are talking about the FCA’s objectives. There has been quite a lot of discussion since the Government published their strategy on the FCA about how that should be framed. It has changed over time. The Government have concluded that there should be a single strategic objective for the FCA—to ensure that the relevant markets “function well”. There is then a set of operational objectives about consumers, integrity and competition.

Amendment 51 is designed to challenge whether the FCA’s strategic objective is sufficiently robust, clear and ambitious and whether it frames the FCA correctly as an ambitious, open and proactive watchdog. The pre-legislative scrutiny Committee recommended, despite  some of the Government’s changes, that there should still be an amendment to ensure that the strategic objective focused on

“promoting fair, efficient and transparent financial services markets that work well for users. This would better reflect the Treasury’s intended purpose for the FCA, which is to ensure that business across financial services and markets is conducted in a way that advances the interests of all users and participants.”

In line with the PLS Committee’s recommendation, we tabled the amendment to insert after the reference to

“ensuring that the relevant markets…function well” the words “fairly, efficiently and transparently”.

It could be argued that the current drafting of the Bill is a little vague and a bit wet, although perhaps that is not a particularly fair description of the generic concept of “working well”. It would be impossible to imagine anyone saying that they wanted the markets to function in a mediocre way or to function poorly, so the concept of working well is okay, but it does not exactly zip with ambition.

The Independent Commission on Banking, the Vickers commission, also recommended that the Government consider changing the strategic objective

“to provide greater clarity on the fundamental issue of making markets work well—in terms of competition, choice, transparency and integrity.”

Which?, the Consumers Association, has also been outspoken in its briefing. It says:

“We do not believe the current drafting of ‘ensuring the relevant markets function well’ is a particularly ambitious strategic objective for a regulator which is intended to take a proactive approach and place the consumer at the heart of the regulatory system.”

The more recent Treasury Committee report, of which two hon. Members in this room will be aware and which was published on Monday—it is hot off the press—pointed out its concerns about the FCA’s strategic objective. It says:

“On the one hand the Government argues the strategic objective merely supplements the operational objectives. On the other hand it argues the strategic objective will act as ‘a check and a balance’ on the operational objectives. The stance therefore appears contradictory. Furthermore, the Government also appears confused as to whether it is a strategic objective or a ‘mission statement’, which are not the same thing. A ‘mission statement’ has no place in primary legislation. At best the supplementary objective adds nothing. It may be harmful. Multiple tiers of objective risk adding to complexity and diffusing the focus within the FCA. It will not assist in ‘focusing the regulatory culture of the FCA’ and could have the opposite effect.”

I am merely reporting to the Committee the views of the Treasury Committee. I will be interested to hear whether the members of the Treasury Committee on this Committee have any views on that.

I accept that it is difficult to frame these issues in the Bill, but there is a need to tighten slightly that strategic objective. We have already debated why the Financial Policy Committee and the Bank of England are only supposed to have regard to the operational objectives of the FCA; we discussed what the point was of the strategic objective and whether it was otiose in some way.

Amendment 40 is slightly different from amendment 51. Currently proposed new section 1B(5) states that

“the FCA must have regard to—

(a) the regulatory principles in section 3B, and

(b) the importance of taking action intended to minimise the extent to which it is possible for a business” to carry on in contravention of various prohibitions. The amendment would add that the FCA must have regard to

“the international competitiveness of the UK markets in financial services.”

A large number of organisations have made representations to Ministers and the Committee about that.

In the existing regulatory structures, regulators are able to consider the UK’s international competitiveness, but that ability has not been included, as I understand it, in the proposed new regulatory framework. Many of the UK’s competitors already incorporate a regard for international competitiveness within their regulatory systems. Those in Hong Kong, Singapore, China and Switzerland must have regard to their competitive positions. I am simply reporting the international facts of the matter. In a changing global economy, our ability to compete with existing and emerging financial powers must be carefully considered.

It is important to strike the right balance. We need a regulator that is aware of the relative regulatory positions of the UK vis-à-vis other parts of the country. We also need a regulator that can strike an appropriate international balance. It must be a tough but sensible regulator. That is the approach that needs to be taken. As I have said, a number of organisations suggest that the consideration outlined in the amendment should be included among those to which the FCA must have regard.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

Does the hon. Gentleman believe that it should be included?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I would not have tabled the amendment if I did not think that it was a good idea. As I have said, it is important to strike an appropriate balance between tough and sensible regulation. We must have regard to our international situation, but that does not mean that we have to have a race to the bottom. I am not saying that regulation must be light-touch, as the Minister once famously said, but it is important that we are sensitive to our position, because regulation can have an impact on our international standing.

Photo of Mark Garnier Mark Garnier Conservative, Wyre Forest

I appreciate the hon. Gentleman’s point about not having a race to the bottom, but what amendment has he tabled that avoids that, given that amendment 40 potentially opens up that possibility?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

The Bill already allows the FCA primarily to take a tough stance, which I would be happy to improve, on consumer protection. Many of the other amendments tabled are designed to protect consumers, ensure stability and cast a spotlight on risks that may need to be taken into account. Those measures are already about improving and strengthening the regulatory system. It is important that our regulators also have regard to what is happening in the rest of the world. That is a simple point. Within the regulatory community, there is a big debate to be had about whether regulation should be light or tough.

There was an interesting recent example in Switzerland concerning capital ratios. I think Switzerland went to about 20%-plus of core tier 1 capital requirements in its banking system. It wanted to send out a signal to the world that it absolutely wanted to be the leading safe, gold standard, secure banking system. In some ways, it regarded that as a regulatory advantage. Having regard to international position does not necessarily always mean being light-touch or weak in the way we regulate. In many ways, one of the virtues of London and our financial services sector is that—this could be the case for the long term—sustainability, security and the stability that we create as legislators is a positive draw to investors and others. That could easily be among the considerations surrounding the amendment.

The regulators need to have such a debate, and that is what we want to achieve through the amendment. The CBI, the British Bankers Association, the Association of British Insurers, the Council of Mortgage Lenders, the Financial Services Practitioner Panel, HSBC, Legal and General, the stock exchange listings authority, the Investment Management Association and others have all made reference to the issue. I want to test the matter and hear the Minister’s views.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

It is a pleasure to serve under your chairmanship this morning, Mr Gray. The Committee will rise before only an hour so perhaps you might wish to come back. [Hon. Members: “ Hear, hear.”] The Committee is always open to you, Mr Gray.

May I pick up a point that the hon. Member for Nottingham East made at the start about the number of sittings for the Bill? The fact that there was not a Division on the programme motion indicates that he was content with 16 sittings. We have been very accommodating to him in arranging the Bill’s sittings, so I hope he does not wish to row back from the position that 16 is enough.

Let us crack on with the amendments. I shall say a few words about the FCA, given that this is the first discussion we have had about clause 5 and the FCA’s role. It is fair to say that, under the existing regime, the combined mandate of the FSA is to deal with both prudential and conduct issues. That has meant there is not sufficient regulatory focus on the needs of consumers of retail financial services products. The establishment of the FCA as a single integrated conduct regulator confirms that conduct of business regulation deserves a regulator that is single-minded, focused and determined in pursuit of its job.

We will also give the FCA new powers to enable it to use its judgment about whether to intervene early to minimise consumer detriment, using new consumer protection tools and its competition mandate. Later, we will discuss the additional responsibilities that the FCA will take on in respect of the regulation of consumer credit. As well as policing retail markets, it will also be responsible for policing the wholesale and markets sphere to ensure that markets are clean and operate with stability and integrity. Of course, the FCA will take on and continue the FSA’s role in tackling financial crime. It will also be responsible for the prudential regulation of all authorised firms operating in the UK that do not fall within the remit of the PRA. It is the breadth of those responsibilities that provide the context for the FCA’s strategic objective, which is the subject of  amendment 51. This acts as an overarching umbrella objective that provides focus for the diverse aspects of the FCA’s work, its new regulatory culture and a framework for balancing the operational objectives.

In discharging its general functions, the FCA must act in a way that is compatible with its strategic objective, ensuring that relevant markets function well, but that advances one or more of its operational objectives. The operational objectives—consumer protection, integrity and competition—act as the day-to-day driver of the FCA’s work and approach.

In most cases, action taken by the FCA for the purpose of advancing its operational objectives will be consistent with the strategic objective. However, because the FCA will need to ensure compatibility with its strategic objective, it will also operate a check or balance on the operational objectives and help to ensure that it does not pursue a single operational objective in a manner that undermines the overall functioning of the market.

Photo of Sheila Gilmore Sheila Gilmore Labour, Edinburgh East 9:45 am, 1st March 2012

Does the Minister agree that expressing this as “the strategic objective” is otiose, because surely no one would want financial markets to operate badly? Might it not be better to expand the objective in the way suggested by the amendment?

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

Let me explain why such action suggested by amendment 51 would not be appropriate. It would be perfectly possible for the FCA to look at its consumer protection objective and advance it to such a stage where it removes all risk for consumers. However, that would lead to an outcome in which markets do not function well in meeting either the needs of consumers or helping to design and provide appropriate products for consumers. There needs to be a balance in the pursuit of the operational objectives, and that check is provided by the strategic objective.

Looking at the wording of the objective, the Government have accepted that the formulation proposed in the draft Bill that focused on promoting confidence in markets needed clarifying. The objective under the Bill has therefore been recast in line with the recommendation made by the Independent Commission on Banking and endorsed by the Joint Committee that the fundamental issue is to make markets work well.

The ICB, in its recommendation, went on to say that markets should work well

“in terms of competition, choice, transparency and integrity”.

The Joint Committee recommended that

“the FCA’s strategic objective should be amended to focus on promoting fair, efficient and transparent financial services markets that work well for users.”

That is the sort of language that the hon. Member for Nottingham East has picked up in the amendment.

We have considered the suggestions carefully, and our assessment is that the matters highlighted by the ICB and the Joint Committee and, indeed, by the amendment, are already captured by the FCA’s operational objectives and the principles of good regulation. For example,  picking up on another recommendation made by the Joint Committee, the FCA now has an operational objective to promote effective competition in the interests of consumers. The matters to which the regulator must have regard in advancing the objective include issues relating to choice and transparency, two of the values highlighted in the amendment. A market that is inefficient will not be one where there is effective competition in the interests of consumers. Similarly, the FCA’s integrity objective focuses the regulator on the integrity of financial markets, their orderly operation and the transparency of the price formation process.

In addition, the FCA—like the PRA—has new principles of regulation in respect of the importance of disclosure as a regulatory tool and transparency on the part of the regulator. The additional drafting proposed by amendment 51 is unnecessary because the issues that the hon. Gentleman has raised are reflected in either the operational objectives or the principles of good regulation. On that basis, the amendment is not necessary. The hon. Gentleman has made important points, but they are reflected elsewhere in the Bill.

On amendment 40, the clause does not carry forward in the FCA’s objectives the corresponding requirement to have regard to competitiveness. I appreciate that, as the hon. Gentleman said—he endorses the view—some City stakeholders want international competitiveness included explicitly in the remit of the FCA. The Government understand those concerns, but consider them misplaced.

I have to say that I am surprised by the amendment, which is why I asked the hon. Gentleman how committed he was to it, and he is clearly very committed to it. We only have to turn to the FSA report on the failure of the Royal Bank of Scotland to see what use has been made of the requirement to have regard to competiveness. On page 29, the report refers to

“a strong focus on the importance of the ‘competitiveness’ of the UK financial services sector and so of avoiding ‘unnecessary’ regulation. This focus reflected in part the FSMA requirement to have regard to competitiveness issues.”

On page 261, it states:

“The then Chancellor, Gordon Brown, on several occasions in 2005 and 2006, made it clear that there was a strong public policy focus on fostering the ‘competitiveness’ of the UK financial services sector, and a belief that unnecessarily restrictive and intrusive regulation could impair that competitiveness.”

It is understandable that, in deciding how to interpret the requirement to have regard to competiveness, the FSA should wish to pay particular attention to the views of the Government who enacted FSMA, but such a requirement might be subject to a wide range of misinterpretation. The Government do not therefore consider that a competitiveness objective would be a desirable feature in FSMA. Our reforms will create new regulatory bodies, with precise responsibilities and clear duties, and it would be wrong to blur the boundaries by imposing a vague requirement on the FCA and the PRA that they could not hope to fulfil—this is my point—without compromising their core responsibilities.

We do not consider that a requirement to have regard to competiveness is necessary to achieve the right balance between over-regulation and under-regulation, or to ensure that proper consideration is given to the needs of the financial services industry or the wider economy. A well regulated financial services sector will enhance  competitiveness because, first, both firms and investors will want to do business in a country where they have confidence in their markets and, secondly, both regulators will have to have regard to the principle of proportionality. New requirements, including those which might affect international competitiveness, will have to be considered and judged appropriate for balance, so ensuring that a cost-benefit analysis is undertaken.

To include a requirement to have regard to international competitiveness in the Bill would send completely the wrong signal about the nature of the regulatory regime in the UK. As we saw in the FSA report on the failures concerning RBS, there would be a risk from placing undue emphasis on international competitiveness. I therefore hope that the hon. Gentleman will see the light and not only withdraw amendment 51, but not persist with amendment 40.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I am grateful to the Minister for his detailed comments on my amendments. I am sorry that, although it is rooted in reasonable concerns, he cannot accept amendment 51. The most recent concerns expressed by the Treasury Committee this week—on Monday—are important, but we will want to return to the amendment on Report and, given our time constraints today, I will not labour my point.

I am not yet convinced by the Minister’s arguments, however. As my hon. Friend the Member for Edinburgh East asked, is the strategic objective just for show or does it serve a purpose and, if it serves a purpose, is it strong enough? If we had to carve in stone a logo or slogan above the door of the FCA, “Enter here all those who want markets to work well” would not spur our regulators to get up in the morning with sufficient levels of motivation and ambition, but that debate is for another day.

Photo of Jesse Norman Jesse Norman Conservative, Hereford and South Herefordshire

In the hon. Gentleman’s view, would regulators be sufficiently motivated by the addition of “and enter into a race to the bottom with countries far less willing to entertain honour and morality in markets”?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

No, I agree with the hon. Gentleman that that would not be a good addition. His intervention helps me to segue to amendment 40, which would require the FCA to have regard to the international competitiveness of the UK. It would be a mistake for the Minister to somehow believe that having consideration for the international relative standing of the UK, as he was saying, necessarily compromises the regulatory duties of the FCA. I do not agree that that has to be the case. It is possible to take a tough view of regulation in a sensible manner. Those two things are not incompatible—tough and sensible are not two sides of the same coin. His characterisation of the amendment is a bit crude, which is a pity given that we surely have a shared ambition, after the crisis, to have a renaissance and a rejuvenated financial services sector that is focused on a long-term but sustainable course. We still, of course, want a successful sector that succeeds internationally, and we would like that reflected somehow in the Bill.

Although I hear the Minister’s concerns, I disagree with many of his points. For the purposes of pursuing other amendments, however, I am happy to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I beg to move amendment 52, in clause 5, page 16, line 7, at end insert—

‘(4A) As part of the FCA’s consumer and integrity objectives, the FCA will raise standards of professionalism in financial services by mandating a training and competence regime. This must—

(a) apply to all approved persons exercising controlled functions, regardless of financial sector,

(b) specify minimum thresholds of competence including integrity, professional qualifications, continuous professional development and adherence to a recognised code of conduct,

(c) be evidenced by individuals holding an annual validation of competence.’.

One of the key lessons we ought to be learning off the back of the global financial crisis is the extent to which the culture—the behavioural traits—of those who are working in the financial services sector had sufficient regard to professionalism and the best standards of integrity and competence. In particular, there are many lessons to be learned from the absence of that in the regulatory approach to the wholesale financial services sector. In October 2010, Hector Sants, the chief executive of the FSA, argued that some of the causes of the financial crisis were deeply rooted in behavioural and cultural issues that resulted in actions and decisions that, with the benefit of hindsight, were not the right ones. That claim is backed up by academic research into the attitudes of risk managers, who attributed the financial crisis to weaknesses in risk cultures, poor risk communication and an overreliance on models via certain financial metrics.

Therefore, when seeking to act ethically, it is not nearly sufficient to have good intentions in terms of putting the consumer first. Financial service professionals must also be competent enough to understand the risks associated with various financial products because, as we now know, there are consequences for the wider economy and society in terms of many of the decisions that can be taken. It is important that society as a whole frames the regulatory arrangements in such a way, so that those professionals operate in a more professional and informed environment.

Although mis-selling can be a function of deliberately selling an unsuitable product for financial gain, it can also be a function of all levels of competence and understanding about the risks of a financial product and the related risk appetite of customers. In the wake of mis-selling scandals—whether pensions or endowments, payment protection insurance and so on—it has also become obvious that, in the conduct space, firms must make a significant change in their cultural and behavioural standards. From the beginning of this reform process, regulators have spoken about the importance of instituting that cultural change. Our amendment is therefore designed to bring that to the fore. I hope that the Minister will recognise the importance of that.

The Chartered Institute for Securities & Investment has already made representations on the issue. It says:

“It cannot be tenable in the long term for the wholesale sector to have significantly lower standards than the retail market in terms of qualifications, CPD and ethics”.

The amendment would not create a qualification at a single point in time. We are seeking to imbue the sector  with the concept of a continuous process of improvement that covers not only technical skills but behaviour and that includes the requirement to operate with high levels of integrity. Professionalism is an important part of the solution that we should be seeking. Evidence suggests that the higher a practitioner’s commitment to professional standards, the lower the likelihood of consumer harm. High professional standards are also important because they are linked to consumer trust and confidence. We know that there are problems with the levels of trust and confidence that many consumers have in the financial services sector.

We were talking about online activities. I have noticed that a report in TheHuffington Post this morning says:

“Next week, Treasury Minister Mark Hoban’s holding a Twitter session on ‘getting family finances right’. The financially challenged and those with nothing better to do are being encouraged to send their tweets in, with the catchy hashtag #askhoban.”

Given that the Minister is possibly having that discussion because of the discussion that we had last week about Twitter, the interweb and so on, may I put on record my congratulations to him on getting involved in that cut and thrust of the 21st century and reaching out to people? It would be a great shame if those in the outside world were to use the hashtag #askhoban to challenge the Minister on the lack of a jobs and growth strategy or to ask him why he has resisted every attempt to improve the Bill so far.

I will tweet my questions to him later as well. In this forum, I shall just ask him what harm there would be in an amendment that ensured that the Financial Conduct Authority sought to raise the professional standards in the sector. Does he not think that consumers would value that and it would be a good way of learning a lesson from the crisis?

Photo of David Rutley David Rutley Conservative, Macclesfield 10:00 am, 1st March 2012

It is good to hear that my hon. Friend the Minister has got to grips with tweeting and all of that. I would like to move away from the issue of Twitter and “ask Leslie”, if that is appropriate, whether he has had cause, in proposing the amendment, to think about what the measures might be in terms of minimum thresholds and about the resource implications for the FCA.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

The amendment is deliberately framed so that the Bill would not be prescriptive about a particular qualification or a particular way in which the matter would be taken forward. It would not be appropriate for that to be set out in the Bill. The amendment is designed simply to ensure that the FCA takes it upon its shoulders to encourage and develop the professional standards and to address the need for appropriate competences to be proven throughout the sector. I am open-minded about taking its advice about how that could best be done, but I think that in general terms it is something that we should see.

If we are having building work done at home and we want external advice, we get an architect to provide it. Architects have professional standards, as do chartered surveyors, doctors and teachers. Other professions have to demonstrate certain levels of competence. Given what we know about the crisis, it is not unreasonable to expect a level of competence to be shown in the financial services sector, too.

Photo of Jesse Norman Jesse Norman Conservative, Hereford and South Herefordshire

Will the hon. Gentleman explain where his proposal goes beyond the existing tests and qualifications, which are set by those governed by the FCA as will be? Those tests and qualifications are, in many cases, very stringent already.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

They are, but they tend to be focused on the retail sector. In the wholesale sector, there is not the same level of standards.

Photo of Jesse Norman Jesse Norman Conservative, Hereford and South Herefordshire

It is many years since I did a registered rep exam in the City of London, but I do not recall that being a retail-oriented thing at all. On the contrary, all professionals with client-facing responsibilities have an increasingly heavy burden of competence and training to meet in the markets.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I agree with his point on client-facing, because that is the case, although there is always a need to refresh and ensure that that is the case. I am talking in particular about wholesale financial services practitioners.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

We may have a difference of definition in that sense. If I may clarify, there are many firms that have their own internal tests and thresholds and standards that they wish to seek, but it is important, given that we are framing the regulator’s objectives, that the regulator also has regard to the behavioural and cultural reforms and improvements that they need. Of all the people who I hoped would agree with that point, the hon. Gentleman was the one.

Photo of Jesse Norman Jesse Norman Conservative, Hereford and South Herefordshire

The distinction is normally made between customers who are retail clients and clients who are wholesale clients. In the sense that I am using, clients means wholesale clients. Because the hon. Gentleman has not specified in any detail how this amendment goes beyond any of the existing qualifications by name, I put it to the Committee that this is a completely void amendment.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

How disappointing. I am trying my best to pick up on some of the concerns in the hon. Gentleman’s literature, articles and books, and yet he resists the amendment. If he wants to frame a better drafted amendment, I would be more than happy to entertain that discussion. It seems, however, that I am the only one doing the work to try to make the many changes needed in this part of the Bill. I welcome the advice of the Chartered Institute for Securities & Investment, which said:

“The CISI believes that Amendment 52, tabled by Chris Leslie MP and Cathy Jamieson MP…will address this issue and calls on Members of the Financial Services Bill Committee to support the inclusion of the Amendment in the Financial Services Bill.”

I am not just dreaming this up on my own.

Photo of Lorely Burt Lorely Burt Chair of the Liberal Democrat Parliamentary Party

My hon. Friend the Member for Hereford and South Herefordshire has mentioned some of the issues that I was going to raise. Of course, all of us accept that it is important that we have proper standards, properly enforced. Does the hon. Member for Nottingham East agree that this  measure would impose an additional layer of bureaucracy on a system that is already overburdened with qualifications and requirements in the opinion of many practitioners? Has he thought about how many additional hours of bureaucratic work the amendment would engender?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I have, which is why I have not been prescriptive in requiring a particular threshold or qualification. I want the FCA to have regard to raising standards and ensure that it champions that and takes that forward. Quite honestly, given the lessons that must be learned from the crisis, surely it is better to try to raise standards of professionalism generally?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I did not expect to encounter such opposition to what I thought was a non-controversial point.

Photo of Matthew Hancock Matthew Hancock Conservative, West Suffolk

The hon. Gentleman says that he is the only one doing any work on this area, but, like my hon. Friend the Member for Hereford and South Herefordshire, I, too, have written a book on this area. I am not allowed to name and promote “Masters of Nothing”, so I will not. Will he describe to the Committee the work that the FSA has done since the crisis to strengthen and expand the existing professional qualifications that make this amendment redundant?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

The FSA has taken many steps to improve some of the qualifications and professional standards, but there is a need for a continuous process that the FSA oversees. On “Masters of Nothing”, the hon. Gentleman ought to be careful, given that he has not tabled anything to improve the Bill so far. He has not made any particular contributions, so the only master of nothing whom I can see in the room is the hon. Gentleman. [ Interruption. ] Perhaps that is a little cruel. After all, we are only on clause 5.

Photo of Mark Durkan Mark Durkan Shadow SDLP Spokesperson (International Development), Shadow SDLP Spokesperson (Work and Pensions), Shadow SDLP Spokesperson (Foreign and Commonwealth Affairs), Shadow SDLP Spokesperson (Home Affairs), Shadow SDLP Spokesperson (Justice), Shadow SDLP Spokesperson (Treasury)

Does it not strike my hon. Friend as odd that Government Members are relying on the great work that the FSA has been doing in the past few years in relation to a Bill that is about replacing the FSA? Surely the Bill is about us as legislators saying what is required. We cannot simply take the status quo on trust. That is not good enough for legislation.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

My hon. Friend is correct. Opposition Members feel that the issue is important. The idea that the new authorities should have no obligation to think about such considerations would be a hole in the process.

Photo of Mark Garnier Mark Garnier Conservative, Wyre Forest

I want to highlight the retail distribution review that has gone on since 2006, which, in its broadest sense, is a welcome improvement on training. However, there are unforeseen circumstances. As a result of the retail distribution review, some 20% of independent financial advisers are furiously angry. They feel that they are being pushed out of the business altogether after many years of experience. The impact assessment estimates that a cost of £1.7 billion will fall on the retail investor. Unforeseen circumstances in a moment such as this can be quite immense.  

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I wholly understand the hon. Gentleman’s point. He makes a fair point. Sometimes regulators get things wrong in the way that they frame the changes that they are proposing. That is precisely why I want simultaneously to increase the accountability and scrutiny of regulators, so that we can test, shape and have a dialogue with the regulators on their proposals. The example that the hon. Gentleman gave is a classic example of a Minister standing up in the House and washing his hands of the matter by saying, “It is nothing to do with me. I cannot have any impact on the regulators,” when it came to that set of circumstances, even though there was a need to talk about how to improve the process.

Nevertheless, I do not think that the pendulum should go from one extreme to the other so that we end up with regulators who have no impetus to improve the professional standards and competencies of those in the sector, particularly in the wholesale sector, in a sensible way. The amendment is important. I did not expect to encounter so much difficulty. I talked to the Opposition Whip about dividing the Committee on various matters, and I did not regard this amendment as controversial. Given the resistance that I have encountered, I wonder whether we need to press the amendment to a Division. However, I will wait to hear what the Minister says.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

Given how the hon. Member for Nottingham East embraces of the interweb, as he so proudly calls it, I am slightly surprised that he is so critical of my embarking on Twitter. The Leader of the Opposition seems to respond to matters of national importance in fewer than 140 characters. Perhaps we would make more progress if we all tried to do that in this debate.

The issue is important. My hon. Friends have teased out two things from the hon. Gentleman. First, he does not appear to be aware of the range of qualifications already out there in the wholesale markets, some of which are provided and examined by the CISI, the very group that supports his amendments. Secondly, when my hon. Friend the Member for Wyre Forest, who is an ardent champion of IFAs—he and I disagree from time to time on the RDR—put a concrete example, the hon. Member for Nottingham East rowed back a bit. That is why it is important to think carefully about changes such as this and to recognise that one size does not fit all. Rules are already in place, which will be enhanced under the Bill, to deal with some of the issues that he has raised.

Photo of Chris Evans Chris Evans Labour, Islwyn

In terms of the financial services industry and IFAs, one frustration when I worked in financial services was that qualifications would change so much. When I started, the FPC was all the rage. All of a sudden, 10 years later, we are now talking about CIMA. There needs to be one qualification across the board, and I hope we can move towards that. When I worked on the unsecured lending side, which I have talked about in previous debates, there was a serious problem where it was felt that a lot of bankers selling on the retail side did not actually understand banking, and that it was seen as a sales job. I hope that the Government will look at a qualification in banking too.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury 10:15 am, 1st March 2012

There are banking qualifications out there. The Chartered Institute of Bankers—I am not sure they are called that anymore—provide qualifications.  The problem is that the varied nature of financial services and the different needs of customers and clients means that it is very hard to have a single qualification. It is vital that those qualifications, if qualifications are required, keep pace with the complexity of financial services. It is in the interest of firms to recruit, train and retain good quality individuals. The regulator’s job is to set standards of competence and ethics, and monitor that they are maintained at an appropriate level.

There is a substantial regime already in place under the FSA, and the FCA will continue that work. The FSA operates an approved person regime, and the FCA and the Prudential Regulation Authority will do so in the future. The regime requires firms to ensure that those persons carrying on functions involving the exercise of significant influence over the firm or dealing with customers or customers’ property are approved by the regulator before they start performing that role. Those individuals are also subject to ongoing requirements relating to fitness and propriety, focusing on a person’s honesty, integrity and reputation, competence and capability, and financial soundness—many of the issues covered here.

There are many more specific requirements around training and qualifications for retail consumer-facing functions in the handbook. I therefore argue very strongly that the amendment is not necessary. In fact, it could have unintended consequences. It seeks to embed some, but not all, of the current approach into the legislation, and removes the flexibility for the FCA to vary requirements according to the risk entailed by the particular activity or sector. I note with concern that the requirements would apply to all controlled functions, and all sectors equally. That suggests a one-size-fits-all approach that we simply do not believe is right, particularly in the wholesale sphere.

Finally, a particular problem posed by the amendment is the requirement of an annual validation of competence. That can be appropriate and indeed necessary in some cases. Indeed, the FSA plans to introduce such a requirement for retail investment advisers at the end of 2012, as part of the retail distribution review—the RDR. However, there is no evidence that that would be appropriate for all approved persons, particularly those in non-retail functions. In fact, it may be disproportionately costly and have the unintended effect of increasing costs for users of financial services as the costs are passed on—a point my hon. Friend the Member for Wyre Forest made in respect of the retail distribution review.

I firmly believe that the FCA will have powers necessary to police the honesty, competence and integrity of those operating in financial services, and that the amendment is therefore unnecessary. I hope that by setting that out in detail I have convinced the hon. Member for Nottingham East to withdraw the amendment.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I am conscious of the time. I do not wish to detain the Committee, and want to get on to the next set of amendments. It is a pity that the Minister does not feel that the amendment is reasonable. His main point of substance concerned an annual validation of competence issue. A reasonable discussion could be had about whether that needs to be annual, but nevertheless  it ought not to be so objectionable to have a training and competence regime overseen by the FCA to specify minimum thresholds of competence with those basic professional development characteristics. Possibly, we ought to try to improve on that, reflect on the Minister’s comments, and return to it on Report. For the time being, therefore, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I beg to move amendment 72, in clause 5, page 16, line 7, at end insert—

‘(5) The FCA must, so far as is compatible with acting in a way which advances its operational objectives, discharge its general functions in a way which promotes the growth and development of social finance and social investment.’.

Photo of James Gray James Gray Conservative, North Wiltshire

With this it will be convenient to discuss amendment 73, in clause 5, page 22, line 44, at end insert—

‘1R The Social Investment Panel

(1) Arrangements under section 1M must include the establishment and maintenance of a panel of persons (to be known as “the Social Investment Panel”) to represent the interests of organisations which specialise wholly or mainly in social finance or social investment.

(2) The FCA must appoint one of the members of the Social Investment Panel to be its chair.

(3) The Treasury’s approval is required for the appointment or dismissal of the chair.

(4) The FCA must appoint to the Social Investment Panel such—

(a) individuals who represent organisations carrying out social finance activity, and

(b) individuals who represent social sector organisations receiving social investment, as it considers appropriate.

(5) The FCA may appoint to the Social Investment Panel such other persons as it considers appropriate.

(6) In making the appointments, the FCA must have regard to the desirability of ensuring the representation of a range of different forms of social sector organisations.’.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

This is an important set of amendments. Hon. Members will have received an impressively put together pack, from a firm of solicitors acting on behalf of many in the social investment and civil society sector, detailing a series of arguments in favour of the amendments.

The amendments would place a social investment duty on the Financial Conduct Authority. Amendment 73 would also require it to establish a social investment panel. In your wisdom, Mr Gray, you have grouped the amendments together, which makes sense.

Social investment bridges the gap between charitable giving and for-profit investing through products that offer a financial return and define a social impact. This key set of amendments is needed to place a duty on the FCA to facilitate social investment.

The amendments are consistent with the Government’s expressed aim to grow the social investment market and increase investment in civil society. The Prime Minister has talked about the big society, although we have not seen much evidence of it yet—in fact, quite the contrary—but I live in hope. It would therefore be useful if we could put some of the more hopeful and aspirational aspects of those policy ideas into Government legislation.

I hope that that is something the Treasury is committed to, and that it is not left to the Cabinet Office or other Departments to advocate such things. As we know, third sector and civil society issues are sometimes parked in one part of Government, when they need to be fully considered by all parts of Government, and especially Her Majesty’s Treasury.

There are some important changes taking place. The Government have made changes on a series of fronts: Big Society Capital, the social investment wholesaler; dormant bank account moneys; and £200 million of Merlin bank investment to capitalise social sector organisations. It would therefore be quite unusual if there was no obligation on the FCA also to have regard to some of the concerns the social investment and civil society sector must cope with.

The non-profit, or low-profit, distributing nature of many social sector organisations—charities, community interest companies, co-operatives and other community benefit societies—means that innovative or atypical financial products and structures often do not fit easily in a regulatory regime that is very much cut out to oversee plcs and other for-profit organisations. It would be useful if we could increase the motivation of those in the social sector properly to engage with the financial and social investment side of activities by showing that there is a regulator that gives consideration to such issues.

The social investment market is not like an ordinary financial market. The aims and activities of the different actors are not usually simply about finance per se. Social investment requires more bespoke treatment. There are concerns that if the FCA’s constitution does not mention social investment, the FCA will not have a mandate to ensure that the regulatory regime is proportionate and appropriate.

Many in the sector have concerns that the FSA does not currently prioritise social investment or distinguish it from other activities, which can inhibit and restrain innovation in the sector in some respects. Indeed, the Secretary of State for Work and Pensions and the Chief Secretary to the Treasury, as co-chairs of the Cabinet’s Social Justice Committee, have often spoken about the issue.

Unsurprisingly, therefore, support for the amendments has been considerable. UK Sustainable Investment and Finance has put forward considerable arguments. There was a letter signed by Sir Stuart Etherington, the chief executive of—

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

Adjourned till this day at One o’clock.