Clause 34 - Amendments of the PRIIPs Regulation etc

Financial Services Bill – in a Public Bill Committee at 4:00 pm on 1 December 2020.

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Photo of Pat McFadden Pat McFadden Shadow Economic Secretary (Treasury) 4:00, 1 December 2020

I beg to move amendment 30, in clause 34, page 40, line 33, after “performance” insert

“including information relating to environmental, social and governance standards.”

This amendment would require that consumers are given information about the environmental, social and governance standards of PRIIPs.

Photo of Philip Davies Philip Davies Conservative, Shipley

With this it will be convenient to discuss the following:

Amendment 31, in clause 34, page 40, line 33, at end insert—

“(4A) The FCA shall ensure that in practice the amendment made as a result of subsection (4) does not result in consumers having a reduced understanding of the risks associated with a particular investment product.”

This amendment would require that consumers are not left with a reduced understanding of the levels of risk involved in buying products covered by this clause.

Photo of Pat McFadden Pat McFadden Shadow Economic Secretary (Treasury)

In this portfolio Bill we now move on to another different subject, that of PRIIPs—packaged retail and insurance-based investment products. Clause 34 amends the consumer information requirements for the sellers of these products. These requirements are also known as key information documents—or KIDs—and we heard in the oral and written evidence that the current information requirements can be misleading for consumers. It is said that this is because they imply that past performance can be too much of a guide to future performance, which we know is not the case. At the European level, where the regulation of these products has taken place, there has also been a big debate about these key information documents and their deficiencies, so this has been an ongoing issue for some time now. It is in no one’s interest to defend misleading or potentially misleading information for consumers.

Removing or substantially altering the requirements of the key information documents does prompt the question of what should be put in their place. It is important that the Government and the regulators take this seriously. In selling anything like this, there is always a major information mismatch between what the seller knows about the product and what the consumer knows. The products are sold and designed by professional staff working for financial services companies, and bought by retail investors. Unless those investors have a professional background in the industry, they are likely simply to be looking for somewhere safe for their money that can hopefully earn them a decent return. There is a major information mismatch in these situations. Who can the consumer look to, to redress that to some extent? It has to be the Government and the regulators, through legislation on the kind of information to which consumers are entitled before making a purchase.

How do the Government and the regulator equip the consumer to make a reasonably informed choice? That is where amendments 30 and 31 come in. Earlier, when talking about capital requirements and the regulator’s duties, we had a debate about environmental, social and governance criteria being part of the regulator’s remit. The Minister rejected the idea, and the Committee voted it down, but what about making this information available to consumers? More and more investors want to invest in a way that helps, rather than damages, the planet. People care about the working conditions under which goods and services are produced, and about good governance—about companies being well run. So why not make this information available to investors? That is what amendment 30 calls for.

If the argument against making that the regulator’s job is that investors are making these decisions for themselves, let us at least give investors the tools to do that job—the information to make those judgments. The Chancellor has spoken warmly about the Task Force on Climate-related Financial Disclosures, which was set up by the Financial Stability Board a few years ago precisely to help companies inform investors about risks related to climate change in investments. The founding statement of that organisation says:

“Without reliable climate-related financial information, financial markets cannot price climate-related risks and opportunities correctly”.

The Financial Stability Board wants this to happen, and has set up the TCFD to advise companies and market regulators on how to do it. Why not take the opportunity in the Bill to ensure that consumers are provided with this kind of information? They can, of course, still make their own investment choices. They can ignore the information and say, “I don’t care about any of that; all I care about is the rate of return.” Investors are completely free to do that, but an increasing number of them do not want to, partly because they see the rate of return and the sustainability of their investments as being closely related. This is not about interfering with investor choice; it is about helping investors to make a choice, and giving them the information to do that.

Amendment 31 deals with the broader issue of the information balance that I spoke about between sellers and buyers. It is a no-detriment clause. It does not seek to prevent the abolition of the performance scenarios referred to in clause 34; it seeks to ensure that whatever replaces these scenarios does not result in consumers having less understanding than at present of the risks involved in a particular investment.

Both amendments are about the regulator taking seriously its duty on consumer information. They are about trying to make sure that public bodies are on the consumer’s side when it comes to making decisions about buying these kinds of products, and that the consumer has someone to look to for help with the information mismatch inherent in the sale of these kinds of products. They are modest and sensible amendments, and I commend them to the Committee.

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury 4:15, 1 December 2020

Amendment 30 seeks to require that information about the environmental, social and governance standards of PRIIPs products be included in the key information document, the KID. Now is not the time to address this, as I shall explain, but I have a lot of sympathy with the intent behind the amendment proposed by the right hon. Member for Wolverhampton South East. The reason I do not believe it is the right time to address this is that it would result in significant uncertainty for industry.

Clause 34 makes changes to the PRIIPs to address the potential for unintended consequences for consumers. The PRIIPs were created by the EU to improve the quality of financial information given to retail investors purchasing PRIIPs, by introducing a short, consumer-friendly and comparable disclosure document. The Government are committed to the original aim of the regulation and has proposed changes in this Bill to ensure it functions as intended.

In particular, there is not a fixed definition of environmental, social and governance standards and no standardised precedent for how such disclosures could be made in a comparable way for PRIIPs products. That is why I sincerely say that I agree with the sentiment, but I do not think we are yet at a level of maturity in definitional terms for such a measure to work. To put this in place, and ensure that the ensuing disclosures are appropriate and useful for consumers, significant policy development would be required.

As a result, the amendment would bring significant industry uncertainty, as they do not report in a standardised way on environmental, social and governance issues at a product level, which is what this would be, and have minimal guidance on how to do so. That would come at a time when the Government are intending, through the Financial Services Bill, to provide more certainty to industry on PRIIPs disclosures.

I recognise that high-quality sustainable finance disclosures that enable investors to take environmental impacts into account in their investment decisions will be crucial in facilitating the growth of green finance and supporting the transition to a lower-carbon economy. As I have previously stated, it would also be premature to adopt an environmental, social and governance amendment in the specific context of PRIIPs when the Government are considering the requirements for legislation relating to the sustainable finance disclosure regulation.

Amendment 31 also seeks to amend the PRIIPs disclosure regime, to require that changes to performance information that will be made by the FCA do not leave consumers with a reduced understanding of the levels of risk involved in buying PRIIPs products. I respectfully submit that the amendment would have little or no effect. The Bill is already intended to address concerns about the information provided to consumers in order to avoid the potential for consumer harm. The issues with the PRIIPs regulation, addressed by the Bill, include concern that the requirement to include performance scenarios in the key information documents may result in potentially misleading disclosures. That has been the key concern that has led to that measure being included.

Clause 34 will replace

“performance scenarios and the assumptions made to produce them” with “information on performance”. That change will allow the FCA to amend the PRIIPs regulatory technical standards to clarify what information on performance should be provided. The FCA already has a statutory objective to secure an appropriate degree of protection for consumers and, as the expert regulator, is best placed to work with consumers and industry to understand issues and respond to them effectively. Moreover, changes the FCA makes to the information provided to consumers in the key information document are subject to a consultation, which it expects to publish next year. Requiring the regulator to ensure that changes to the KID do not reduce consumer understanding of risk would have no effect.

The changes we are making to the Bill address the potential for consumer harm and the FCA is best placed to ensure the appropriate degree of consumer protection. I hope that offers reassurance to the right hon. Member for Wolverhampton South East. I therefore ask that he withdraw the amendment.

Photo of Pat McFadden Pat McFadden Shadow Economic Secretary (Treasury)

At this stage in our proceedings we begin to recognise the debates that we are having, because we have had them more than once. I find the Minister’s answers on the subject of ESG slightly circular. He says—and I believe him—that he has great sympathy with the intent, but now is not the time or this is not the quite the way to do it, and so on. The reason I find that unconvincing is that I think the Government will do this, or something quite close to it, and will then claim credit, saying that doing it makes the UK a more friendly environment for environmentally sustainable investments. Because of that, I will press the amendment to a vote. Then, as is the way of these things, what we did when we had the chance to make a decision about this, both at the level of the regulator and at the level of the investment product, will be on the record.

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

May I express my regret at the right hon. Gentleman’s decision? I acknowledge that this country is going on a journey, and it is very important that we make progress with regard to such disclosures, but this specific measure in this specific Bill at this time would not be in the interests of consumers or the regulation. I respectfully disagree, and I look forward to the vote.

Question put, That the amendment be made.

Division number 9 Financial Services Bill — Clause 34 - Amendments of the PRIIPs Regulation etc

Aye: 5 MPs

No: 10 MPs

Aye: A-Z by last name

No: A-Z by last name

The Committee divided: Ayes 5, Noes 10.

Question accordingly negatived.

Question proposed, That the clause stand part of the Bill.

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

Clause 34 makes changes to the packaged retail and insurance-based investment products—PRIIPs—regulation to address the potential for unintended consequences for consumers. PRIIPs are a category of financial assets regularly provided to retail investors, and the PRIIPs regulation will form part of retained EU law from the end of the transition period. The regulation sets the requirement for a standardised disclosure document known as the KID—key information document—which must be provided to retail investors when they purchase certain packaged investment products.

The regulation, while its aims are laudable, has arguably been less successful in its achievements. The clause demonstrates our balanced approach to remedying the issues with the regulation by addressing the most pressing concerns ahead of the further wholesale review of the disclosure regime for UK retail investors to which the Government are committed. This will limit any disruption to the disclosure of information to investors while seeking to improve the existing framework in this area.

To address uncertainty regarding the precise scope of the PRIIPs regulation, the clause will enable the Financial Conduct Authority to clarify the scope of the PRIIPs regulation through its rules, allowing it to address existing and potential future ambiguities. To address concerns that the methodology used to calculate performance scenarios misleads consumers, the clause will also replace performance scenarios and the assumptions made to produce them with information on performance. After the transition period, that change will allow the FCA, the expert regulator with a responsibility to protect consumers, to amend the PRIIPs regulatory technical standards to clarify what information on performance should be provided in the KID.

The final change allows the Government to extend the exemption currently in place for undertakings for the collective investment in transferable securities—UCITS, a type of investment fund—from December 2021 for a maximum of five years. That will allow the Government to consider the most appropriate timing for the transition of UCITS funds into any domestic successor that may result from the planned review of the UK framework for investment product disclosure.

We recognise that there is more to be done to improve the overall disclosure regime for UK retail investors. That is why we have committed to a wholesale review. In the meantime, these changes will provide greater certainty to PRIIPs manufacturers and address the potential for consumer harm. I therefore recommend that the clause stand part of the Bill.

Question put and agreed to.

Clause 34 accordingly ordered to stand part of the Bill.