Financial Services Bill

Commons Reason and Amendment

Motion A

That this House do not insist on its Amendment 1 and do agree with the Commons in their Amendment 1A in lieu.

1A: Page 36, line 13, at end insert the following new Clause— “FCA rules about level of care provided to consumers by authorised persons (1) The Financial Conduct Authority must carry out a public consultation about whether it should make general rules providing that authorised persons owe a duty of care to consumers. (2) The consultation must include consultation about— (a) whether the Financial Conduct Authority should make other provision in general rules about the level of care that must be provided to consumers by authorised persons, either instead of or in addition to a duty of care, (b) whether a duty of care should be owed, or other provision should apply, to all consumers or to particular classes of consumer, and (c) the extent to which a duty of care, or other provision, would advance the Financial Conduct Authority’s consumer protection objective (see section 1C of the Financial Services and Markets Act 2000). (3) The Financial Conduct Authority— (a) must carry out the consultation, and publish its analysis of the responses, before 1 January 2022, and (b) must, before 1 August 2022, make such general rules about the level of care that must be provided to consumers, or particular classes of consumer, by authorised persons as it considers appropriate, having regard to that analysis. (4) The duties to consult under this section may be satisfied by consultation carried out after 1 January 2021 but before this section comes into force (as well as by consultation carried out after this section comes into force). (5) In this section— “authorised person” has the same meaning as in the Financial Services and Markets Act 2000 (see section 31 of that Act); “consumer” has the meaning given in section 1G of that Act; “general rules” means rules made under section 137A of that Act.”

My Lords, this Financial Services Bill will enhance the UK’s world-leading prudential standards, promote financial stability, promote openness between the UK and international markets, and maintain an effective financial services regulatory framework and sound capital markets. I acknowledge the work of your Lordships in scrutinising this important Bill. The issue of parliamentary scrutiny has been prominent in our debates and noble Lords have more than demonstrated the positive role that they can play in this regard.

During the passage of the Bill, Members of both Houses debated how best to address issues of consumer harm in the financial sector. Amendment 1, which this House approved on Report, proposes that this should be addressed through a requirement for the FCA to bring forward rules on a duty of care. Let me underline that the Government are committed to ensuring that financial services consumers are protected and that steps are taken quickly to address issues, when they are identified. However, as the Economic Secretary set out in the other place, the Government believe that the FCA already has the necessary powers and is acting to ensure that sufficient protections are in place for consumers, so I cannot accept this amendment.

It is important to remember that financial services firms’ treatment of their customers is already governed by the FCA’s Principles for Businesses and specific requirements in its handbook. These fundamental principles set out specific requirements for firms, including that

“A firm must pay due regard to the interests of its customers and treat them fairly.”

The FCA’s enforcement powers allow it to ensure that these standards are met, but it recognises that the level of harm in markets is still too high. It is committed to taking further actions.

The Government accept, as the noble Lord, Lord Tunnicliffe, has rightly suggested, that this harm may stem from asymmetry of information between financial services firms and their customers. The risk is that some firms may seek to exploit this asymmetry. The FCA is well aware of how informational asymmetries and behavioural biases can influence consumer behaviour, and it works every day to address these issues where it considers that they may result in harm. The Government therefore support the FCA’s ongoing programme of work in this area and believe that it will deliver meaningful change for the benefit of consumers.

My Lords, we will not challenge this Motion. I cannot say that it goes as far as reassurance, but I think we are in a much better place to have the consultation and its characteristics in statute on the face of the Bill. I particularly thank the Minister and his team. I suspect they have been instrumental in making sure that the concerns, from all sides of the House, were communicated back to the Treasury and the Treasury team.

The Minister today repeated a number of the statements that the Economic Secretary made in the other place when he addressed this issue. I will highlight a few that were of particular importance to me. The FCA recognises that,

“the level of harm in markets is still too high and is committed to—”—[Official Report, 24/4/21; col. 867]

taking further actions. That is an important statement to have on the record. I am slightly concerned, however, that the focus of the FCA should not exclusively be on asymmetry of information. Asymmetry of information is fundamental and important, but it is far from everything. The Economic Secretary said that

“the FCA will consult in May on clear proposals to raise and clarify its expectations of firms’ actions and behaviours, and on any necessary changes to its principles to deliver this.”—[Official Report, Commons, 26/4/21; col. 84]

I hope that will not be confined simply to asymmetry of information, but as the Economic Secretary said, and the Minister today said, Parliament wants to be assured that the FCA’s ongoing work will lead to meaningful change. I think that reflects some of the frustrations expressed in this House of having had eight consultations to date and relatively little action. I hope this will lead to a great change.

In the amendment in lieu—this is perhaps something the noble Lord, Lord Eatwell will address more extensively than I—the fact that all consumers are part of the consideration is an important one. I want to use this opportunity to underscore to the Minister how urgent and significant this issue is.

My Lords, while we on this side of the House were hoping for action rather than further consultation, and we remain somewhat puzzled as to exactly what further the FCA has to learn that was not learned in the consultation of 2018 when it published a discussion paper entitled with some prescience, A Duty of Care and Potential Alternative Approaches. None the less, despite our desire for action and puzzlement in that respect, we welcome the tenor of the Government’s amendment.

In particular, I congratulate the Government on the clear acknowledgement that real harm is done today to millions of users of financial services by this famous asymmetrical relationship in financial transactions and that harm is done to those excluded from access to financial services. As evidence of this acknowledgement, I refer to the remarks just made by the noble Earl, Lord Howe, and also the remarks by the Economic Secretary to the Treasury, referred to by the noble Baroness, Lady Kramer. For example, Mr Glen said:

“The Government agree with the concerns that … this harm may in part stem from an asymmetry of information between financial services firms and their customers. The risk is that many firms may seek to exploit this asymmetry. The FCA is well aware of how informational asymmetries and behavioural biases can influence consumer behaviour, and is committed to ensuring that these issues are addressed where it considers that they may result in harm”.—[Official Report, Commons, 26/4/21; cols. 83-84.]

All I can say to that is: “Quite right too”.

I am particularly pleased that in new subsection 2(b) in their amendment, the Government refer to the need to extend the duty of care to “all consumers”. I urge the FCA to ignore the suggestion that a duty of care might be limited to “particular classes of consumer”. That way lies unnecessary complexity and the potential for error and injustice. Any inclusive list of “particular classes” is also a list that excludes. Confining the duty of care to particular classes would also eliminate the peculiar advantages of principles-based regulation, namely the flexibility of the principle in an industry of which persistent innovation is a defining characteristic. This is an advantage not to be sacrificed lightly.

The amendment sets out proposals on consultation. Consultations are important sources of information, and it is beneficial that those most active in the industry have the opportunity to express their views and to identify potential pitfalls. However, there is always the danger that the consultation that the FCA undertakes will be seen as an exercise in circumscribing the field of action—in watering down the duty of care. We should support the contrary. The FCA should not regard the results of the consultation as defining what it should do; rather, it should do the right thing. Having been a regulator myself, I know that regulators are never popular, but consultation is not a popularity contest.

A most welcome element in the Government’s amendment is the timetable for action—not the immediate legislative action that we on these Benches sought, but a timetable none the less. I assure the Minister that we will be ticking off the dates by which the FCA is required to act, and of course we will scrutinise the new general rules with great care. In doing so, I look forward to working with the noble Earl, Lord Howe, to achieve what is now a clearly shared objective: a well-defined regulatory principle of duty of care.

My Lords, I express my thanks to the noble Baroness, Lady Kramer, and the noble Lord, Lord Eatwell, for what they have said. I am pleased that they have both taken the trouble to read the words of my right honourable friend the Economic Secretary when responding to the debate in the other place on Monday. I was careful to frame my remarks in a way intended to ensure that there is not a hair’s breadth of difference between his words and mine.

The noble Lord made some very well-observed remarks on the risks arising from asymmetric information. However, I am happy to confirm to the noble Baroness that the FCA’s consultation will not be solely focused on asymmetry of information, important though that is; it will look more broadly at raising the level of care that firms provide to consumers—not particular classes of consumers, but all consumers.

Some hesitation—I think that is the best word—was expressed as to why there is yet another consultation. In response to that, I say that it is important that consumer groups and firms have the opportunity to comment on clear proposals and subsequent draft rule changes before final rules are set in stone. So I argue that it is a necessary step, even though I fully understand the noble Baroness’s wish for action this day. I remind her that we are talking about a consultation to be launched very shortly, and I hope that indicates that the sense of urgency which both noble Lords have indicated is right is shared by the FCA.

The FCA will and must act in accordance with its statutory objectives, which include the consumer protection objective. I come back to that point: this is not an issue that is ever lost on the FCA. With those comments, I am grateful to both noble Lords for their acceptance of the amendment in lieu, and I beg to move.

My Lords, we have a request to speak after the Minister from the noble Baroness, Lady Neville-Rolfe.

My Lords, I join others in congratulating my noble friend the Deputy Leader of the House and other Members of the Front Bench on the way they have dealt with the Bill and got us to this final stage. I just have a question about the consultation on the duty of care, and it stems from my experience in other areas of regulation—that is, health and safety and food safety. I have found that, where a duty of care is introduced, it is sometimes possible to change adjacent rules and regulations in a regulatory area and reduce the bureaucracy that can be a problem for both consumers and operators in the field. I would be interested to know whether that sort of work is likely to be envisaged by the Economic Secretary.

My Lords, I do not have an answer for my noble friend, but her point is extremely helpful and I shall ensure that it is fed into the thinking that will be wrapped around the consultation process as it goes forward.

Motion A agreed.

Motion B

Moved by

That this House do not insist on its Amendment 8, to which the Commons have disagreed for their Reason 8A.

8A: Because the Commons consider that it is not a proportionate or practical means of tackling the issues around consumers who have mortgages with inactive firms.