The
Chairman: Before I call the next speaker, may I say to the
Committee that the question of clause stand part has already been
extensively referred to. It might be appropriate if we include
discussion on clause 26 in the
next group of amendments, so will members of the Committee bear that in
mind? The vote on clause 26 will be put direct to the
Committee.
The
Economic Secretary to the Treasury (Ian Pearson): I, too,
welcome you to this penultimate sitting, Mr. Benton. I will
explain to the Committee in general terms the importance of the new
power for the FSA to make rules requiring firms to establish consumer
redress
schemes. Given
your instructions, Mr. Benton, I will start by explaining
broadly the purpose of the clause, which it is twofold. First, we
believe that it will provide better routes to redress in cases of
widespread mis-selling or other scandals, contributing to the
restoration of consumer confidence in financial services. Secondly, it
will provide a regulatory alternative to large numbers of consumers
bringing claims before the ombudsman or the
courts. The
FSA already has powers to impose redress schemes on individual firms,
but its power to deal with a widespread failure is insufficient. The
hon. Member for Fareham pointed out that the existing power in section
404 of the Financial Services and Markets Act 2000 has never been used,
and I can confirm that the FSA has not approached the Government with
the intention of doing so. That is partly because the scope of the
power is limited to compliance with regulatory rules, whereas failures
often involve a mix of breaches of general law as well as FSA rules.
The power also requires the approval of both the Treasury and
Parliament, which sets a high threshold for action, as he
noted.
It is a shame
that the hon. Member for Chichester is not here. I admit that I have
not taken the opportunity to review the debates from 2000 on the
Financial Services and Markets Bill, so I do not know whether he warned
us at the time that the powers involved an incredible hurdle and would
never be used. The practical reality is that we probably did not get it
right in the Bill in 2000 and made the power unlikely ever to be used,
thereby creating a gap. That emerged clearly in the responses to the
consultation. Clause
26 provides for the FSA itself to make rules requiring firms to
establish and operate consumer redress schemes. It will be able to act
in cases of widespread failure by firms to comply with legal or
regulatory requirements. Consumer redress schemes will involve firms
investigating their past business, assessing their liability in
accordance with the rules governing the scheme and making redress where
it is due. The clause will therefore enable firms and the regulator to
deal quickly and efficiently with large-scale cases of mis-selling or
other failures that have caused detriment to
consumers. The
amendments tabled by the hon. Member for Fareham would alter the basis
on which the FSA could act by requiring the FSA to apply to the court
for a consumer redress order, passing on decisions about whether to
introduce a consumer redress scheme from the FSA to the courts. The
courts would apply certain tests before approving a scheme. Anyone
would be able to appeal an order to a higher court or go back to the
court that made the order to seek an amendment.
I am simply
not persuaded that the court is the best party to take a decision that
is the preserve of the regulator. The decision to establish a scheme is
an extension of the FSA’s normal regulatory remit, and in my
view, it is properly the role of the regulator, not the
court, to make such decisions. The court does not have the same degree
of specialist knowledge as the regulator; its established role is to
check whether the FSA has exercised its powers lawfully and in line
with its FSMA responsibilities. Courts should not be asked to make an
ex ante assessment of the merits of regulatory action. I believe that
the amendments would lead to a significant departure from the current
regulatory and judicial framework and relationships. We envisage
that under clause 26, where the FSA believes that there has been
widespread legal or regulatory failure by firms, it should have the
power to require firms to carry out an investigation. The FSA itself
will not, in general, carry out investigations or determine liability;
it will be for the firms to do so in accordance with the rules made by
the FSA. That seems a purely regulatory
matter.
Mr.
Hoban: In the Minister’s view, where there is
uncertainty whether there has been a breach of regulation or law, what
safeguard in the process will give certainty?
9.30
am
Ian
Pearson: I will come on to safeguards in a moment. The
hon. Gentleman will be aware of judicial review processes that can
already be
applied. Involving
the court is likely to be burdensome, and the likelihood of firms
appealing adverse decisions or applying for amendments to orders will
work against the speedy facilitation of redress for consumers. It is
important to remember that the schemes are intended for the most
serious and widespread cases of mis-selling or other failures by firms
in order to provide a viable alternative to individuals taking claims
to the Financial Ombudsman Service or the
courts. The
hon. Gentleman is right to say that other avenues should be explored
first. We hope that, in the first instance, the regulations are right,
so that there will not be mis-selling, but the ability to have the
schemes means that there is no need for recourse to the courts through
individual cases or collective proceedings, which we have discussed.
Without that power, there is an overall weakness in the
system. I
take the hon. Gentleman’s point, however, that the regulator
should not have unfettered powers to impose decisions without adequate
oversight or appeal mechanisms. The FSA has a responsibility to act
reasonably and proportionately, as he knows. He will be aware that
clause 26 proposes a number of safeguards. Let me list them. First,
rules made by the FSA under this power will be subject to a public
consultation, including a cost-benefit analysis. The FSA must have
regard to any representations made to it, and a further cost-benefit
analysis must be provided if the issued rules differ significantly from
the consultation draft, along with an explanation of the
differences. Secondly,
the new power is limited so that the only failures that a redress
scheme can address are breaches of legal or regulatory requirements, as
opposed to a subjective assessment of the reasonableness of a
firm’s actions. Thirdly, where the power allows the FSA itself
to take over an investigation by a firm and to take decisions relating
to the firm’s liability, firms will be able
to appeal those decisions to the Financial Services and Markets
Tribunal. Fourthly, firms will be able to challenge the FSA through
judicial review, as I said, and the High Court will be able to review
the reasonableness of a decision to require firms to establish redress
schemes. It will correct any errors of law made by the FSA in setting
out the terms of a
scheme. As
the hon. Gentleman is aware, the Financial Services and Markets Act
does not provide a right of appeal against the FSA’s other
rule-making powers, other than through judicial review. That is because
judicial review is the right way to challenge rules that apply on a
general rather than an individual basis. They do not involve
consideration of the facts of individual cases. That is exactly what we
propose here
today. I
have serious reservations about whether the amendments would be
workable. I am concerned that they would provide for applications to
the court seeking changes to a decision that the court has made. That
would in effect be a disguised appeal mechanism. The amendments would
create a risk that a regulatory decision to launch an investigation
would be delayed, perhaps by years, through legal challenges about the
meaning of words, and we are trying to provide swift and appropriate
redress for
consumers.
Mr.
Hoban: The Minister talks about the safeguards and refers
to a situation in which rules have been made under new section
404A(1)(k), in which the authority takes over the investigation and
there is then the potential for appeal to the tribunal. He will be
aware of just how long that can take in slowing down the process. In a
recent case, it has taken several years for enforcement action to go
through all the steps of warning notices, decision notices and then the
appeal to the tribunal. Therefore, even the mechanism that the Minister
proposes as a safeguard can involve quite significant delays to the
process.
Ian
Pearson: The hon. Gentleman helps me to make my point,
because that is an instance in which the FSA is stepping in and taking
actions with regard to an individual firm, as opposed to making general
rules. Where it makes general rules, the general rule has been that
those can be JR’ed. However, where it is taking action against a
specific firm, if the firm has a dispute with what the FSA is doing,
having a mechanism in such a case is not unreasonable. Yes, that may
take some time—we would all like things dealt with
speedily—but it is appropriate that for that to be done in an
individual case. That does not detract from the general principle I was
outlining. The requirement for prior court approval places an
unnecessary hurdle in the way of swift and effective action. The point
of new section 404 is to make court action a last resort, for the
benefit of firms as much as for consumers. The amendment thwarts that
objective, which is why it should not be
agreed. The
hon. Gentleman talked about a situation in which there is uncertainty
in law. Our intention is for the FSA to use the power where the law is
sufficiently clear, for example if there had already been a test case
in the courts. The FSA does not want to act when the law is not
sufficiently clear. It would always be open for the FSA to seek a
declaration from the court, but that would be the exception rather than
the norm.
Mr.
Hoban: Is that safeguard of the FSA acting only
if there is certainty built into the measure? If so,
where?
Ian
Pearson: As I said, we anticipate the FSA acting where the
law is sufficiently clear. We have talked about collective proceedings
in previous debates, when it has been made evident that the reason why
collective proceedings might be entered into is because the FSA has not
felt able to act because the law is not sufficiently clear. I am happy
to put that on the
record. May
I go through the points made by the hon. Gentleman about the more
general issues relating to clause 26? First, on new section 404(1)(b),
he raised the specific issue of the phrase “or may
suffer”. The purpose of that phrase is to ensure that cases of
contingent loss are captured, such as a person who has been mis-sold a
pension scheme but who may not have suffered any loss at the close of
the scheme. Another example, endowment mortgages mis-selling,
demonstrates why the provision is needed. The consumer has been
incorrectly sold an endowment mortgage, which is an inappropriate
product, but the detriment will not be felt until the clock stops
ticking and we find that the money to repay the mortgage when the
endowment expires is insufficient. That is why “or may
suffer” is
included.
Mr.
Hoban: The Minister raises an interesting issue, because
in a number of the cases of mis-selling around mortgage endowment, we
do not know what the outcome will be until the policy matures. What is
the expectation for such schemes? If a scheme comes to an end and we
are not clear whether a loss had crystallised, what provision will
there be in the rules for consumers to be compensated for a loss that
may not have crystallised or may never
crystallise?
Ian
Pearson: I am not sure that I want to get into the detail
of the hon. Gentleman’s specific case of a general nature. What
we are trying to do with consumer redress schemes is clear. In effect,
they require companies to put things right and ensure that there is
appropriate compensation. It will be up to companies in the first case
to review their operations and to make their decisions on what they
think is effective redress. The FSA, as a regulator, will want to
oversee the actions companies take in that respect. The hon. Gentleman
said that the FSA could act—he did not say on a whim, but
without there being widespread evidence of a problem.
I come back
to the fact that the FSA is under a duty to act reasonably and
proportionately. It must have a reasonable basis for deciding to use
the power. I do not believe that the test is too weak. Nor do I believe
that new section 404A(1)(b) needs to be tidied up, as the hon.
Gentleman suggests. However, I shall reflect upon that, and if there is
a particular problem with the wording we can come back to it on Report.
Similarly, I am not persuaded of the risk of double jeopardy in new
section 404B(4), but again I undertake to consider the point.
New section
404D defines consumers. The hon. Gentleman referred to subsection
(1)(a). The definition covers those who may have contemplated using the
relevant services. He asked why. It will enable the FSA to establish a
scheme, if there has been widespread discrimination, ensuring redress
for those who are unlawfully
denied access to a service. The FSA can require firms to establish
consumer redress schemes only if there is legal liability, so there is
no room for spurious claims. I hoped to
have clarified matters, but I see that I have
not.
Mr.
Hoban: The Minister has not. I am not sure what is meant
by discrimination in the context of financial services. Is he saying
that there may be a breach of equality rules—that a service has
been denied by virtue of race, gender or sexual orientation? Does he
mean that sort of
discrimination?
Ian
Pearson: It will certainly cover that, but I am not sure
whether it covers anything else. The provision covers those who are
unlawfully denied access. The hon. Gentleman mentioned some obvious
ways in which someone might be unlawfully denied access, but there may
be others.
Mr.
Hoban: If there is discrimination on those counts, are
there not other means of taking action that do not require a regulatory
response? I am not sure how it would fit in with the FSA’s
rules. I would expect prosecutions to be made under the Equality Bill
when it becomes law. That would be the way to deal with the matter,
rather than giving the FSA that remit.
Ian
Pearson: There may well be other avenues to pursue a
remedy. It might, however, be appropriate and best for financial
services products if we get the company to sort it out. Indeed, the law
provides for that to happen. That is why it is sensible to include such
a measure in the Bill.
I hope that
my clarification has helped. If further clarification is needed, we
will seek to provide it. I hope that I have answered the points raised
by the hon. Gentleman. It is not right to ask the courts to deal with
such matters. The regulator is responsible for taking action on those
matters. I urge the Committee to resist the
amendment.
Mr.
Hoban: I am grateful to the Minister for taking the time
to make those general remarks and for his response to the amendments
and the questions that I asked. I am concerned about the process that
the FSA will have to go through in order to establish the redress
schemes. I do not think that there is any disagreement between us that
there is a necessity for a proper consumer redress scheme to come into
play. In some of the discussions that I have had prior to the outcome
of the Supreme Court case on bank charges, it was indicated to me that,
at that point, there was not a proper mechanism in place to deal with
the back-book of consumer complaints if the case had gone in the
OFT’s
favour.
9.45
am Clause
26 contains a vehicle that would help to deal with the determination of
historic cases involving bank charges, if that determination was deemed
appropriate. It would give certainty to the industry and consumers
alike that complaints would be resolved, so I have no doubt about the
merits and necessity of that action.
Clearly, the
previous measure—section 404 of the Financial Services and
Markets Act 2000—has not worked. The fact that the FSA has not
even sought to
engage in this process demonstrates that we got it wrong in passing the
original measure. I gather that it was structured that way to ensure
political engagement when there was a mis-selling case, and I suspect
that, over time, politicians and others have decided that these matters
are best left in the first instance to regulators, rather than being
subject to a political decision. It is therefore right that there be a
general framework. What concerns
me is the circumstances in which this new scheme could be used and what
the process is to ensure that proper safeguards are in place. Where
there is certainty that there is a breach of the rules or the law, that
is a good starting point for using this process. Where that certainty
does not exist, I am not sure that the safeguards are adequate for
firms regulated by the FSA. There may not be a clear-cut case and, if
so, how do we achieve certainty in such a process? Also, we are asking
the FSA to internalise in its thinking some of the processes that a
court may go through in establishing certainty. At the moment, there is
not adequate provision in the clause to protect firms where there is no
clarity or certainty about whether a rule or the law has been
breached.
There may
well be an opportunity, either on Report or in the other place, to find
a way—perhaps by introducing a procedure—to deal with
what happens when there is no certainty that rules have been breached.
That might just strengthen some of the safeguards. There is opportunity
for more thinking to be done between now and the later stages of the
Bill’s passage. On that basis, I beg to ask leave to withdraw
the amendment.
Amendment,
by leave, withdrawn.
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