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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.
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?
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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.
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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.
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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