Financial Services Bill
The Committee consisted of the following Members:
James Rhys, Marek Kubala, Committee Clerks
† attended the Committee
I wish to say a few words about the clause and the repeal of the special competition rules that makes redundant chapter 2 of the Financial Services and Markets Acts 2000 as well as chapter 3 on exclusion from the Competition Act 1998. Instead of those provisions, section 290A of FSMA means the appropriate regulator has the power to refuse a recognition order if the applicant has existing or proposed regulatory provisions that might have excessive implications for a person who is affected directly or indirectly by it.
Does the Minister believe that there would be scope to require the recognised body to make changes to its regulatory provisions, if an application were being refused solely on the basis of that particular regulatory provision? There seems no obvious sign that subsequent changes to the regulatory provisions of recognised bodies will be monitored by the relevant body. Can the hon. Gentleman give me an assurance on that matter?
Which body have the Government decided will be responsible for such issues going forward? Will it be the Financial Conduct Authority, given that it has a competition objective, or will it be the Office of Fair Trading? I shall not go through all the information about the duties and functions of the OFT because the hon. Gentleman will be aware of it, but will he provide some clarity and say which agency is most suitable for monitoring competition?
The clause repeals the special competition regime. That regime is now considered redundant, particularly since the coming into force of the Investment Exchanges and Clearing Houses Act 2006, an Act that was sped through the House at the direction of the then Minister with responsibility for the City, the right hon. Member
The new regime provides what is effectively a system of real-time scrutiny of recognised bodies’ regulatory provision. It can therefore replace the system under chapter 2 of part 18 of the Financial Services and Markets Act 2000, which provides for detailed OFT and Competition Commission scrutiny of applications for recognition, and for the OFT to keep the regulatory provision on recognised bodies under review.
We are also repealing chapter 3 of part 18, which provides an exclusion from scrutiny under competition law generally for the rules of recognised bodies. It would not be appropriate to keep that in place now that chapter 2 has been replaced. Of course, it is of limited benefit as competition authorities can always take action under European Union competition law, whether or not they are excluded from doing so under domestic law. We are now seeing ongoing scrutiny by the relevant regulator of either a recognised investment exchange or a recognised clearing house. The body responsible is the FCA for recognised investment exchanges, but the Bank has responsibility for recognised clearing houses.
Cathy Jamieson: I thank the Minister for his clarification of those issues, some of which we covered earlier. Given the number of times that we see references under the Bill to the relevant regulator or the relevant authority, for the purpose of clarity it is useful to have such matters on the record. I do not intend to press the clause to a Division.
Cathy Jamieson: Briefly, the clause is centred on a number of minor and consequential amendments that relate generally to changes in replacing the FSA with either the Bank or the FCA, which, again, goes back to points that we have already discussed. Although the amendments may seem minor and consequential, they are symbolic of problems in the Bill as a whole and the potential confusion about which regulator is responsible for what. Many of the amendments have been made with the intention of providing clarity, but they demonstrate further the Bill’s complexity. As someone said to me, it looks as though instead of there being one fixed circuit, there are wires going off in all directions. The Government are trying to put things together in the hope that the bulb will stay on and the situation will be illuminated. There is a distinct possibility, however, that the light will be switched off if people do not understand the provision.
I want the Minister to clarify what assistance the Government will offer to individuals who have an interest in a healthy financial services industry to ensure that they can cut through the Bill’s complexity. I will not comment on the detail of schedule 8, but I ask him for clarity. I note the number of times the Bill states that the responsibility has shifted to the “the appropriate regulator”. Perhaps everyone is expected to know immediately who is responsible.
Mr Hoban: The clause and related schedule refer to a set of rules that is applied to recognised investment exchanges and clearing houses. The provisions ensure that powers are exercised by the relevant regulator. It is straightforward: the Bank of England is responsible for clearing houses and the FCA is responsible for recognised investment exchanges. There is a simple divide between the two, which provides a great deal of clarity for people interested in these topics.
Cathy Jamieson: I thank the Minister for those comments. I realise that I have, again, repeated some of the criticism that has been made in discussions on the Bill. His clarity has been put on the record, which will be helpful as we move forward. I do not intend to press the matter to a vote.
‘3 (1) Section 287 (application by an investment exchange) is amended as follows.
(2) In subsections (1) and (2) for “the Authority”, in each place, substitute “the FCA”.
(3) In subsection (3)—
(a) in paragraph (a), after “provision” insert “by another person”,
(b) in paragraph (b), for “clearing services” substitute “services falling within section 285(2)(b)”, and
(c) in paragraphs (d) and (e), for “the Authority” substitute “the FCA”.’.
Mr Hoban: This is a series of consequential amendments that deals with one matter. Clause 26 amends section 285 of FSMA to ensure that a recognised investment exchange that also acts as a central counter-party clearing house must be separately designated by the Bank of England as a recognised clearing house. We have discussed that divide. The amendments complete the necessary work of clause 26. They include in schedule 8 to the Bill the consequential amendments to other provisions in part 18 that refer to the term “clearing services” and the services offered under the exemptions specified in section 285, which will be changed under clause 26.
‘(4) In subsection (3)(b), after “clearing services” insert “or services falling within section 285(3)(b)”.’.
‘(c) omit the “or” following paragraph (a), and
(d) at the end of paragraph (b) insert “or
(c) the provision by the applicant of services falling within section 285(2)(b) or (3)(b),”’.
(a) in paragraph (a), after “provision” insert “by another person”,
(b) in paragraph (b), for “clearing services” substitute “services falling within section 285(2)(b)”, and
(c) for “the Authority” substitute “the FCA and the Bank of England”.
‘(4) In subsection (7)—
(a) in paragraph (a), after “clearing services” insert “or services falling within section 285(3)(b)”,
(b) in paragraph (b), after “clearing services” insert “or services falling within section 285(3)(b)”, and
(c) for “the Authority” substitute “the Bank of England and the FCA”.’.
‘(a) in subsection (1), for the words from “with” to the end substitute “with—
(a) its business as an investment exchange,
(b) the provision by it of clearing services, or
(c) the provision by it of services falling within section 285(2)(b) or (3)(b).”, and
35A In section 313 (interpretation), in subsection (4), after “clearing services” insert “or services falling within section 285(3)(b)”.’.— (Mr Hoban.)
Cathy Jamieson: It is good to see that we are making some progress. I hope to continue in that vein, although I want to put a few important points on the record. Clause 33 introduces certain requirements and allows the FCA to require an institution to suspend or remove a financial instrument from trading in order to protect the interests of investors or the orderly functioning of the financial markets. The changes are generally uncontroversial, but some areas need particular scrutiny.
(a) has required the suspension of a financial instrument from trading, or
(b) has required the removal of a financial instrument from trading”,
the FCA must require the relevant exchanges or multilateral trading facilities that it regulates to suspend or remove such financial instruments from trading, unless such a step would be likely to cause significant damage to the interests of investors or the orderly functioning of financial markets.
We are looking for some clarity from the Minister. For example, if an EEA state were to decide that some trading derivatives, such as sub-prime mortgage backed securities or credit default swaps, should be suspended or removed from trading, but the FCA decided that that suspension or removal would likely cause damage to the interests of investors or the orderly functioning of financial markets and so decided not to suspend or remove the financial instrument, that would cause a huge asymmetry in the global marketplace, so I would like the Minister to respond to the following questions. What would be the consequences of such a decision? Does the Minister agree that if another competent authority in another state wanted to suspend or to remove a financial instrument, there would be a reason for that? If the suspension or removal of an instrument were to destabilise the markets, would the FCA not be required to consult the Financial Policy Committee or the Treasury to ensure that it would not need to step in with its emergency macro-prudential toolkit? What consultation measures would the FCA need in order to refuse to suspend or to remove a financial instrument from trading?
Mr Hoban: The clause is very simple, because it substitutes “FCA” for “Authority” and “FCA’s” for “Authority’s”, and the relevant powers have been in FSMA for some time. There are times when we need to allow the regulator to exercise its judgment and to consider whether the steps taken by a competent authority in another EEA member state are appropriate, and processes will be in place to deal with that. On systemic risk, the FCA will clearly need to consider the consequences of its actions and whether it needs to discuss them with the FPC if there is a threat to financial stability, but I am confident that the proper processes are in place for that to happen.
Cathy Jamieson: I thank the Minister for that response, but we have put such issues on the table because we have been keen throughout the Bill to ensure that where the arrangements are fairly complex—notwithstanding that for the Minister and others who are directly involved it may seem that all the ducks are in a row, so to speak, and that people will understand it—the important oversight processes are in place. I understand what the Minister says about allowing the regulators and appropriate authorities to make such decisions and judgments, but, none the less, looking at the overall picture, we are keen to ensure that everything possible is in place wherever there are difficulties or anything that needs to be resolved.
Cathy Jamieson: As we have heard, schedule 9 makes a variety of amendments to the Financial Services and Markets Act 2000 on disciplinary measures and the enforcement thereof. The Committee’s discussion of that has been reasonably good.
Again, we want clarity on some points, because schedule 9 addresses a range of issues, including disciplinary procedures for regulated persons, penalties for market abuse and disciplinary measures, injunctions and restitutions. Paragraph 14 amends section 381 of FSMA, which sets out the FSA’s powers and functions. The schedule also addresses warnings, decisions and discontinuations, so it is an important schedule.
I am disappointed that the Government have not seen fit to accept our amendments. Once again, we are trying to improve the Bill, and it is disappointing that we have not been able to persuade the Government. Given that the schedule addresses important issues, particularly discipline and enforcement, I am not suggesting that we do not adopt it. I want to put on record, however, that we will return to some of those issues.
It is useful to move on now to issues relating to financial services compensation and how the Financial Services Compensation Scheme operates. This short clause—five lines in length—refers to schedule 10, so it is a moot point whether issues should be raised now or when we discuss that schedule.
The key points on the FSCS mostly relate to its accountability and the lines of accountability to the new Prudential Regulation Authority and the Financial Conduct Authority, as well as how that dual accountability will work. Apparently, between the FSCS and the new regulators, there will be memorandums of understanding, which will be key. The concept of trilateral contact has been raised and the FSCS has made recommendations on how the Bill should be framed, in respect of the contact and harmony that are required for joint working, co-ordination and collaboration between the FSCS and the two new regulators.
Therefore, clarity is needed over who is covering what aspects of work between the Financial Ombudsman Service and the FSCS. Some of the memorandums of understanding will be important, but I am slightly nervous that they will not receive much scrutiny, in terms of how the practical operation of joint working and collaboration might take place between the FSCS, the PRA, the FCA and the FOS, and so forth. It would be useful if the Minister can assure us that the memorandums will be put in the public domain, so that we can look through them and check their efficacy, because that point is incredibly important.
The Financial Services Compensation Scheme has fared relatively well recently and it is clearly operating as it was designed to. However, there have been considerable concerns, particularly among levy payers—the industry—who are the principal funders of the FSCS arrangements. Significant costs are involved in being a financial services practitioner, because of the levy arrangements as they stand. Although I am not steeped in the issue, as I understand it, levy payers are split into sub-classes, so there is a sense of trying to get a proportionate spread of contributions where issues will arise. However, there are concerns that an unfair burden will sometimes fall on one class of financial services practitioner, as opposed to others. For example, if failures occur—the Keydata scheme, Arch Cru, Wills & Co and MF Global are significant, as, potentially, are others—a particular class of financial services practitioner, such as independent financial advisers, might end up with a levy being charged upon their shoulders, and they might not understand how those sums have come about. Perhaps there should be a smoother application of those levy charges across a broader category of classes, rather than concentration on one particular class. That is a difficult balance to get right and I do not have an alternative proposal on how it should work. I am sure that the Minister is constantly keeping these things under review, because there are some occasions where significant concerns have been raised.
Will the Minister, in layman’s terms, paint a picture of the costs that can fall on an independent financial adviser or a typical small financial services practitioner? The levy is obviously not a tax on their work, but it is a cost—a burden to some extent—that they have to factor into their running costs, which include paying their business rates and their staffing costs and all those other things.
On some occasions I have been told that the levy is 5% or 10% of turnover. Does the Minister have a way of characterising the impact of the levy on the sector in those particular terms? If we could get a grip of what the levy is as a typical share of turnover, that would give us a sense of the significance of this issue. We hear a lot in the trade press—in Money Marketing and elsewhere—about how that levy hits the particular classes of financial services practitioners, so getting some sense of that in layman’s terms would be useful.
Will the Minister take this opportunity to try as hard as he can to improve the transparency of how the levies are calculated? There have been a number of concerns about people who might find that the final sum of money that they are due to pay has landed upon them. There is great frustration that there is not a much clearer methodology to specify how those particular liabilities have come about in that particular way. It would be useful if he gave us some assurances on those points.
The British Bankers Association and others have made a number of other points about the Financial Services Compensation Scheme and the ombudsman scheme. They have welcomed the publication of annual plans in the National Audit Office application to those particular schemes, but they have concerns about the budgetary responsibilities being properly co-ordinated as a whole within a single budgetary exercise across all the financial regulatory authorities. Again, there are concerns from the industry about the costs and the levies that fall on them in paying for that overarching regulatory arrangement. Those regulatory costs will increase significantly, and the industry is saying that it wants the compensation scheme budgets to be taken into account in the round with those wider regulatory costs. To what extent will there be an exercise by the regulators collectively to present an overall budget, so that there is some degree of co-ordination and so that the budget changes from one regulator to another will be taken in the round and not just done in isolation from each other?
Mr Hoban: The hon. Gentleman raises some helpful points and we should recognise that the FSCS plays an important role in providing confidence to investors. When a firm suffers financial problems and there is a regulatory issue, the scheme is there to stand behind that firm. The scheme has been used in a number of different ways during the past two or three years.
The hon. Gentleman asked about the memorandum of understanding. The Bill requires it to be published and I hope that that gives him reassurance. There is a challenge, which he is right to highlight and which often crops up in his conversations with trade bodies and individual levy payers—they have raised the issue with me, too—with the incidents of the levy. The scheme is designed so that individual sub-sectors have a limit on how much compensation they will pay out under the
The challenge has been that it is difficult to predict the calls on the scheme because they depend on how many firms go bust and what liabilities a firm has as a consequence of regulation. It is hard to predict. That is why I do not think one can forecast the total cost of regulation, because the FSCS levy will vary from year to year depending on what is happening in the sector. It is not a predictable flow.
Mark Garnier (Wyre Forest) (Con): Does the Minister agree that, although the FSCS is an effective safety net, it should be regarded as just that, and the ultimate cost of regulation should be reduced by having a more effective regulatory regime, which is what we are trying to achieve with this Bill?
Mr Hoban: My hon. Friend is right, but that is not to say that it will be a zero-failure regime. One purpose of ensuring that we improve the effectiveness of the regime is to try to reduce that incidence and, therefore, cost of failure to the industry. There is a trade-off there. There has been a level of failure in particular sectors in the past couple of years that have led to relatively high levies being imposed on firms. That has triggered a call for review. The FSA is currently conducting a review of the FSCS and its funding to look at the burden and find whether there are better ways to manage the interaction between different categories of firm. It is right that the FSA is doing that but the problem with all reviews is that there is a cost of failure that needs to be apportioned across the industry, and there will never be an entirely satisfactory outcome, because someone will always have to pick up the cost of failure. We need to encourage the FSA to continue the review, to engage fully with the industry and vice versa, and see the outcome and whether there is a better or fairer way to apportion the burden between different types of firm.
I had hoped the hon. Gentleman might come up with a solution. I have though about it and failed; the FSA is struggling with it, as are industry groups, because they recognise that the burden has to be shared, but who is prepared to pick up more to compensate someone for paying less? These are complex issues to get right, and the review is the right way to do so, and I encourage the FSA to continue with that process.
Chris Leslie: I am grateful to the Minister; it is useful to have on the record that there is a review process and we are looking at ways to ensure fairness. My other two points, to which it would be useful to have a response, concern the transparency of the methodology and getting a handle, in layman’s terms, on the costs to a particular firm. If we as legislators know that it is a marginal or insignificant burden, we can take that into account. However, if the FSCS levy is a significant slug of factor costs for a particular firm, we need to show extra
Mr Hoban: I think I am right in saying that the FSCS annual report provides a historical snapshot of the incidence of levy between different sectors. Broadly, what the FSCS does with a sub-sector is try to find an appropriate metric for allocating the levy across a range of firms, so, for deposit takers, it is based on their retail deposits. So, the larger the deposit base, the greater the share. On investments, normally, it funds under management. There is an industry-specific metric to allocate the share of the levy, but the other side of the equation is the cost of failure. That could be zero in one year, but a great deal in another year. So, that is why it is hard to predict.
There is a proper consultation process going on as part of the review, and a rigorous cost-benefit analysis is emerging from that. That will help inform the levy payers as to the right allocation. The last time there was a review, everyone was content with the allocation mechanism. Events subsequently suggested that the mechanism was not appropriate, and it is now being revisited. There is no perfect solution to this, but it is better that the industry pays, rather than the taxpayer.
Chris Leslie: I am grateful to the Minister. It is incumbent on us to show that we are aware of and attuned to the sensitivities of the sector regarding the levy and the methodology. However, we do not have any particular problems with the clause, and schedule 10 is simply a set of consequential changes. Having focused on the issue of dual accountabilities and what will happen with the review, I am content with the Minister’s comments.
‘(14) The regulators shall bring forward recommendations within six months of Royal Assent of this Act applying the Financial Services Compensation Scheme by brand.’.—(Chris Leslie.)
Chris Leslie: This is a mammoth clause stretching to at least a dozen words and taking up an enormous two lines of the Bill. Obviously, it refers to schedule 11 and we will talk about that shortly. The Financial Ombudsman Service has stood the test of time relatively well. It handles about 4,000 complaints a day and one in five of those turns into a formal dispute heard by adjudicators and ombudsmen. Apparently, 78% of British adults are aware of the Financial Ombudsman Service; I am not sure whether that statistic still applies, but that is the claim, so its work is relatively well known. That might be because more than half its work recently has been focused on the mis-selling of payment protection insurance. We have an opportunity to pause and reflect on how the scheme is working.
Lord Hunt’s review in 2008 of the Financial Ombudsman Service made recommendations about how it could use different means to improve communications and brand itself in a way that was more open to the public. A key recommendation was that under no circumstances should the FOS charge customers for access to its services. Can the Minister put on the record that there is no plan for the FOS to charge customers for complaining?
The 2005 Conservative party report, “Reform of Regulation Covering the UK Financial Services Industry”, recommended charging a fee of £50 for complaints, but I do not know whether that has been killed off. I presume it has. I cannot remember whether the right hon. Member for Wokingham (Mr Redwood) was the author of the report, and it would be useful to put on the record that the Minister no longer supports that recommendation. Is he generally happy with the state of the FOS? Given the small and perfectly formed nature of clause 36, I assume that he has no other plans for reform of the service.
Mr Hoban: I am not sure who the author of the 2005 plan was, but it was not me. Neither the FOS nor I plan to introduce a fee for customers. A great strength of the FOS is that it provides a free dispute resolution mechanism for consumers, which is an important way to enable them to enforce their rights when using financial services. The FOS has a high work load; it received 105,000 complaints on PPI alone last year, and such use demonstrates the high standing in which consumers hold it. It is an important part of the architecture of regulation, and we support and are keen to maintain it.
‘In section 234(1), after “or any class of authorised person”, insert “or any claims management company authorised under the Compensation Act 2006.”’.
This topical amendment relating to the Financial Ombudsman Service looks at extending regulation to claims management companies. I mentioned earlier that the payment protection insurance mis-selling crisis has had a big impact on the FOS; it has also created an industry. A large number of organisations and claims management companies have stepped into the market as mediators to facilitate the complaints process.
Yesterday, while I was recovering from a slight bout of food poisoning, courtesy of the House of Commons dining room, I spent no more than an hour watching daytime television, which is not something I do very frequently. One of the strange things about daytime television, apart from the fact that there is not a lot on, is that the advertising breaks are filled entirely with adverts urging customers to ring claims management companies. It is absolutely astonishing. I had no idea that that happened, so in some ways, I pay tribute to the House of Commons dining room for facilitating my experience of daytime television, and for opening my eyes to what is happening.
Chris Leslie: I would not, but I had my eyes opened to the phenomenon of push advertising, encouraging and luring people to use claims management companies. Several organisations, particularly building societies, contacted us when we were preparing for the Bill and said that claims management arrangements had a considerable impact on their business. They do not in any way wish to deny customers a legitimate return of their money or compensation, but they have serious concerns about whether customers are doing the right thing and getting good value by using claims management companies.
Customers are lured into using the companies in several ways. There is a phenomenal amount of cold calling, text messages, pre-recorded telephone calls, and TV and radio advertising. Companies buy lists of contracts from brokers and so on. The claims management companies, armed with the knowledge that there is possibly a relationship between certain customers and certain firms, pile a load of complaints, through pro forma arrangements, on to those firms, sometimes at significant cost to the customer; 25%, 35% or 40% of compensation sums are taken in fees by the claims management companies.
Lorely Burt (Solihull) (LD): I am totally with the hon. Gentleman on some of the techniques used by claims management companies, although I am not entirely with him on his taste for daytime television. Obviously, claims management companies need strong and proper regulation, but why should that come under financial services, as opposed to other forms of services? Why the need for financial services regulation to control properly the activities of some companies?
Chris Leslie: That is a good question. Perhaps it is one of those areas that falls under the Office of Fair Trading, or is covered in the same way as other practices. The volume of claims management involvement in financial services has been such that it would be peculiar if we set up a consumer champion called the Financial Conduct Authority that did not in some way have a locus when it came to aspects of consumer activity that clearly take up a great chunk of the public’s interest, in relation to financial services complaints and redress. It is important that the Government take action on some of the arrangements. I understand that there is a prospect of a ban on referral fees in personal injury cases, but the non-sales problem in financial services is likely to increase unless strong action is taken to deal with those claims management companies that indulge in nefarious or less desirable activities; I accept that that is not necessarily all claims management companies.
I want to get a sense of the Minister’s feelings on the subject. Is he content with the current arrangement? Is he happy with the status quo? I hope that he thinks that action must be taken to rein in the business models of some claims management companies. I understand that many of those companies throw hundreds of claims, about which there is often little information—there is often very little work involved—to the firms concerned, and leave it to the Financial Ombudsman Service and the firms to weed out the claims that do not apply.
One building society recently told the Building Societies Association that in the past six months it has had to increase its PPI provision by £15 million, of which £10 million is for the cost of processing claims from people who never bought a product from the building society in the first place. The increase was not for consumer redress; it was simply to field inappropriate claims from claims management companies. Everyone accepts that money ought to be put aside by the banks and building societies for proper compensation where it is due, but I worry that vexatious administrative costs will eventually fall on the shoulders of ordinary customers. We need to ensure that does not happen.
I have printed the standard, pro-forma document on how to complain about PPI from the Financial Ombudsman Service website. The form is significant, so I am not surprised that some people just ring a claims management company. There is a point about being put off by the number of questions, and leaving it to other organisations to do the form-filling. Has the Minister looked at the ombudsman’s scheme and judged whether the free service on the public’s behalf could be advertised and made more widely known, so that ordinary customers recognise that they have a choice between going through a claims management company, which will take a considerable slug of any compensation, and pursuing the complaint directly through a free service?
Going back to what the hon. Gentleman said in the stand part debate, 78% of people are aware of the FOS. They know that there is a free dispute resolution process out there. Some people may want to use a claims management company, but there are checks in place. The claims management regulator is carefully considering the way in which claims management companies address PPI claims.
We are caught in a dilemma. On the one hand, the hon. Gentleman says that a building society has put aside £10 million to process possibly spurious claims; on the other hand, we have a longish questionnaire. Someone has to bear the costs somewhere, and the more information that consumers provide to help expedite the claim process, the better. Having a form that provides evidence that a policy has been bought is helpful.
I raised the matter with the FOS. Banks, building societies and, indeed, the FOS are able to push back on CMCs and ask for more information. CMCs should not be on fishing trips. There is merit in banks and building societies taking a much more proactive role in pushing back on CMCs and asking them to get the information required to judge whether a claim is necessary, rather than leaving it to the bank or building society. The cost of erroneous claims is borne by their customers. Yes, banks and building societies need to pay their fair share of the cost of addressing PPI mis-selling, but they should not be paying the cost of vexatious claims. That cost should be squarely and firmly put on the shoulders of CMCs, and the banks and building societies should push back on that.
The balance is about right, but the banks and building societies need to take a much more assertive approach to pushing the onus on to CMCs. If consumers wish to use CMCs, they need to understand the costs. CMCs need to be transparent about the costs, but let us remind our constituents that the FOS is there and it is free.
Chris Leslie: I hear the Minister’s points. The issue is important and needs to be raised. I am concerned that there is insufficient regulatory ambit in the claims management procedures. I know the Ministry of Justice is considering these questions.