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Secondly, Clauses 9 and 10 provide the Government with the power to make regulations to implement in full Sir David Walker's recommendations on disclosure and transparency. This will sit alongside and complement the FSA's greater control over the system of rewards. These measures will enhance shareholders' ability to exercise effective oversight over the remuneration paid in companies in which they are investors-a critical deficiency in current custom and practice. We will shortly publish draft regulations setting out the detail of how the Government plan to implement Sir David's recommendations. The regulations will naturally be subject to full consultation and to the affirmative resolution procedure.
Clause 12 relates to recovery and resolution plans, which are sometimes called living wills. These plans will play a key role in reducing the probability and the impact of failure. They aim to make it more credible that firms will be allowed to fail, thereby addressing the moral hazard problem that is particularly associated with systemically significant firms. The recovery and resolution plans are only one element of the Government's comprehensive policy to deal with systemic risk posed by firms, which also includes tougher prudential requirements on firms that pose the greatest risk.
Clauses 6 and 18 to 27 contain measures designed to support and protect consumers. The FSA will establish a new independent consumer financial education body with a remit to enhance consumers' understanding of money matters and to improve their ability to manage their financial affairs. With support and education, consumers will be empowered to make the right financial decisions, and will be better able to manage their money today and safeguard their livelihoods for the future.
The new body will co-ordinate the implementation of a national money guidance service beginning this spring, making available for the first time accessible and impartial information and guidance on a range of financial issues online, on the phone and face to face.
As well as improving consumers' financial skills and awareness, we need to provide consumers with better mechanisms for redress. In recent years there have been several instances in which a large group of consumers has suffered detriment at the hands of firms. We cannot allow this to continue. The Bill
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In Clauses 18 to 25, we also propose to enable a representative body to bring an action through the courts on behalf of a group of consumers. This may be necessary when regulatory action is not appropriate, for example, when the law is unclear. This is a ground-breaking development for UK law. It is the first example in the UK of a full collective action in the courts for people with similar claims. It will empower consumers to group together to take legal action against firms, and it avoids the situation where a large number of consumers would have to make identical or similar individual claims.
The rule committee of England and Wales and the rule-making bodies in Scotland and Northern Ireland will make generic rules governing court practice and procedure. The Government will then consult further on the supplementary regulations that may be necessary to deal with financial services claims. These may cover, for example, regulatory alternatives and further conditions for authorising collective proceedings, including the approval of the representative. Regulations can also provide for damages to be awarded as a lump sum and ensure that claims do not become time-barred unfairly. Consumers will be able to use collective proceedings to pursue claims relating to financial services once regulations and court rules come into force. We are also proposing to ban unsolicited credit card cheques which tempt those who may already be in financial distress to increase their borrowing, rather than resorting to cheaper and more appropriate forms of credit.
These measures are key to renewing consumer confidence in the financial services industry. I am sure the House will agree that giving consumers the information that they need to make sound decisions and the opportunity collectively to seek redress are both good and imperative.
I hope that I have provided some additional context to the various measures contained in the Bill and what they will achieve. I very much look forward to the speeches this afternoon, and in due course the Committee debates.
Lord Henley: My Lords, I start by thanking the Minister for introducing the Bill and apologising for the absence of my noble friend Lord Hunt of Wirral, who had hoped to make this speech. He will be back for the Committee stage, whenever that might be. I note that the Minister referred to a possible date, and perhaps we can explore that later. It would be interesting to know when the Government plan to fit in a Committee stage, as it will certainly take more than one day and probably quite a few days, and there are a number of other bits of legislation that they hope to shoe-horn into the relatively short time between now and when they go to the country. I hope to take part in that
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We understand from the Minister's introduction that the Bill is designed to remedy the enormous regulatory failure that the financial sector has just experienced. It is a remarkable mishmash of provisions-some new, some cosmetic and some merely placing on a statutory basis powers that are already accepted.
Unfortunately, the very parts of the Bill where radical changes are needed-those relating to the failure of the FSA to foresee and prevent the collapse of financial stability which triggered the recent great recession-are the most timid. I will leave it to my noble friend Lady Noakes to lay out in detail our criticisms of the opening clauses, Clauses 1 to 5. However, we believe that nothing here will address the macro-level failings of the current system of regulation. On these Benches, our policy is to return prudential supervision to the Bank of England, which would ensure that one body-and only one-has the power and the responsibility for controlling risks to the whole financial system. The current regulatory system has been proven to be a failure by recent events; the sticking plaster that these clauses represent will do nothing to address the underlying structural defects.
The other provisions relating to the duties of the FSA, and to preventing the worst sort of imprudent behaviour in future, are more technical. In many cases, as the Minister made clear, we agree with the principle behind them. They bear close scrutiny, and I and my noble friends are certainly looking forward to engaging on that in Committee, but even here many of those clauses add very little. Powers are being taken in areas that certainly need looking at, but the powers we are being asked to grant the Government-or, for that matter, the FSA-are extremely premature. There is nothing wrong with leading the way in establishing best practice in our financial sector, but many of these provisions could be used to send us in a completely different direction from the rest of the world.
It would be both costly and disruptive to the industry to rush ahead in setting up a system that will have to be substantially downscaled in the near future to prevent the United Kingdom becoming uncompetitive. Nowhere is that more true than in the provisions dealing with consumer matters. We welcome the fact that the Government are taking steps to deal with the shockingly low level of public understanding of financial products-I believe that that is in Clause 6-and with the most irresponsible of financial products. I also welcome the Government's attempts to set up quick, cost-effective and fair systems of redress for consumers. But do these provisions do that?
Once again, the majority of the provisions are nothing but broad brushstrokes, setting out the most general principles of consumer protection. That haziness is not an advantage; leaving so many critical decisions to a later stage has resulted in much uncertainty and concern among stakeholders. Consumer groups are rightly pleased that the Government have accepted that consumer redress proceedings need to be improved, but the provisions do not guarantee that the final
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Again, we believe that we are in danger of embedding serious inconsistencies, both internationally and within the domestic sector. These provisions take no account of directives going through Europe on collective redress, nor is there any co-ordination with proposals for a new United Kingdom consumer advocate for the non-financial sectors, which are looking likely to involve only opt-in procedures and maintain a public interest test. Consumers will not be well served by multiple, conflicting redress systems across the United Kingdom economy.
Even within the United Kingdom financial sector, there is confusion and duplication. After the Bill has been enacted, there will be three separate avenues for consumers to seek redress. The Bill is silent on the interaction between the existing ombudsman scheme, the right to undertake collective proceedings and the new powers for the FSA to establish a redress scheme. Would it not be sensible to enshrine in these provisions the progression suggested by the Ministry of Justice last year, whereby court proceedings would be a last resort after the administrative routes had been exhausted? I should be very interested to know what the Government think about that.
With so little spelt out in these clauses, it is not surprising that important safeguards are absent. The Bill allows anybody to be identified as a representative, even where they have no interest in the proceedings, and that opens the way for claims farmers to siphon off damages rightly owed to consumers.
The lack of any criteria against which the court will judge whether opt-out proceedings might be considered suitable leads to further questions about how costs are to be apportioned if the case is unsuccessful and how unclaimed damages will be apportioned. The answers to those questions are also to be left to the rules, which we have yet to see.
These sorts of details are not trivial. The Bill does not even contain the criteria that the court will apply when ruling on whether a collective action should be certified. Matters of implementation detail are, in the main, better left to court rules, but these decisions are fundamental to the question of what sort of system we wish to see established. I think that we need to ascertain that while the Bill is proceeding through this House; again, it is another matter that will need to be addressed in Committee.
Unfortunately, the list of uncertainties is added to by Clause 26. The extension of the FSA's powers and the exclusion of Parliament in the exercise of those powers were rightly highlighted in the fifth report of the Delegated Powers and Regulatory Reform Committee. Again, that is something that the noble Lord will have to address in due course. The existing powers which the FSA has to impose a redress scheme have been completely rewritten by Clause 26, which I think extends over four or five pages. In the process, many of the essential steps that are required under the Financial Services and Markets Act 2000 before the FSA imposes
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Clause 26 also appears to give the FSA the responsibility of second-guessing what a court might decide and of assessing liability not only for breaches of its rules but also for breaches of the law. The potential sums that redress schemes might handle run into the hundreds of millions. It is hard to accept that the courts should be excluded because of the burden on their time or the length of court proceedings when such a significant cost could be imposed on firms by what is a wholly administrative system. Judicial review will obviously not allow firms to challenge the substance of the FSA's decision, only the process by which that decision was made. It is no substitute for the checks and balances that should be in place for such schemes. However, with the number of distinguished legal luminaries who are to speak later, I have no doubt that others may wish to address that point.
The consumer provisions in this Bill should enable the establishment of just and effective systems for consumer redress. The lack of detail in these clauses unfortunately puts consumers at risk of exploitation by organisations more interested in generating revenue and publicity than in seeking fair compensation for damages-something we have seen in the world of personal injury for many years. The lack of safeguards in the clauses leaves the entire financial sector uncertain as to their rights and responsibilities towards their customers, and without recourse to the appropriate judicial protection. What is worse, both schemes-the collective proceedings and the redress scheme-appear to be retrospective. I appreciate that the Minister addressed this point earlier on another matter, but is he happy with establishing systems that will be imposed on actions taken before the Bill comes into effect? Does he not think that that is unfair and completely counter to the principles of natural justice?
As I said at the beginning, I do not know when we will have the opportunity to discuss these matters in greater detail. The sands are fast running out on both this Parliament and this Government. The Government want to squeeze a vast array of legislation into a limited amount of time. However, I can assure the Minister that, when the business managers tell us that it is appropriate to have a Committee stage of this Bill, we will want to give it a full and detailed examination of the sort that this House can give before it continues its progress. I am sure that the noble Lord will be looking forward to that Committee stage.
Lord Sawyer: My Lords, during the Queen's Speech debate in November 2009, I made a short contribution about customer involvement and engagement with retail banks. I wanted to say something more about that this afternoon and to encourage my noble friend the Minister, for whom I have the greatest respect, to think widely and laterally about how he might do more to engage customers and give them the opportunity to influence events before they happen. Already, only two speakers into this debate, we are concentrating on redress and compensation, which means dealing with customer problems when it is too late. We need to think about ways in which we can engage customers in a meaningful dialogue with their retail banks that is helpful to all parties but avoids the pitfalls of the past.
In my previous contribution I was essentially arguing that a heavy reliance on regulation-the FSA in particular-is a top-down approach. To help customers, we really need to pay closer attention to what can be done from the bottom up. What can be done to give customers more say-even some power, perhaps-in how they regulate their own relationships with the banks? I drew attention to how customer engagement was the hallmark of the mutual sector, where customers or members can attend annual general meetings, debate motions with the board of directors, elect directors to the boards of mutuals and take part in a whole range of activities that engage them with their banks or building societies in a way that does not happen in the private sector.
I recognise that the private sector is different and that customers do not own the banks. I understand that shareholders own them; Governments might own them in the short term but in the long term the banks belong to shareholders. However, I believe that there is a strong case for giving the rest of the bank's stakeholders-its employees and customers-a much greater say in how the bank is governed and managed.
In my previous contribution, I asked the Government to think about three things. First, would it be possible to have the equivalent of an annual general meeting for the customers of banks? Obviously it would have to be organised in a different way, but there would be an opportunity for a group of members to engage with the chief executive officer and other directors to discuss how the bank is performing and how that performance affects stakeholders-the customers of the bank. Secondly, I asked for an annual customer meeting in those regions where a bank has more than 10 branches. Thirdly, I asked for banks over a certain size, which is to be determined, to have a consumer council or council of members that would meet at least four times a year with-this is crucial-the chief executive officer and the directors to debate the bank's performance and to get the customer view of that performance.
Following the debate last November, I decided to put these proposals to the chief executive officers of five retail banks that I selected at random. I had substantive and helpful replies from John Varley at Barclays, Eric Daniels at Lloyds and Stephen Hester at RBS, to whom I am grateful for their time and
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With this information as a background, I want briefly to press the case even more firmly for a new, bottom-up customer engagement approach that involves customers and gives them rights about how they should be consulted and engaged with by their banks. I want to see customer engagement that goes beyond what the chief executives outlined in their letters, such as satisfaction surveys, customer panels and focus groups. All those are things that banks do regularly and successfully, but I want them to bring their customers together with the chief executive officer and other directors for a period of half a day or perhaps a day in order to have a meaningful debate on an agenda that can be mutually agreed, but agreed in a major way by the customers themselves. I want to see an end to the customer as the passive recipient and a start of customer power. I want customers, not the banks or politicians, to set the agenda on the issues that they want to talk about. I want the debate to be between the customers and the board and to have directors pay real attention to what customers think about topics that customers decide.
If we can do this-and I believe we can-we can open up the banks to real customer engagement. If we can replace banks' questions down to customers on things such as, "Do you find our staff friendly?"-a fair and important question-with real questions such as, "Will you tell us and have a real debate about what you think about our remuneration policy?", we will be moving away from the normal stuff towards hard debate between customers and the people who run their banks. That is the sort of thing that I am looking for. We can change the behaviour of the banks and we can change the paradigm of bank and customer consultation. In doing that, we can change the culture of how this stuff works.
To achieve bottom-up stakeholder and customer engagement, we do not necessarily need legislation; I understand that. The banks could do this, but I do not think that they will. Are the Government, whom I admire and greatly respect despite all their problems, prepared to stand on the side of customers and give them some real power? That can be done either by pressing the banks to do some of the things that I am arguing for or by putting something in the Bill that would help to move in that direction. I do not know what could go in the Bill or even how to do it, but I still feel strongly about what needs to be done and I hope to be able to work with the Government to make something more meaningful happen than what we have at the moment or have had in the past.
Lord Lawson of Blaby: My Lords, if the previous speaker will allow me, I will not follow his interesting proposal. I would rather start from what the Minister made clear was the principal object of this Bill, which is to ensure so far as is humanly possible that a banking meltdown such as we recently experienced, at
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The present Prime Minister cannot escape his substantial share of responsibility for the disaster, not least by his precipitate abolition as Chancellor of the greatly improved system of bank supervision that I introduced in the Banking Act 1987 and its replacement by the fundamentally flawed tripartite system. Indeed, the dysfunctional nature of his regime is all too eloquently exposed by the changes being proposed in the Bill.
Some of my best friends are bankers, although I cannot compete with the Minister in that regard, but the popular view that the root cause of the crisis was the greed and folly of all too many bankers is justified. The success of the market economy derives from the fact that greed and folly are in general kept in check by the disciplines of the marketplace. In banking, the disciplines of the marketplace in the last resort are all too often absent. That is the heart of the problem. It has long been recognised-at least since the 19th century, with Bagehot and all that-that the particularly grave consequences of banking failure mean that the authorities have to stand ready to help failed banks. The quid pro quo is that banks are obliged to submit to a form of regulation that is neither necessary nor desirable in the case of other industries.
What kind of regulatory framework do we now need to put in place? That is really what we are discussing today more than anything else, although I acknowledge that there are some other issues. Clearly, we need to ensure that the banking system is adequately capitalised at all times. But it is neither practicable nor sensible to try to put in place for the banks as they are now a sophisticated regulatory system that is both flexible enough to deal with all the many complex forms of modern banking and robust enough to provide the safeguards that we need. If we try, the system either will be inadequate or will stultify the financial sector with overregulation-probably both. We need a fundamental structural reform of the banking industry-a reform that will maximise the extent to which we can rely on the disciplines of the marketplace and minimise and simplify the burden that regulation has to bear.
A year ago, I wrote an article in the Financial Times advocating a return to something along the lines of the American Glass-Steagall Act 1933. The purpose of that would be to enforce a separation between narrow, commercial, deposit-taking utility banking on the one hand and high-risk investment banking on the other. It is quite simply unacceptable that taxpayer-guaranteed retail deposits should be used to finance high-risk investment banking activities and that the taxpayer should be required to bail out banks whose solvency is threatened when those activities come unstuck.
Any such separation is, needless to say, anathema to those who currently run broad or universal banks. Maybe they have intimidated the Minister. Incidentally, being a free-standing investment bank did not seem to prevent Goldman Sachs, for example, achieving no small success in its field. Be that as it may, the universal bank lobby raises four objections, all of which need to be considered.
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