That sort of activity is prohibited under existing regulation, but unless it is effectively policed it comes to nothing. However, large numbers of those in the industry do not adhere to best practice and a few could even be described as rogues. In a recent debate on this subject in your Lordships’ House, the noble Lord, Lord Kennedy, said that the Government need to take a long, hard look at the industry, look at existing provisions and make a number of changes to beef-up existing regulation and ensure that existing provisions are used effectively in an industry that needs effective policing.

In those circumstances, it is also fair to pick up a point made by the noble Lord, Lord Flight, that the current arrangements with the Ministry of Justice acting as both the sponsoring department and the regulator appear to have broken down. It would be good if the Minister could report on what progress has been made on this list of helpful suggestions.

My noble friend Lord Borrie drew attention to the debt management sector and in particular to the 2007 Act. There are nothing like as many private sector debt management firms in the UK, as much of the debt advice is undertaken by charitable bodies such as Citizens Advice and my own body the CCCS, which offer a free service of high quality. Collectively, commercial firms administer some 200,000 debt management plans and about 50,000 IVAs. The trade body, DEMSA, estimates that this is some 40% of all the debt management plans currently in operation.

DEMSA states that its goal is to promote best practice and protect the interests of clients and the lenders to which they owe money, but in its review of the sector in 2010 already referred to, the OFT found instances of non-compliance among DEMSA member firms, albeit DEMSA members received a clean bill of health compared to the rest of the sector, and action was taken on a number of firms.

On the publication of its report on debt management in March 2012, the chair of the BIS Select Committee, Adrian Bailey MP, said:

“During these difficult economic times, increasing numbers of people up and down the country—not least some of the most vulnerable members of our society—are relying on the provision of consumer debt management services and payday loans to make ends meet. And yet this industry remains opaque and poorly regulated. Despite a Government consultation that ended almost a year ago little has been done to remedy the situation. The Government must take swift and decisive action to prevent firms from abusing the needs of such a vulnerable customer base”.

The committee’s main recommendations are worth repeating. The Government must work to phase out up-front fees: the provision of guidance on this point by the OFT is inadequate. The Government should introduce the necessary regulations to ensure companies publish the cost of their debt advice and their outcomes if an agreement cannot be reached during discussions

18 July 2012 : Column 317

with the industry. The Government should establish effective auditing of debt management companies’ client accounts. The report concludes that greater transparency in the commercial debt advice market would benefit consumers hugely and that voluntary codes of practice are highly unlikely to achieve this aim. The Government must be prepared to regulate if consumers are to receive the protection and the level of information they require.

It seems clear from all this that we have reached the stage in these two sectors whereby strong and effective regulation is required. We also think it is time that the Government should take advantage of the opportunity of the Financial Services Bill to make the new regulatory bodies responsible for this currently unregulated part of the market which affects so many vulnerable customers.

Lord Sassoon: My Lords, this group contains an interesting mix of loosely related amendments, if they are related at all. I shall respond first to the amendments concerning claims management firms.

Amendments 118D and 147K seek to bring claims management companies under the regulation of the FCA. Clearly the regulation of claims management companies must be effective, but there are two reasons why a transfer of CMC regulation to the FCA is not the right course of action. First, the best way to improve regulation of CMCs is to make changes to the current regime, rather than by transferring responsibility for regulation to another body. My noble friend has already questioned whether the transfer of consumer credit responsibilities by April 2014 is achievable. I should say, in parenthesis, that I believe it is achievable, although I appreciate that there is a lot to do. There will be a consultation early in 2013 about how it will operate. However, we are talking here about making another transfer of responsibilities, which I do not believe is necessary or the best way to achieve the objective.

The Ministry of Justice, as we have heard, is the body responsible for regulating the activities of businesses providing claims management services. It carried out a review last year of claims management regulation which concluded that fundamental reform was not needed but identified a number of areas where improvements could be made. A shift in responsibilities now would not address the underlying problems in the conduct of claims management companies and would detract from the concrete steps that the Government are taking to address those problems.

Lord McFall of Alcluith: The Minister said that the Ministry of Justice undertook a review that concluded that fundamental reform was not needed. As I mentioned earlier, two months ago I chaired a meeting between the banks and consumer groups on PPI, where £8 billion is at stake. Both groups were very concerned about some rogue claims management companies and asked for an urgent meeting with the Ministry of Justice. Indeed, I hope that they will get a meeting with Ken Clarke as a result. Therefore, on the ground the situation is much different from the one the Minister describes, with the Ministry of Justice saying that fundamental reform is not needed.

18 July 2012 : Column 318

Lord Sassoon: My Lords, I have said, however, that improvements are needed, as was identified in the review. If any impetus is needed in setting up the meeting which the noble Lord seeks, I shall relay the message to my colleagues in the Ministry of Justice to make sure that it happens if it is not already fixed. Yes, there are problems to fix. They include—very much to the point of the noble Lord, Lord McFall—the establishment by the claims management regulator of a specialist team to handle CMCs that pursue claims for mis-sold PPI. Not for the first time, the noble Lord is one step ahead of me, but that is one of the specific items that need to be addressed to improve the situation.

Since last November, the team has conducted more than 60 audits of claims management companies to identify any evidence of lack of compliance with the rules. That team is working with the Financial Ombudsman Service, the FSA and the Financial Services Compensation Scheme, as well as with major banks, to help identify non-compliant businesses, gather evidence and help improve the claims process for consumers. It is recognised that there is a problem, and the authorities are working in a joined-up way to deal with it. More broadly, the Government have reviewed the conduct rules which all CMCs must comply with as a condition of their licence. The Ministry of Justice will shortly launch a consultation on amending the conduct rules to tighten up on certain practices and provide further clarity. I firmly believe that improvement is needed and that the improvements to regulation of CMCs currently being proposed by the Ministry of Justice are the right course of action. Transferring responsibility for regulation to another body would not be.

Secondly, the FCA will be a conduct-of-business regulator for financial services, but claims management companies do not provide a financial service. It is true that many of those companies are active in the financial services sphere, particularly in relation to matters of PPI, but their business is not limited to claims in relation to financial services. It is therefore not clear why it would be logical for the FCA to take on this responsibility.

I turn to Amendment 108, concerning the regulation of consumer credit. The amendment would require the FCA, in considering what degree of protection is appropriate for consumers, to have regard to,

“where credit is granted to a consumer, a clear statement, in cash terms, of the total cost of such credit”.

I am conscious that, with an amendment in the names of the noble Lord, Lord Borrie, and my noble friend Lady Oppenheim-Barnes, I am facing a formidable duo with vastly more experience in these matters than I have. The Government clearly recognise that there are difficulties with APR—which, for the avoidance of doubt, refers to the annual percentage rate—representing the cost of short-term loans such as pay-day loans, but let me explain to the Committee what we are doing.

My colleagues in the Department for Business, Innovation and Skills have been working with the short-term loan industry to ensure that borrowers receive clear information about the cost of a loan in cash terms per £100 in addition to its APR. The four main trade associations, which represent over 90% of the short-term loan industry, have agreed to update

18 July 2012 : Column 319

their codes of practice to reflect this and made other commitments to help consumers, and that will be done by 25 July. I believe that this is very significant progress. Having said that, I would argue that the APR serves a useful purpose in enabling consumers to compare the cost of different credit products, so that will remain in place in addition to the new cash cost number that will be given.

9.15 pm

As I think my noble friend recognises, it is important to note that the consumer credit directive is a maximum harmonising directive and one that requires the cost of credit to be expressed as an APR. It does allow for other pricing information to be given, such as the cost of the loan in cash terms, but this must be less prominent than the APR.

I very much agree with the sentiment of Amendment 108 but, as I have explained, in making this new agreement with the industry, we are going as far as we can to add the cash cost as far as it is permitted by the European directive.

Lord Borrie: The people who will subscribe to the new code are those who are more likely to conform to the requirements of the Government, the ministry or whatever. It is the other companies, which may not subscribe to these requirements, that one is bound to be more worried about. Those are the ones that will not provide the cost of credit in cash terms.

Lord Sassoon: My Lords, I believe that a step that takes us from no agreement in this area to a situation where over 90% of the industry has agreed through the code of practice to reflect the cash cost, and for that agreement to be in effect from 25 July, is a huge step forward. Of course, because it is done via a code of practice and a voluntary agreement, BIS has been able to do it relatively quickly. I would suggest that having it 90% done, and done quickly—which one hopes will drive fringe players out of the market if they do not buy into the codes of practice—is the right way, and an energetic and effective way, for my colleagues to address the situation. We should wait and see how that operates, but I believe that it will be effective. It is a major advance and is compatible with the difficult constraints of the European directive.

Baroness Oppenheim-Barnes: Could the motive behind the European directive possibly be their desire not to see anything quoted in euros?

Lord Sassoon: I am not going to question the motives of the directive, except to note that in this area, as in others, we are not free agents.

I turn to Amendment 118E, which seeks to insert into the list of “regulated financial services”, referred to in the FCA’s objectives,

“debt management companies or debt adjustment services companies”.

There is no explicit reference to debt management or debt adjusting on the face of the Bill. However, I would like to reassure—I am grasping for whose name is attached to this amendment—the noble Lord,

18 July 2012 : Column 320

Lord Eatwell, but also the noble Lord, Lord Stevenson of Balmacara, that Clause 6 enables all consumer credit activities currently regulated by the Office of Fair Trading to be transferred to the FCA, including debt management. So I hope the noble Lord will accept my assurance that no further provision in this area is necessary, because it is indeed picked up by the definition of Clause 6.

I should turn next to Amendment 197ZA, before I address some government amendments in the group. It concerns the question of the statutory debt management scheme and is also in the name of the noble Lord, Lord Borrie. It would amend enabling powers in the Tribunals, Courts and Enforcement Act 2007 for a statutory debt management scheme, if implemented, to apply to commercial as well as not-for-profit organisations.

As I said, the Government are currently working to deliver non-legislative alternatives with the debt management industry, as we have with the fee-charging pay-day loan industry. We want to give sufficient time and focus to that work to develop a voluntary code and to take account of the wider changes to the regulation of the debt management sector enabled by the Bill, which will lead to more proactive and intrusive regulation for the sector, before we look to a statutory scheme. If the Government were to resort to a statutory scheme, that would be the appropriate point to revisit the provisions in the Tribunals, Courts and Enforcement Act 2007 to ensure that they meet the policy needs, rather than addressing it at this stage through the Bill before we have bottomed out the ability of a non-legislative solution to have effect.

I shall speak briefly to the government amendments in the group, Amendments 142 and 194 to 196. Noble Lords may be aware that the Government brought forward a number of amendments at Report in another place to support the transfer of consumer credit regulation from the OFT to the FCA. Among those amendments was provision enabling local weights and measures authorities—trading standards—to continue to provide services to the national consumer credit regulator and to take action against those who provide credit on an unregulated basis following the transfer to the FCA. The amendments complete the group by creating parallel provisions for the Department of Enterprise, Trade and Investment in Northern Ireland, which plays the same role in Northern Ireland as does trading standards in England and Wales.

With those various assurances abut this rather disparate group of amendments, I ask the noble Lord, Lord Borrie, to consider withdrawing his amendment.

Lord Borrie: Yes, of course I will withdraw my amendment, but I must express disappointment with the disinclination of the Minister to take the one further step that would enable a change to be 100%, rather than whatever percentage of good boys will conform to a code of practice.

Lord Bilimoria: My Lords, I accept that there is an element of contradiction in advocating, on the one hand, that we go carefully on transferring consumer credit but, on the other, that we transfer CMCs. I just

18 July 2012 : Column 321

make two points on consumer credit. I argued strongly for its transfer at the time of the FSMA; I am pleased to see it happening; I think that that is correct. CMCs are basically a financial service. They are lodging claims for people, whatever the cause. I hope that, in due course, it may be transferred to the FCA.

Amendment 108 withdrawn.

Amendments 108A to 108D not moved.

Amendment 108E had been withdrawn from the Marshalled List.

Amendments 109 to 111 not moved.

Amendment 111A

Moved by Lord Tunnicliffe

111A: Clause 5, page 17, line 23, after “exchange” insert “or market maker”

Lord Tunnicliffe: My Lords, Amendment 111A is in the names of my noble friends Lord Eatwell and Lady Hayter, and I shall also speak to Amendments 112, 115 and 116; I shall do so briefly.

Competition has an important role to play in the financial services industry. Indeed, as the party leader, my right honourable friend Ed Miliband, has been arguing since his conference speech in the autumn of 2011, if we are to rebuild our economy so that it works in the interests of the many and not the few, we need root and branch reform of our banks. Having greater competition and more players in the market is an important element of the process. Competition, along with choice, transparency, integrity and access, is an integral part of the market working well. On this side of the House we welcome, therefore, the inclusion of a competition objective in the remit of the Financial Conduct Authority.

However, we must continue to emphasise the question “What is competition for?”. It is for the consumer. In a sense, I am disappointed that the noble and learned Lord, Lord Fraser of Carmyllie, did not move his amendment. First, it would have been an opportunity for me to say just how much I disagreed with it. Secondly, it would have been an opportunity for the Minister to say how much he agreed with me. I hope, therefore, that he will emphasise the importance of this clause to the interests of the consumer. The competition objective in the Bill is built around the consumer, so I support the amendment in the name of my noble friend Lord McFall, which requires the FCA to have regard to the factors contained in new Section 1A.

I shall turn to Amendment 111A, and I am very pleased that the noble Lord, Lord Lucas, asked a probing amendment, proving that it is respectable to do so. This is but a probing amendment, in order to understand new Section 1E(1), which states that:

“The competition objective is: promoting effective competition in the interests of consumers in the markets”.

Perhaps it is trying to say “all financial markets”; if the Minister said that was what it meant, that would be great. Clearly it covers a great chunk of financial markets with new subsection (1)(a), “regulated financial

18 July 2012 : Column 322

services”. However, it needs to add new paragraph (b), because—and I did not know this, until I looked it up this morning—certain recognised investment exchanges are not, apparently, regulated financial markets, because they get an exemption under Section 285(2).

We have added “or market maker” because market makers seem to be taking in the role of investment exchange in some areas. There is a move-over. If those market makers are already covered by new paragraph (a) —“regulated financial services”—I would be content with that assurance. If they are not, I would be grateful if the Minister could sketch out what exemptions there are from this new paragraph. I beg to move.

Lord McFall of Alcluith: My Lords, I would like to address briefly a number of the points in Amendments 112, 115 and 116. It is just a simple change: rather than have “may have regard”, put “must have regard”—to, for example,

“the needs of different consumers who use or may use those services, including their need for information that enables them to make informed choices”.

It is this concept of informed choice that is very important. I well remember when we had the scandal of endowment mortgages; we looked at that issue in the other place. The consumers would be presented with two types of mortgages, one which the salesperson said had a small pile of cash at the end of the day, and the other a repayment mortgage. Believe it or not, the one which had a small pile of cash was cheaper than the repayment mortgage. It defied logic, but everybody piled into it, not least because the salespersons were getting 80% of the first year’s contributions from individuals. When we looked at this, the industry said, “This was way in the past”. It was depending on a high level of inflation for its returns. If inflation is 8% then you are going to get your cash pile, but if it is only 2% or 3% then you are in trouble. We are still living with the consequences of those endowment mortgages, with people making claims for them. That was not an informed choice, and it is why it is important to be more definitive in the Bill and insist that the FSA must look at that issue, as well as at,

“the ease with which consumers who obtain those services can change the person from whom they obtain them”.

9.30 pm

We all remember another case where people going into retail shops, whether an Army and Navy store, Marks and Spencer or wherever, were being sold credit cards in store. They had to sign up there and then in the store for those credit cards and there was no redress. We ensured in the other place that that practice was stopped and that people had an opportunity to reflect on the card and decide whether or not they wanted it.

If you make a plea to people in industry, that does not seem to work, so we need to be much more firm. It is with that in mind that I ask that we make this simple change from “may” to “must”.

Lord Sharkey: I support Amendment 112 in the name of the noble Lord, Lord McFall. As the Bill stands, the use of “may” instead of “must”, when listing matters

18 July 2012 : Column 323

to have regard to in considering the effectiveness of competition in the markets under discussion, seems to have two problems. The first is that it makes the competition objective less strong than the consumer protection objective, in which the FCA is given a list of things that it must have regard to. In the competition objective, the FCA is given a list of things that it may have regard to. Why is this? Why is the consumer protection objective definite about what the FCA must have regard to, while the competition objective is not? Surely it would be more sensible to have these objectives on an equal footing and in both cases supply the FCA with a list of things that it must have regard to.

The second problem is that the use of “may”, regarding what the FCA takes into account in considering the effectiveness of competition, seems to render the whole clause without much force or substantive meaning. Why list the factors that the FCA may have regard to if it actually does not have to do so? Either the factors listed are important to consider or they are not. If they are important, surely the FCA must consider them. If they are not important and can be disregarded by the FCA, as the Bill seems to provide, why are they there at all? I hope that the Minister may see the virtue of “must” and might agree to the noble Lord’s amendment.

Lord Sassoon: My Lords, I am infinitely flexible; it depends how long we go on this evening but I can see one or two amendments coming up on which I can be more accommodating than I will be on this one.

I shall start with perhaps the easiest part: the questions from the noble Lord, Lord Tunnicliffe, around Amendment 111A. I am delighted to see the noble Lord joining the fray. We have now had four players on the Front Bench from the Opposition; I wish that we had such depth of reserves on our side. However, I will battle on.

Amendment 111A seeks to bring the activities of market makers into the scope of the FCA’s competition objective. I reassure the noble Lord and the Committee that the activities of market makers are already very much covered by the objective. Put very simply, to operate as a market maker firms will have to obtain permission to deal in investments as principal, and that is a regulated activity. That means that such firms are performing a regulated activity or a regulated service, and noble Lords will see that new Section 1A(1)(e) clearly states that markets for regulated financial services fall within the scope of the FCA’s objective, so the FCA can indeed shine its regulatory light on market makers as on any other part of the sector. For completeness and to clarify, as far as recognised investment exchanges or RIEs are concerned, they can be exempt from the general prohibition under Section 285(2) of FiSMA, but even their activities are brought within the scope of the competition objective by virtue of subsection (1)(b) of new Section 1E in the Bill. I hope that that deals with that.

Turning to Amendment 112, competition can mean many things to many people. To indicate what the Government might want the FCA to look at in deciding how to advance its competition objective, subsection (2) of new Section 1E sets out a number of matters to which the FCA may have regard in assessing the

18 July 2012 : Column 324

effectiveness of competition in a given market. It is an indicative and, importantly, a non-exhaustive list. The FCA cannot dodge or duck out of its overall competition objective. Had we not put the non-exhaustive list of examples down there we might not be expressing the concern that we have. There would be the simple competition objective and that would be that.

Given the list, let me explain a bit more why there is danger in changing “may” to “must”. That would mean that the FCA would always have to consider all the issues set out in new subsection (2). The FCA should not necessarily have regard to all of that list when looking at particular competition questions. There could be unintended consequences.

If the FCA wishes to take action to promote switching, the consideration of barriers to entry will not be as important as the ease with which consumers can transition between providers and how that is affected by the structures of the market or behaviours of incumbents. To enable the FCA to generate the outcomes that we want under the competition objective it is important that the list is expressed in the terms that it is. This does not make the basic objective of the FCA weaker in this area. It just means that we need to give it a degree of discretion to be able to target the particular issues that they are looking at at any one time.

That addresses the amendments that are being spoken to and I hope that the noble Lord, Lord McFall of Alcluith, will consider not pressing his amendment.

Lord Tunnicliffe: My Lords, I am sorry that the Minister did not rise to my invitation to wax a little lyrical over his commitment to consumer interest, but at this late hour I do not now invite him to. I am sorry too that he was not able to see the attraction of “must”. I have laboured on such ventures and I know the ferocity with which one’s brief has said that one must never move from “may” to “must”. Many of us would have been more satisfied if the Minister had accepted “must”, and we will have to see whether my noble friend Lord McFall brings this back later for further consideration.

I thank the Minister for his straightforward assurances on Amendment 111A and I beg leave to withdraw.

Amendment 111A withdrawn.

Amendments 112 to 113 not moved.

Amendment 114

Moved by Lord Sharkey

114: Clause 5, page 17, line 34, after “market,” insert—

“( ) developments in the markets for unregulated financial services that are in the interests of consumers and businesses,

( ) the desirability of establishing a new authorisation regime for direct financial platform providers to protect consumers and providers,”

Lord Sharkey: I shall speak also to Amendment 119. Both amendments are to do with financial innovation and particularly with peer-to-peer lending. They add to the factors the FCA may have regard to—or must

18 July 2012 : Column 325

have regard to, if the Government eventually accept Amendment 112—when considering the effectiveness of competition. The first amendment would require the FCA to have regard to developments in markets for unregulated financial services that are in the interests of consumers and businesses and to have regard to the desirability of establishing a new authorisation regime for direct financial platform providers to protect consumers and providers.

That means, essentially, that the FCA would have to look carefully at new, unregulated services and would have explicitly to weigh the merits of regulating peer-to-peer lending organisations. Peer-to-peer lending has already passed the $1 billion mark in the United States, where it is regulated, and it is growing very fast in the United Kingdom. Many commentators see peer-to-peer lending as a direct way of dealing with the banks’ failure to lend to individuals and to small businesses. Andy Haldane of the Bank of England has even suggested that these non-traditional lenders could eventually replace banks.

The Government acknowledge the potential of this new lending model and have made £100 million of seed money available. However, this new model of peer-to-peer lending is not covered by existing financial services legislation and that leaves it exposed to very serious dangers. This new industry, unregulated, is extremely vulnerable to rogue players entering the market. All it takes is one rogue player, one big scandal and a lot of losses for ordinary lenders for the model to be discredited and to fail. That would be a very undesirable outcome. We desperately need new and innovative financial services to provide real competition for existing banks and to fund those areas of commercial life, particularly SMEs and start-ups, that the banks are so obviously failing to fund. It is not as though innovative, real-world consumer-orientated financial services are in good supply. In fact, it could be argued that peer-to-peer lending and crowd funding are the only significant financial innovations that are around at the moment and likely to benefit the real economy.

At Second Reading, the Minister said in response to suggestions that peer-to-peer lending be taken into regulation:

“The Government do not think that statutory regulation is appropriate at this point. The sector is very small and such regulation would be a barrier to new entrants and innovation”.—[Official Report, 11/6/12; col. 1261.]

The industry does not agree with that. The leaders of the industry are acutely alive to the danger to their business model presented by a rogue operator. They would welcome regulatory protection for consumers and providers. This protection need not be onerous. Indeed, any regulatory regime should be judged for suitability not only on the protections it provides but on how little of a barrier to entry and innovation by proper operators it offers. In fact, this is one of those occasions when the market, particularly for crowd funding into SMEs, requires regulation in order to expand. We need IFAs to distribute these products if we are to enlarge the market, and IFAs absolutely require regulation before they will consider doing that. We also need regulation that will allow these products to be located inside tax-efficient wrappers.

18 July 2012 : Column 326

This is one of those asymmetrical cases where no regulation risks the complete destruction of the sector and some regulation carries only a small risk of discouragement, if any, and the strong probability of encouraging wider distribution and uptake. At Second Reading, the Minister also said,

“this is a matter that we will keep under review”.—[

Official Report

, 11/6/12; col. 1261.]

That is precisely what these amendments would require the FCA to do. It is important that we have that commitment in the Bill and I hope that the Minister will recognise that the balance of risk and reward here argues in favour of these amendments.

Before I close, I would like to ask the Minister for clarification. It may be that the Bill already brings peer-to-peer lending under regulation. Clause 6(3) amends paragraph 23 of Schedule 2 to FSMA 2000. This paragraph brought into the scope of regulation rights under any contract under which one person provides credit to another if the obligation of the borrower to repay is secured on land. The present Bill amends paragraph 23 by removing any reference to secured on land and substituting the phrase,

“Rights under any contract under which one person provides another with credit”.

Does this change in practice bring peer-to-peer lending under regulation, as it might appear? If it does not, as is probable, despite the apparent clarity of language, then I hope the Minister can give sympathetic consideration to the amendments. I beg to move.

9.45 pm

Lord Flight: My Lords, I believe that the FSA has been looking in some detail at how to regulate platforms, and has been doing so for quite a while because it is difficult territory. It is either about to or just has come forward with its proposals.

Lord Lucas: My Lords, I very much support what the noble Lord, Lord Sharkey, has said in this area. My Amendment 117B in this group picks up a couple of aspects of it. The first aspect is,

“the role of regulation in enabling innovative business models to compete with established businesses”.

By regulating this area so heavily we have created a structure where it can be extremely difficult for people to be innovative. The noble Lord, Lord Sharkey, drew an obvious example of that when he talked about the regulations that independent financial advisers have to work under. If IFAs are allowed to talk about ordinary money products but not allowed to talk about peer-to-peer lending products then, by not regulating them and not bringing them under the umbrella of regulation, we are making it difficult for these new entrants to compete. We are creating a barrier to innovation.

This particular innovation is not just fluff or amusement. It promises, if it gets going in a substantial way, to alleviate some of the pressure on the national financial system: you get away from borrowing short and lending long, and away from the £85,000 guarantee, and you put those risks back on the lender. It is also a structure that may prove to be extremely useful in local lending in areas where the lenders can identify that the borrowers are part, in some way or another, of

18 July 2012 : Column 327

the same community and can, in that way, develop substitutions for pay-day lending and other more expensive and onerous arrangements. So there are real opportunities here to improve the financial system as a whole. The FCA really ought to have regard to the way in which regulation produces barriers for entry in the way that the noble Lord, Lord Sharkey, has described.

But it is not just without government that these barriers appear; they are also within government. One of the principal barriers to the expansion of peer-to-peer lending is the tax arrangements, that you cannot offset your losses on bad debts against the interest you earn on the good ones. Banks can but peer-to-peer lenders cannot. Among the reasons why the Treasury, which is refusing to regulate, will not extend tax concessions is that these businesses are not regulated. So the Treasury itself is causing the problem that is crippling the development of this business.

It is all very well to run a business which is restricted to borrowers of the highest quality, which is effectively what it is at the moment. All the peer-to-peer lenders that I am aware of have pretty low bad debt ratios. That is because they do not lend to risky borrowers, because there is no offset for the losses. The net return to their investors if they did start making loans with, say, an average default rate of 5% would start to become extremely low because there would be no relief for the 5% of losses and they would be paying full income tax on their 12% of income. It starts to make very little sense, so none of the peer-to-peer lenders have gone into that territory. But lending to areas of the community where there is a risk of default, such as young businesses, is exactly the sort of area where this Government are trying to push the banks with so little success, and where businesses such as the Funding Circle would love to go if the Government would make it possible.

As I say, the reasons for not going there are entirely due to the Treasury, and the reasons why the Treasury cannot grant the concessions are also down to the Treasury. It really should be open to the FCA to try to break that circle and persuade the Treasury to face one direction at a time and to promote something which is in everyone’s interests, particularly the Treasury’s. Nor would I just confine our thinking to peer-to-peer lending, which is what is there at the moment. Other peer-to-peer ideas are around. Peer-to-peer investment in start-ups already qualifies. There is an FSA-registered business called Seedrs, in which I take an interest. There are proposals for peer-to-peer investment management. That goes back to an earlier amendment in terms of trying to reduce the return that stays in the pockets of investment managers by disintermediating that business.

There are certainly proposals for doing this in the field of annuities. The opportunity is obvious: old people want income and young people want capital. If you can produce a mechanism where the two can exchange that, you are looking at something where you can cut out a very large amount of cost in the middle, where you could produce for people who are trying to settle their pension fund annuity at the moment a decent rate on which to do it, and where you could provide for young people who need capital a decent rate at which to have it.

18 July 2012 : Column 328

The difficulty with doing that is the forest of regulation we have put in place to tie down the existing old-style businesses in that area. The opportunity for and the benefits of innovation in that area seem obvious. So we must have an FCA which understands not just not-regulating but also how regulating constructively will enable businesses to compete where, if they are left unregulated, they may not even be able to exist.

Lord McFall of Alcluith: My Lords, I should like to add my support. My name is not on the amendment. A number of months ago I spoke to Giles Andrew, of Zopa, about peer-to-peer lending, and I was very taken by what he said. I think back to the MPC and the American whose name escapes me but who is just departing from the MPC to take up a post at the Peterson Institute in America and his comments about a spare tyre. We lack a spare tyre in the UK in terms of our banking. Whether it is a Labour Government or this Government, none of us has solved the problem of getting lending out. We have a lot to learn in that area. Our top banks are responsible for 450% to 500% of our GDP. We will not make progress on that. This initiative should be looked at. Nothing fundamental will change tonight but it is good that it is on the agenda and I am delighted to be associated with it.

Baroness Kramer: My Lords, I am in full agreement with the three previous speakers, who have covered virtually all the territory—which at this hour I will not repeat. However, I should like to add one point. The only argument that I have received from Ministers outlining why this area should not be regulated is that regulation is potentially too heavy-handed and will prevent the sort of growth of a new, young industry. I think that in this House we have rather more faith in the regulator, which has begun to move forward and understand that appropriate and proportionate regulation is a standard that can be achieved. I say that in order to pick up the entity to which the noble Lord, Lord Lucas, referred. Unlike the peer-to-peer lenders which fall outside the current regulatory framework, Seedrs had to be regulated because it is marketing equity investments. It falls into the regulated arena and has had to seek authorisation.

I quote from the blog of the chief executive:

“The authorisation process was long and sometimes painful, but we feel that it was an absolute necessity in order to satisfy both the letter and the spirit of the law. The FSA scrutinised every aspect of our business model and operations, and after over a year of iterative questions and answers, they gave us the go-ahead.

We are proud to be the first platform of our kind to receive FSA authorisation—or, to our knowledge, approval by a major financial regulator anywhere in the world. But more importantly, we are convinced that it was the right thing to do to go down this route, and we now look forward to launching the Seedrs platform as a fully authorised business”.

It is using the authorisation as a marketing mechanism. Having talked to the regulator and then followed through with Seedrs publications, it is clear that both sides have been satisfied with this process. Rather than being too onerous, there is a sense that regulation has been appropriate and that the authorisation has matched the circumstances. If we can achieve that with the equity platform, surely we can achieve that with the lending platform.

18 July 2012 : Column 329

The Lord Bishop of Durham: My Lords, my name is on this amendment and the noble Lords, Lord Lucas and Lord Sharkey, have said virtually everything I want to say. I will simply add that in the areas where the access to finance is most wanting, the creation of safe space—through regulation of the kind that the noble Lords described—is what will enable competition to start to break the stranglehold of some of our larger lenders, who neither lend in these areas themselves nor are willing to make space for others to lend in them. That is a fundamental reason why there is still a shortage of finance.

The Bank of England’s north-east agent in her report, which was published this morning, talked about inadequate supplies of finance to the SME sector in the north-east of England despite the valiant and determined efforts of the Government, through guarantee schemes, to make that possible—and those schemes are not providing finance at anything under 10%. The banks are simply layering charge upon charge upon charge. We need regulation to permit competition. It will not stop competition. I hope the Minister will see the advantage of this as it has been so eloquently put by previous speakers.

Lord Tunnicliffe: My Lords, these Benches do not have a particular view on Amendment 114. If the noble Lord, Lord Sharkey, is to press this further at a later stage in light of the response from the Minister, we will have to think through whether we will support it. It clearly has consensus support in the Chamber tonight so we will look at it very carefully. In his response, can the Minister give a view on how wide or narrow he sees his amendments, particularly the extent to which they might have a general utility in, for want of a better term, future-proofing the legislation?

Turning to Amendment 117B, we all want to support innovation. Once again we do not have a view on this amendment, but if it is pressed at a further stage, what we always have to look at with innovation and competition is proportionality. Yes, innovation creates competition, new ideas and opportunities, but it may put the customer at risk. Proportionality has to be there to balance new opportunities with proper protection.

10 pm

Lord Sassoon: My Lords, in addressing Amendments 114, 119 and 117B, the Committee has drawn attention to some very topical and important issues. I cannot now remember why Adam Posen of the MPC came in; I think it was Adam Posen who the noble Lord, Lord McFall of Alcluith, referred to. This is an area that is rightly being widely discussed. The Government agree that innovative finance models such as peer-to-peer lending are important. Some £100 million of the £1.2 billion that will be invested through the Business Finance Partnership will be invested through other non-traditional lending channels, to reach smaller businesses such as peer-to-peer platforms, so the Government are putting their money in this space.

We agree that if these types of operations are to be regulated, the regulatory approach to be applied should be proportionate. However, the Government do not believe that the case for regulation has yet been made.

18 July 2012 : Column 330

As I said when I responded at Second Reading, this is a new and growing sector and we do not want to inhibit its growth. Nor do we want to put up barriers to new entry by protecting the incumbents. Furthermore, we would expect the costs of regulation to be passed on to consumers.

I reassure noble Lords that the Treasury is alive to the needs of the sector. My colleague the Financial Secretary has met some key players in this emerging market. While the Government do not think that statutory regulation is appropriate at this point, we will keep this under review. I say advisedly that the Treasury will keep it under review because the decision is for the Treasury and not for the FCA when it comes into operation.

I am happy to confirm to the Committee—this is important in relation to some of my noble friend’s points—that the changes being made as part of the Bill under Clause 6 would make it legally possible to bring direct platforms into scope. I stress again that we have made no decision to regulate and do not believe that we should. However, unlike the position under FiSMA, we now have an enabling provision in new Section 1J whereby we can amend the objectives to bring peer-to-peer platforms, for example, into the scope of regulation. My noble friend is right to draw attention to Clause 6 as an enabling clause.

I turn to Amendment 117B. Where innovative finance models are regulated, the FCA will of course take a proportionate approach, as I made clear when the Committee discussed social investment last week. Where they are not regulated, there is no role for the FCA, and there can also be no role for the FCA to facilitate the work of other government departments. I regret to say to my noble friend that the decisions about tax treatment, for example, will remain a policy matter for the Chancellor, as will the decision about the scope of regulation in this area. Of course, the Chancellor keeps all tax policy matters under review in the context of his Budget.

It is perhaps worth saying that there has never been a generalised income tax relief for losses on investments, which is part of what is being discussed in this area. HMRC has always sought to classify dealings in financial products by individuals as investment rather than trade, and a targeted income tax relief specifically for loans made through p-to-p platforms would be open to particular risk of avoidance, would encourage other, similar investments to request similar tax relief and might prove challengeable under EU state aid rules. Therefore, I do not want to get my noble friend’s hopes up in this area, although he was of course right to draw our attention to the issue.

Finally, I cannot support Amendment 119 because only if and when the Government decide that direct finance platforms are to be regulated will we insert relevant definitions into FiSMA. As I said, the provision is there in new Section 1J to update the definitions. I hope I have provided my noble friend with at least some assurance that the Bill takes forward the legal framework so that if a decision is made to bring p-to-p platforms into the scope of regulation, it could be achieved. Therefore, I ask him to withdraw his amendment.

18 July 2012 : Column 331

Lord Lucas: My Lords, is my noble friend agreeing with me that the principal reason why there is no ability to offset tax for peer-to-peer lending activities is that they are not regulated and therefore there is scope for abuse?

Lord Sassoon: No, my Lords, I am not saying that. There are plenty of different tax treatments for all sorts of regulated and unregulated activities. I see the issues as separate. However, I have indicated a couple of areas in which changing the tax treatment would be difficult and would run counter to some of the broader accepted principles by which we run the tax system. But I would not link the two things explicitly together.

Lord Sharkey: There was a question in the debate about the scope of my suggestion. The amendments were drafted deliberately widely so that they create a “may” or a “must” for the FCA when it considers competition so that it looks at new developments in the market that may be in the interest of consumers.

18 July 2012 : Column 332

I have been encouraged by a lot of the debate. There is an almost universal consensus that regulation might be important and might be a very good thing. I think I am perhaps a little encouraged by what the Minister has said, but I will read Hansard carefully tomorrow to check that I am still encouraged. There is one issue here that needs stressing, which is the matter of urgency. It takes only one rogue operator to go bang in a very serious and public way to sink this whole area. The Government should perhaps be a little more alive to that particular problem and the risk of that happening. Having said that, and looking at the clock, I beg leave to withdraw.

Amendment 114 withdrawn.

Amendments 115 and 116 not moved.

House resumed.

House adjourned at 10.07 pm.