Financial Services Bill

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 Committee. My noble friend will certainly be back for it, as it cannot take place for two weeks following Second Reading. 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 schemes will benefit consumers as they should. It is very unwelcome that the Government thought it appropriate to rush through legislation on these matters without the pre-legislative scrutiny that we believe such matters warrant. 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 a scheme on the industry have been dropped. Many of us remember the passage of that legislation. I think it was the noble Lord, Lord McIntosh of Haringey—I see him smile—who took it through this House before the noble Lord, Lord Myners, was here. As I said, many of the essential steps required by that Act before the FSA imposes a scheme on the industry have been dropped, and that is very much at odds—again, I see the noble Lord smile—with some of the debates that we enjoyed when dealing with that legislation. The Minister may want to look at his declaration on the front of the Bill that it is compliant with the Human Rights Act, as I have a sneaking suspicion that the appropriate safeguards that would ensure that FSA decisions were human rights-compliant are being dropped. I simply make that comment in passing but I should be very grateful if the noble Lord would look at it. 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.