Financial Services Bill

My Lords, one of the interesting things about the Bill is the very wide range of submissions that have been received by me and, I am sure, by other noble Lords in advance of this debate. There are, of course, the usual suspects, but a much wider range of people and organisations has got in touch with us than is, I think, normally the case. The more direct among them have described the Bill as "a ragbag". The smoother have described it as "an eclectic mix", but whatever the adjective one uses to describe it, there is evidence of the Bill having been put together in quite a hurry and some of the Minister’s opening remarks left me to wonder whether his heart was really in it. Coming 18th in the debate, a lot of the ground has been extensively ploughed, so I shall confine my remarks to something on the architecture, something on collective claims and something on the consumer financial education council and avoid repeating a lot that has been said before. I have interests to declare as the chairman of three firms involved in private equity, specialist insurance broking and the provision of independent financial advice. They are all in the Register, but they are all firms regulated by the FSA and I am an authorised person of the authority. I was also a founder member of the Security Investments Board and subsequently, as the noble Lord, Lord Eatwell, kindly pointed out, a member of the board of the Securities and Futures Authority, one of the self-regulatory organisations replaced by the FSA under FiSMA. This is not a cry for the re-establishment of the ancien regime. Self regulation was tougher in its impact than is popularly supposed, as the noble Lord, Lord Eatwell, pointed out. I am afraid that it could no longer command public confidence; it could too easily be characterised as letting your friends off over lunch. However, it had at least one aspect in its favour which I agree with the noble Lord, Lord Eatwell, is worth preserving in the future: it was very close to the markets that it regulated, because it was made up of practitioners who were earning their daily bread dealing face to face with a range of firms. Therefore, one came to know quite clearly the quality of the processes and the quality of the people in individual firms, which are critical issues in a fast-moving industry. My concern is that, as we create the more elaborate structure envisaged in Clause 1, with more committees, there is a danger that theoretical discussion in the citadels of government will obscure the hard edge of developing market practice. I hope that the Minister will forgive me. He has been a hard-edged practitioner, I know, but I have noticed that even he is falling under the spell of the theoreticians. We had a very interesting discussion at Question Time the other day in which we explored the possibility of extending ISA eligibility to AIM shares. The Minister said: ""The noble Lord should recognise that AIM is a market for listed companies. At the time of listing, it is not in itself a source of new capital for investment. That takes place before, so buying a share of an existing company does not represent the flow of new funds into a business".—[Official Report, 27/01/10; col. 1409.]" That is theoretically true, but if the noble Lord takes off his ministerial hat and puts on his investment manager hat, he will recognise that it is practically incorrect. It is incorrect because when as an investment manager you make your investment, you are hoping to sell it; in order to sell it, you need the secondary market. A buoyant secondary market is therefore an important part of the primary market. In addition, when you recycle in the secondary market, you free up funds for reinvestment in the primary market; that is, in new companies. I look forward to discussing with the Minister in Committee how he sees the proposal working in practice, day to day, as opposed to in the laboratory tests that he is running in the Treasury. That takes me to my second point about architecture. At Second Reading in the other place, a number of exchanges dealt with the speed with which the architecture of the FSA was outlined after the 1997 general election and the lack of consultation that accompanied it. From my worm’s-eye view at the SFA, it seemed that the jelly was set pretty quickly. One has to wonder whether a period of reflection might have led to a better structure. As my noble friend Lady Hogg pointed out, one wonders whether greater consultation on the very far-reaching implications of this Bill and the plenary powers that it grants would both improve the proposals and, equally importantly, improve public buy-in. It is interesting that the British Bankers’ Association says in its briefing: ""A fundamental concern is whether the consequence of some of these proposed actions can fully be assessed in the short time that has been allocated to the Bill for Parliamentary debate, particularly in those instances where the Bill is conferring statutory obligations in respect of requirements that have not yet been defined"." A further discussion arose in the other place about the attitude of the Bank of England to the dismemberment of its empire. All I recall is the late Eddie George, then Governor and later a distinguished Member of your Lordships' House, turning to his deputy, Howard Davies—now Sir Howard Davies—head of the LSE and then to be the first chair of the FSA, handing him a dollar bill and saying, "This is the buck that stops with you". Whether that was the action of a happy man or an unhappy man, it is up to noble Lords to judge, but I judge the latter. However, this is the question: where does the buck stop? Where does the new financial stability objective rank alongside the Bank of England’s view of future economic prospects and the Treasury’s politically driven agenda? We need to tease out the relative priorities in Committee. So much for architecture; I said that I wanted to say a few words about collective proceedings. Here, I follow the points made by the noble and learned Lord, Lord Goldsmith. I have no theoretical objection to the idea of collective proceedings, but I am concerned that we have not got the balance right in the Bill. There is the narrow question of "opt out or opt in?"—for me, the default position should be "opt in" if we are to avoid ambulance-chasing on a grand scale. However, the general point is the truism that we live in an increasingly litigious society, reflecting partly changing socio-economic attitudes and partly the changes in methods of legal remuneration. One only has to listen to Classic FM to hear a firm advertising itself as "fast, friendly and free" to know that increased litigation is with us. Further, from time to time, cases may be brought, not to win the case but to ventilate an entirely separate, often political, grievance. When we were taking the Companies Act through this House, we had many discussions in Committee about the issue of derivative claims, which runs parallel to this issue. The noble and learned Lord, Lord Goldsmith, then for the Government, and his colleague, the noble Lord, Lord Sainsbury, understood concerns about managements being distracted by frivolous claims, or claims whose primary objective was outwith a company’s remit. I think that it is fair to say that the Government listened. Various provisions were put into the Bill, particularly at Clause 263, to provide a balance—they were things that a court would have to take into account before allowing a derivative claim to proceed. I hope that the Government will look at those debates and at what was done then and see whether there are not some ways forward here to get the balance right. It is important that companies and managements of banks are not diverted by claims that are not seriously central to their purpose. To do that, we need clear, detailed rules before we leave Committee stage. I turn finally to the consumer financial education body, which, again, is a good idea which has not yet been properly thought through. I share the concerns of the noble Lord, Lord Barnett, about a quango. I am concerned about the huge and prescriptive nature of Schedule 1, which makes the FSA’s task, especially with its new, added responsibility for financial stability, incredibly difficult; that is, of being responsible for regulation of markets on the one hand and for the protection of customers on the other. However, the Government do not call them "customers"; they call them "consumers", which gives the whole game away. When the Minister was running his extremely successful unit trust group, he would not have called them "consumers". They did not consume his unit trusts; they were customers. The whole phraseology around the way in which the body is being set up and the way in which the FSA is approaching it does not hit the central point that we are trying to achieve. I therefore wonder whether the FSA is the right place to be locating the body at this stage. We have a highly prescriptive schedule; we have the absence of any requirement for public interest representatives on the council; and we have a failure in Part 3 of Schedule 1 to require, as opposed to permit, an annual value-for-money audit. Finally, as the Minister said in his opening remarks, the body will establish a new service called money guidance. Offering guidance to millions of our fellow citizens is potentially a huge business. I understand that it is being trialled only in the north-west and the north-east, but it is about to be rolled out. It will require very careful and experienced handling. I am not clear at this stage why the Bill does not talk about the establishment of some form of national money guidance as part of the objectives of the body, and how it will be executed and carried out. That is an issue at which we will need to look very carefully in Committee. There are other important points in the Bill—for example, the provisions on short selling in Clause 13 —which need close examination, but unless we get the architecture right, so that basic structure is effective, unless we prevent our financial institutions being distracted by frivolous claims and unless we have a proper, effective system for educating our fellow citizens, I doubt that we will have a Bill which is fit for purpose.