Bank of England and Financial Services Bill [HL] — House of Lords, 2015-11-11
Topic: Domestic Commerce
Jean Lesley Patricia Drake (Labour, Centre-left): My Lords, in this amendment I return to an argument that I have articulated in this House before. Culture and conduct in the banking sector were integral to the explanation for the financial crisis in 2008 and there is no compelling evidence that the culture has changed sufficiently. As the Financial Services Consumer Panel commented: "The financial services industry has a long and ignoble history of poor treatment of consumers" The recent foreign exchange riggings saw banks fined £4 billion for deliberately misleading customers. Fixing the market was still happening a full five years after the financial crisis. Now we read in the CMA report on the £16 billion current account markets that millions of customers who regularly use their overdraft get a poor deal. In effect, the law still does not protect customers sufficiently The purpose of this amendment is to ensure that providers must put the consumers’ interests first and resolve conflicts of interest in the interest of the customer when providing core services and in the management of any contract to provide services. Profit should not be made at the expense of the customer through their lack of knowledge and consent A fiduciary duty of care, as contained in this amendment, is needed for two reasons: first, to force the pace of cultural change in the banking sector, and, secondly, because regulation still enshrines too weak a duty to the consumer. Massive fines are simply not delivering the desired behavioural change, but they add to the cost for consumers and raise concerns about sustainability. A regulatory focus on sufficient providers in the market and a reliance on the power of the disclosure of information are simply not delivering the required consumer outcomes. The markets are becoming more complex. Governments will continue to react to rather than prevent problems unless a step change is taken in defining the duties expected of providers towards consumers The FCA’s Treating Customers Fairly initiative enshrines a weaker duty to the consumer, arguably rendered weaker by the Financial Services and Markets Act, which requires the FCA to have regard to, "the general principle that consumers should take responsibility for their decisions" Indeed, the Financial Services Consumer Panel September 2015 briefing provides a well-argued presentation on that very point The complexity of many financial services, combined with weak standards of governance, conflicts of interest, inappropriate remuneration structures, asymmetries of information, knowledge and understanding between the provider and consumer, behavioural biases, and unequal power between consumers and providers, has resulted in an extremely unbalanced relationship. Given that imbalance of power, consumers can reasonably be expected to take responsibility for their decisions only where provider firms exercise a fiduciary duty of care. Regulation does not explicitly create a requirement for firms to act in their customers’ interests or to eliminate conflicts of interest in the consumers’ interests The need to balance consumers’ responsibility with greater firm responsibility is not new. The Joint Committee on the draft Financial Services Bill commented in 2011 that, "a statutory duty should be placed on firms to treat their customers ‘honestly, fairly and professionally’", allowing the FCA to ensure that, "companies address conflicts of interest" The then FCA said that it supported a general principle that a regulated firm should act honestly, fairly and professionally, in accordance with the best interests of the consumer The Financial Services and Markets Act as amended by the Financial Services Act 2012 requires the FCA to, "have regard to … the general principle that those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate" The Government argued at the time that this provision would ensure fairness, honesty and professionalism. This intended effect is clearly not being achieved in many instances in practice Some argue that a fiduciary duty requiring providers to put customers first would impose an obligation to act in the best interests of customers to the exclusion of the firm and its shareholders’ interests. My response to that is that no financial organisation or its share- holders should have the right to a profit where, integral to the design of a product or service and the manner of managing that product or service, is a disregard or neglect of the consumer’s interest. Without this principle asserted as the bedrock to regulatory rules we continue to lock dysfunctionality into the financial and banking sector which will continue to manifest itself. That is not good for the UK when we have such a high dependency on the sector, providing as it does £65.6 billion, or 11% of total government receipts, and nearly £127 billion in gross value added to the UK economy.