New Clause 5 - Duty of care

Financial Services (Banking Reform)Bill – in a Public Bill Committee am 10:30 am ar 16 Ebrill 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

‘At all times when carrying out core activities a ring-fenced body shall—

(a) be subject to a fiduciary duty towards its customers in the operation of core services; and

(b) be subject to a duty of care towards its customers across the financial services sector.’.—(Cathy Jamieson.)

Brought up, and read the First time.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I beg to move, That the clause be read a Second time.

I hope that we can continue the good progress that we have made this morning. New clause 5 would introduce duties of care for ring-fenced bodies: a fiduciary duty in the carrying out of core services and a more general duty of care across the financial services sector. A fiduciary duty is characterised as a requirement to serve loyally in trust and in good faith.

As a bit of background to the new clause, a Which? survey in March suggested that banks’ safeguarding of customer interests remains inadequate. It found that banks are failing to give the right advice regarding, for example, transferring and managing cash ISAs. Which? placed around 180 calls to 15 leading banks and building societies to assess the quality of advice provided concerning the transfer of cash ISA savings, and it found that HSBC, Yorkshire Bank, RBS, First Direct and Barclays failed to give correct answers to three simple cash ISA questions in more than 50% of the calls.

In addition, according to a YouGov poll for TheSunday Times last year, almost two thirds of banking customers no longer trust their lender to look after their money. We have spoken this morning about public perceptions of the banking industry and its culture and the changes that need to be made. Of particular concern in the YouGov poll was the fact that almost half the respondents believed that some of the high street banks were dishonest, and 45% described them as incompetent. We do not want that situation to continue. Only 1% of respondents believed that senior executives of the biggest banks had improved their behaviour since the financial crisis began. It would be interesting to repeat that poll in future and see whether perceptions have changed.

New clause 5 would insert into the law a concept that we believe would go a long way towards ensuring that consumers could have full confidence that their best interests were being served and that those selling financial services products were acting in both a prudent and ethical manner. We have discussed this morning whether that can be regulated and legislated for and how much of it is down to individuals acting in an ethical fashion. The new clause would require a ring-fenced body not to act in a way contrary to the customer’s interest while carrying out its core activities.

It can be argued that banks and financial institutions ought not to be acting contrary to their customers’ best interests, but when we look at what has actually happened and some of the inquiries undertaken, it is clear that, in some circumstances, the banks were doing that when carrying out their activities.

If such a duty were to be applied to banks generally, it could create problems in areas where banks have competing interests, or their customers have competing interests. However, we believe that, in the context of carrying out core services, it is right that customers should be able to rely on the banks to look after their best interests. The new clause would improve customer protection and boost consumer confidence in the banks.

The more general duty of care amounts to a duty to act reasonably when dealing with the customer, or in matters relating to its customers. People may argue, and hon. Members may suggest, that both of those represent a principle that is hard to disagree with: banks should treat customers fairly. They may also argue that similar duties already exist in common law.

I suggest, however, that those duties have developed in a piecemeal way, and creating a general duty would get rid of any uncertainty over whether a duty will be found to exist by a court. There would then not be the scenario where the customer always has to go to court for clarification. Giving the duties some statutory basis would bring them within the remit of the regulators who cannot oversee the common law duties of care that currently apply to banks.

When a similar amendment was debated in the Financial Services Bill in 2012, the hon. Member for Solihull (Lorely Burt) commented that the duties should not be made too specific or people might be able to circumvent them. However, the duties imposed by this new clause would allow all relevant considerations to be taken into account by a court, while assuring customers that the banks had the legal obligation to act fairly.

Many Members and media commentators have expressed concerns about the mortgage and remortgage markets, where safer safeguards need to be pursued, particularly in relation to the best interests of clients. For example, mortgage customers on standard variable rates might be persuaded that remortgaging is their only option, but they could end up accruing significant costs such as surveying, legal fees and so on. Because those costs are added to the mortgage in many cases, the customer does not necessarily feel that they are being made to pay for a remortgaging product, yet it will hit them at some stage.

Photo of Mike Thornton Mike Thornton Democratiaid Rhyddfrydol, Eastleigh

I am not sure whether the hon. Lady is aware that the regulations currently mean that any kind of advice given for a remortgage must take concern of the difference between the existing product and the product being taken out.

My experience when I was an adviser was there were many people who I or my colleagues advised not to change their mortgages because, first, we were ethical—I think we were ethical. Secondly, the less ethical ones who would be tempted to do this—I accept that there are many of them—are unable to do so because the compliance regime would immediately reject that advice, the firm would be fined and, in my experience, the person giving that advice would be delicensed. Therefore, there are already adequate safeguards within the current legislation.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I thank the hon. Gentleman for giving us the benefit of his experience. I used that one example that was brought to us. I am trying to ensure that there would be a wider fiduciary duty that would also ensure that the forest of paperwork that is sometimes supplied to consumers would be balanced by the need for clear and consistent information. I am sure that the hon. Gentleman would accept that in some instances it can be difficult for people to wade their way through all the paperwork and small print and make a decision about what is in their best interests.

Hon. Members will be aware that in July 2010 the US Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010, giving the Securities and Exchange Commission the authority to impose a fiduciary duty on brokers who give investment advice. A stronger duty of care would ensure that the industry had to take customers’ interests into account when designing products, and had to provide advice throughout the product life-cycle. That takes us back to my earlier point that this issue is not simply about selling products, but about the many stages during which people are advised about what is in their best interests.

We believe that several benefits would arise from placing such duties on ring-fenced bodies. Doing so would increase consumer protection and help to restore confidence in our banks. To return to another earlier point, it would raise standards of conduct in banks if they knew that they would be responsible for acting according to those duties. If the Minister does not feel that a fiduciary duty towards customers in the operation of core services and a duty of care towards customers across the financial services sector ought to be put in place, I would be interested to hear why; if he believes that legislation is not needed, I would be interested to hear what proposals he might have to ensure that those principles would be upheld.

Photo of Greg Clark Greg Clark The Financial Secretary to the Treasury 10:45, 16 Ebrill 2013

I am pleased to respond to the debate. I say to the hon. Lady that it is not that legislation is not needed on these matters; it is, however, important that when we legislate we are clear about the consequences of that legislation.

Let me deal with new clause 5. Proposed subsection (a) refers, as the hon. Lady said, to a fiduciary duty towards customers in the operation of core services. A fiduciary duty is a duty of trust in circumstances where one person is, in effect, acting on behalf of another—or, at least, in the other’s interests—and so needs to make sure that they follow faithfully the best interests of the party to whom they have a duty of care; in economics, we know the situation as the “principal-agent problem”.  An example would be a director acting on behalf of shareholders: directors, in effect, are the trustees for the interests of shareholders, and hence, quite properly, have a fiduciary duty to keep that always in mind and not pursue their own private interests as directors over the interests of the shareholders whose interests they represent.

When it comes to deposits in a bank, however, the relationship is rather different. The bank is not acting on behalf of depositors; instead, the relationship is contractual. For example, in determining the interest paid on sums deposited in an account, if a bank were acting under a fiduciary duty to depositors—that is to say, it were to have in mind the interests only of the depositors—it would be constrained to pay them, as a fiduciary duty, the maximum available. That would be the bank’s responsibility. Instead, as it is engaged in a commercial transaction and is a competitive business that operates within a competitive environment, it pays the interest rate that allows it to have a competitive position in the market.

Although, on the face of it, the small change in the new clause seems rather innocuous, it would fundamentally confuse the basis on which banks operate. Of course we need to make sure that insured deposits, in particular, would be safely held, and this morning we have been debating the arrangements for that. The whole purpose of the Bill, in terms of ring-fencing arrangements, is to put in place particular requirements to ensure that deposits are safe and that the behaviour of the bank is sound. Such regulatory requirements are different from the fiduciary requirement that would oblige the bank to act, as it were, as a trustee for its customers.

Proposed subsection (b) refers in a different way to ring-fenced bodies having

“a duty of care towards its customers across the financial services sector.”

That is, at best, opaque, and, at worst, worryingly vague. First, it is not clear what a duty of care, especially to customers across the financial services sector, means. Can a bank be said to have customers across the financial services sector, presumably in other, competitor institutions? Since it refers to the financial services sector, does it mean that a bank has a duty of care not only towards its competitors’ customers, but to the customers of insurance companies?

It is important to be clear about what is required. The new clauses would make unclear many of the provisions that we are seeking to introduce. We can clarify existing contractual obligations, as we are through the insured deposits. We can clarify regulatory requirements, and the new ring-fencing requirements do precisely that.

A ring-fenced body must always be in a position to repay deposits when they fall due, but that is a contractual requirement. It must meet its obligations on ring-fencing and on conduct, so it is hard to see what a duty of care can add to that. All financial services businesses have contractual obligations to customers. Some of them already have fiduciary duties—for example, when acting as a trustee, an executor or an asset manager. Fiduciary duties are established for financial services institutions that operate in that way.

All financial services businesses, and indeed persons, including my hon. Friend the Member for North East Somerset, are subject to obligations under the regulatory  regime that we have for the FCA. My colleagues in the Committee that considered the Financial Services Bill took great pains to specify, with some precision and in some detail, the purpose and the remit of the Financial Conduct Authority to advance consumer protection, integrity and competition. The PRA is to promote the safety and soundness of PRA-authorised persons.

The Bill would add to the specific objectives a continuity objective to require the regulators to make ring-fenced rules and for ring-fenced bodies to comply with them. Those are specific and focused requirements that are much better than general concepts that do not relate to the objectives of the regulatory bodies. The hon. Member for Kilmarnock and Loudoun said that such matters would be brought within the scope of the regulators, but they would not. The regulators have a strict scope to discharge the remit laid down in the Financial Services Act 2012, which will be amended by this Bill in terms of the continuity objective.

Imposing a duty of care to customers in other financial services bodies or a fiduciary duty for institutions that do not actually have fiduciary responsibilities would not give firms a clear view of what conduct is expected of them or provide any means of holding firms to account. Since the regulators are responsible for governing conduct, it would confuse matters and ultimately that would be to the disbenefit of consumers, rather than to their benefit.

Photo of Mark Durkan Mark Durkan Shadow SDLP Spokesperson (International Development), Shadow SDLP Spokesperson (Work and Pensions), Shadow SDLP Spokesperson (Foreign and Commonwealth Affairs), Shadow SDLP Spokesperson (Home Affairs), Shadow SDLP Spokesperson (Justice), Shadow SDLP Spokesperson (Treasury)

The Minister’s arguments differ from the previous Minister’s arguments on the Financial Services Bill when we were in Committee and in the Chamber. Whenever many of us tabled amendments to the Financial Services Bill on the fiduciary duty and duty of care, the two arguments from the Government were: first, it does not need to be in the Bill because it is a common law requirement and is binding anyway, so we would not achieve anything extra and it would be otiose; and, secondly, in the context of a Bill that provided for the new regulatory framework, we were providing a fiduciary duty that would almost be a giant, stalking duty affecting everybody in every section of financial services, so it would be an impossible duty to meet and would not be focused and measured in the way needed.

Proposed new clause 5 provides for the fiduciary duty to centre on ring-fenced bodies. The Minister has argued against other Opposition amendments on the basis that they widen the scope of the Bill beyond the guarantees and protections that people want in the concept of ring-fencing. The proposed new clause is focused in a way with which the Government should be comfortable. It applies the concept of a fiduciary duty in these new circumstances.

When we debated the Financial Services Bill in Committee, we did not know the revelations about the LIBOR scandal and other things. Many Members said that not only was the fiduciary duty in common law, but it was regularly and competently observed in the banks. The only problems were what happened on the speculative side, which were the result of Government policy and so on, but the conduct of banks and bankers showed that they had a healthy, daily regard to their duty of care to customers. We all know differently now, and we should all know differently now.

People expect a different duty of care from us as legislators in respect of such matters, so we need something like proposed new clause 5. I accept the Minister’s point about proposed new subsection (b) being somewhat unclear. It would need qualification in certain directions and specification. He asked who the customers across the financial services sector would be. As with my previous point, credit unions are often customers of banks and there will be others in the financial services sector, such as industrial and provident societies. It would not be inappropriate to say that there should be a duty of care to such customers.

I recognise the Minister’s statement that once we get down to insurance companies, agents and so on, there may be greater difficulties, so I accept his slight point about the measure of proposed new subsection (b), but I thoroughly disagree with his argument. It runs contrary to the arguments on the fiduciary duty made by the Government last year.

People want the Bill to be about Parliament setting clear standards and sending a clear signal in light of all that we know and all that has happened. Parliament refusing to put a fiduciary duty front and centre in relation to ring-fenced bodies sends seriously confused signals.

Photo of Greg Clark Greg Clark The Financial Secretary to the Treasury

Thank you, Dr McCrea. I am happy to respond.

On the first point, I hope that the Committee can see that I take all the proposed clauses seriously. I think about them very clearly, and I hope rigorously, and come to a view, advised by my officials. I have given thought to the proposal and had discussions about it. My considered view is that such a change would confuse the situation. However well intentioned, it is imprecise. There is nothing between us at all on this—of course, we want consumers protected and ordinary people’s deposits, savings and access to finance guaranteed, as far as they can be. We are doing that, and must do it, by being precise and clear and by putting in place provisions that can be enforced, while being clear who can enforce them and the institutions responsible.

The two parts of the proposed new clause differ. First, there is a problem in placing a fiduciary duty on organisations that strictly do not do what a fiduciary duty means, which is to exercise on behalf of their depositors a kind of in loco parentis role, as described elsewhere. Secondly, there is the duty of care. The Bill will establish a ring-fencing system, establish proper standards of professional conduct, create measures to ensure that creditors other than depositors are bailed in to resolve failing banks, and clarify the regime through which failing banks are resolved without recourse to depositors’ or taxpayers’ funding. Those measures all express, in practical terms, the thought behind what is described in the new clause as a

“duty of care towards…customers across the financial services sector.”

The purport of the Bill is to do that. To distil the whole Bill down to a subsection that talks about a

“duty of care towards…customers across the financial services sector”,

in an attempt to simplify the Bill, would make it simplistic, and would be to the detriment of the objectives that we all have.

Photo of Mark Durkan Mark Durkan Shadow SDLP Spokesperson (International Development), Shadow SDLP Spokesperson (Work and Pensions), Shadow SDLP Spokesperson (Foreign and Commonwealth Affairs), Shadow SDLP Spokesperson (Home Affairs), Shadow SDLP Spokesperson (Justice), Shadow SDLP Spokesperson (Treasury) 11:00, 16 Ebrill 2013

The Minister will know that I have some difficulty in accepting the perfection of new clause 5(b). I return to the example of the Presbyterian Mutual Society in Northern Ireland. One thing that came out in evidence when the Treasury Committee and others examined that situation was that some banks, which were in a position to know something about the business of the Presbyterian Mutual Society, started to say to some of their customers, “You should be taking your money out of the Presbyterian Mutual Society and putting it into us, because it is not protected; and there are other things going on.” The banks used their intelligence and insight to create, in effect, a run on the Presbyterian Mutual Society. That was not to the benefit of the financial services sector in Northern Ireland, and it ended up costing the public purse money as well.

Photo of Greg Clark Greg Clark The Financial Secretary to the Treasury

I accept that we need to address circumstances like that. However, the hon. Gentleman will know that some of the changes we have made, such as the UK Financial Services Compensation Scheme, will address such situations in the future. However, such things are best addressed by the consideration of the regulators, using powers that follow from a clear remit. We should not leave it to obscure litigation which, if there were a duty of care or a fiduciary duty, could provide a get-out from the enforcement powers that are clearly vested in the institutions that enforce these matters.

I do not want to be, as a consequence of the passage of the Bill, there to be a degree of opacity in the regulators’ powers, so that they can be challenged by people who do not have our constituents’ best interests at heart. I do not want those people to be able to stay the hand of the regulators by getting them bogged down in the interpretation of something that is not absolutely clear. That is my point, and I advise the Committee to oppose the new clause.

I am not saying that the protection of consumers’ interests should not always be borne in mind, but the best way to secure that objective is to be clear about what our objectives are, to vest them in the regulatory authorities and to put in place measures that require regulators to implement the powers they have been given. That is better than introducing what has been imperfectly drafted here, which could provide a get-out from the regulatory arrangements that we are debating.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

We have had an interesting series of exchanges on this issue. My hon. Friend the Member for Foyle is absolutely correct in his description of part of the debate that took place in a previous Committee on the Financial Services Bill. I think that at that time there was a slightly more sympathetic view on the issue of a fiduciary duty.

I was quite surprised to hear the Minister coming at things from a different angle. Although we have gone into some of the technical detail, the real issue for members of the public—the ordinary customers of the banks—is that they want to believe that banks are going to be acting in the best interests of customers. They want to have that confidence and to know that a regulatory  regime is in place that will protect them. However, they also want some signal from the financial services sector and the banks themselves that things have changed. Without going back over previous debates, the protections that were in place were not enough. We have had a lot of discussion on that, but none the less, people’s view is that the culture has not yet moved far enough in the correct direction.

The Minister talked about potential conflicts between the interests of the shareholders and the interests of the customers, and the possibility of the new clause changing that contractual relationship. Again, to emphasise the point from the consumer’s perspective, when someone goes to the bank and enters into that contractual relationship, they do so in the hope and belief that the banks will also play their part in looking after their interests. With the various scandals and other things that have been referred to, somewhere along the line that part of the contractual relationship was forgotten or lost in the process. With the new clause, we were seeking to ensure that that whole issue was back on the agenda and that people could see that it was important. If the banks themselves will not willingly come to the table and make the necessary changes—I hope that they will—there has to be some way of ensuring in legislation that the consumer interest is looked after.

I hear and understand what both the Minister and my hon. Friend the Member for Foyle said in relation to the wording of the new clause. The Minister will be well aware that it is sometimes quite difficult to get the technicalities of these things correct, but I have no intention of trying to put in place something that would cause unintended consequences or lack of clarity. However, I hope that the Minister would accept that the new clause was tabled because of the principle of ensuring that customers are looked after and that the banks are clear about their responsibilities and remember the part of the contractual relationship with customers that is about looking after their money. That was where many people felt that they were particularly let down.

As I said in my opening remarks, we tried to pin down the responsibilities of banks on their core activities or services. I understand the comments that have been made, particularly on proposed new subsection (b) and whether its definitions would cause more concern or particular problems. Given that, I will not seek to press the new clause to a vote at this stage, because I understand the technical issues involved. However, I certainly want to give advance notice that we feel quite strongly about the principle of the fiduciary duty and will want to return to it at some stage, hopefully with a draft in a slightly different format, so that we can put it to the test. On that basis, I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.