Lord Davies of Brixton (Lab)

This extensive group of amendments is focused on the role and functioning of the Financial Ombudsman Service—the FOS. We have already had a taste of that debate with group 2, but I am concerned that there is not going to be enough time for me in my 15 minutes—perhaps the Whip is already thinking that I should get on with it—and I will not be able to finish it all. I have said that I will take the opportunity, if I have not been able to ask my noble friend the Minister all the questions that I want within my allotted time, to ask further questions when we get to Clause 8 stand part. This group of amendments deals with three issues: time limits for taking cases to FOS, the proposed system for the referral of issues to the FCA and, significantly, the changes to the “fair and reasonable” test. This is a lot to deal with, and in fact it is about the interaction between these three different changes. They might appear separate, but their overall impact has led to real concern that the interests of consumers are not being given sufficient attention. I must pay tribute to the support that I have received from the All-Party Parliamentary Group on Investment Fraud and Fairer Financial Services, of which I am vice-chair, as well as Which? Money and Fairer Finance. They have all expressed concerns that consumers’ interests are being adversely affected, and those concerns most definitely need to be addressed. Starting with Clause 6 and my Amendment 31, I am concerned about the changes to the 10-year longstop on complaints to the Financial Ombudsman Service. The case for some kind of time limit is not unreasonable in itself. Firms do not wish to face indefinite exposure to complaints about events that happened decades earlier, and I understand why the Treasury wants certainty on that point. But Clause 6, as drafted, creates a hard structural barrier that applies regardless of when the consumer could reasonably have known they had grounds to complain. That is the flaw. It is not that a longstop exists; it is that it takes no account of discoverability. That matters most for long-term products such as pensions and mortgages, areas where I have personal and professional experience and where consumers often do not find out for years, sometimes decades, that they have been poorly advised or missold something. The Explanatory Notes accompanying the Bill suggest that allowing complaints years later creates problems with data retention. I do not think that holds up. The appropriate rule, rule 9.5.2 in the FCA’s Conduct of Business Sourcebook, sets out the record-keeping requirements for firms that give personal recommendations on certain pension-related transactions. The rule as it stands requires firms to retain their records that were the basis of a personal recommendation indefinitely in cases of pension transfers, pension conversions, pension opt-outs and FSAVCs—which, for those who are not up on the jargon, are free-standing additional voluntary contributions. For other types of advice, COBS sets shorter retention periods, but these four pension categories are singled out precisely because of the long-term nature of the harm that can arise and, originally, because of the personal pensions misselling scandal of the late 1980s and early 1990s, a scandal that is too often forgotten but that led to £13 billion being paid in compensation. The practical significance for the Clause 6 argument is that the justification for 10 years does not stand up. Firms advising on pension decisions are already legally required to hold the records, so the 10-year rule does not serve that data problem. The “indefinitely” formulation is worth noting. Most compliance obligations come with a defined shelf life, so the fact that the FCA made an exception here reflects a considered regulatory judgment that pension transfer advice is different from other forms of pensions advice. The consequences can take many years to materialise, and records need to be available when the problems are eventually seen. Of course, I am most familiar with the issue in relation to pensions, but it is not just about pensions: endowment mortgages are a good past example where problems that arose for which compensation had to be paid were found outside the 10-year period. For the very products most exposed to long-delayed discovery of harm, firms already have the data that they need to defend themselves—they have to have the information that is being required. It is worth asking how this is being played out against real cases. I believe, and I would be interested in a response from the Minister on this, that if a strict 10-year limit without proper exceptions had been in place during the PPI scandal, it would have blocked the mass redress exercise altogether. The worst mis-selling happened between 1998 and 2005, but public awareness did not peak until after 2011. This was not a case of deliberate concealment; it was total misunderstanding and wishful thinking on the part of the people being sold to, but compensation was still due. A rigid longstop could well have disqualified millions of older claims in law before most of the consumers involved would have known that they were affected. I would be grateful if the Minister could say how these new arrangements will affect such cases and, as I mentioned, endowment insurances, appropriate personal pensions and the discretionary commission scandal in car finance, which is more recent. As it stands, Clause 6 gives the FCA a power to create exceptions to the 10-year limit, but the legislation does not say what those exceptions must be at a minimum, so there is no statutory obligation on the regulator to build in protection for the consumers most likely to need it. My amendment goes further than that in the name of the noble Lord, Lord Sharkey, by writing two specific circumstances into primary legislation itself, rather than leaving them to be worked out later in the FCA rules. First, it is just cases where the consumer faced exceptional circumstances, such as serious ill health or other incapacity, so people will know that they have a special claim in those circumstances. Secondly, there are cases where the consumer could not reasonably have known about the financial detriment within the 10-year window. These could be exercised on a discretionary basis, but my argument essentially is that those cases should be laid down in statute. It does not preclude the possibility of other exceptions being made, but for consumers it is a question of trust, and that trust requires consumers to know that those exceptions will be available. Putting these exceptions in the Bill removes the ambiguity, gives firms the certainty that they are after and makes sure that deserving consumers are not shut out of redress by an accident of drafting rather than a deliberate policy choice. On Clause 8 and the powers of the ombudsman, I want there to be a proper debate about what is actually being changed here, and I look forward to guidance from my noble friend the Minister. The question underneath this debate is a simple one. What is the ombudsman for, and why do we have one, instead of just relying on the courts for people to get good tests? For the FOS, the “fair and reasonable” test is not something that has been put in and invented by the FOS itself; it comes from Section 228 of the Financial Services and Markets Act 2000 and provides that: “A complaint is to be determined by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case”. What the test displaces is important. The court applies the law strictly: the relevant statute, regulations, contract terms and case law. That is what the courts do. The ombudsman is not bound to decide a case the way a court would. That is the whole point of having the ombudsman—it is not a court that is able to take a view as to what in the overall circumstances is fair and reasonable.