SIB Polarisation Rules

HL Deb 24 February 1987 vol 485 cc166-94

7.46 p.m.

Viscount Colville of Culross rose to ask Her Majesty's Government whether the likely effect of the proposed rules of the Securities and Investments Board Limited with regard to polarisation will be to restrict, distort or prevent competition and whether they will provide the consumer with adequate choice.

The noble Viscount said: My Lords, I beg leave to ask the Question standing in my name. As I understand that there is some controversy about the last part of the Question, I want to make it abundantly clear to my noble friend, Lord Lucas. When I ask in the Question, whether they will provide the consumer with adequate choice",

I mean whether Her Majesty's Government will provide the consumer with adequate choice. I am going to ask my noble friend how that can be done under the legislation which we passed in the last Session.

I have no interest to declare in this, save that when it comes to asking about changes in the rules of the Securities and Investments Board—I shall refer to it as SIB from now on—I must declare that I am a member of one of the embyronic new self-regulatory organisations which are trying to set up rules in order to become recognised under the Act.

The subject is polarisation, which is a jargon word. I shall attempt briefly to explain what it is in a moment. I want to draw attention to the particular rules that were published by SIB in their final form about 10 days ago. I want to ask my noble friend about the Government's ability to secure changes in the SIB rules in general, not only on this point but also in other respects, because I believe it is important to find out whether the Government can do so.

The subject of polarisation was referred to on 20th October last in a short amendment at Report stage of what was then the Bill, and I took up a point then which I propose to pursue again today. The SIB rules in respect of polarisation concern life assurance and unit trusts. SIB thinks that these are inseparable. I do not know whether other noble Lords will agree, but a powerful document arguing that they are has been produced by SIB.

In order to try to describe briefly what polarisation means, I should explain that the rules require that anyone advising a member of the public on, or selling to a member of the public, life assurance or unit trusts must be either a company representative working for one company or group and selling the group's products or an independent intermediary; that is, an agent for the customer acting only for him and surveying the whole market to find the product which best suits that customer's needs.

The restriction will apply to many financial organisations, groups and companies. It will apply to insurance companies, to banks, to which I have certainly talked about this matter and which are not exclusively involved at all, to estate agents who advise those who are taking out mortgages to cover their mortgage by an insurance policy, to solicitors, to accountants and, I suspect, to others. It will apply to all those people if they have any tie with a life assurance or unit trust firm whose products they are proposing to sell to the customer.

The Securities and Investments Board is anxious about small investors. I am bound to say that that is entirely in the spirit of the legislation and I am sure that it is right to be anxious in that way. The board is particularly concerned for customers and members of the public who do not know about any special commission that will be received from the people in charge of the insurance company or unit trust scheme by the agent who is trying to sell such customers an insurance policy or is suggesting that they should buy into a unit trust scheme. It is concerned too that customers may not know whether the insurance policy or unit trust scheme is in-house for the person who is purveying it to them.

I shall summarise the arrangement that is suggested in order to look after the small investor, and other noble Lords may wish to flesh out my remarks. In the branch of the insurance company, bank, or whatever, the manager can advise the customer on the firm's own schemes but on no other, or he can refrain from giving any advice at all. However, it is possible for a large financial group to set up a separate independent subsidiary which can advise on the full range of financial services, including life insurance and unit trusts. Such a subsidiary can cover the entire range of services and give the customer the benefit of impartial advice. There is one snag about that, and I shall come back to it in a moment. It happens that I had prepared this speech in sufficient time to enable me to watch television for a short while last night and during that period, in prime time, one insurance company and one bank were featured, both advertising that sort of comprehensive service.

The difficulty about an independent intermediary, which is the subsidiary, is that if it is part of a group which itself has in-house products, whether it be life assurance or unit trusts, in theory it is perfectly entitled to advise on those products as well as on all others that are available. However, there is a rule—Rule No.5.03(2)(a)—which will make that impossible. It is too complicated to read out in full but I shall try to summarise it. The rule forbids an independent agency of that sort which has a connection with a group that is offering insurance or unit trusts to advise the customer to take out one of those policies or to embark upon one of those unit trust schemes unless, after making reasonable inquiries, that firm neither is nor ought to be aware of any other life office or unit trust scheme which is not part of the group that would be willing to enter into a transaction with the customer that is likely to secure his investment objectives as advantageously as the in-house scheme. It is the words "as advantageously" that are the catch.

I ask your Lordships to contemplate the situation for one moment. It is very clear that life assurance and unit trust schemes are matters which have to be judged over the long term, and crystal balls are of no use when the customer enters into the agreement. It will be actionable as a breach of statutory duty, sounding in damages, if that agency advises the customer to take out an in-house policy or to go into an in-house unit trust scheme which turns out to be not as advantageous. In those circumstances what agency in its senses will ever advise on the in-house group?

So there are two places to which the customer can go: the branch, where only the in-house group can be presented to him, and the independent agency, where only the in-house group schemes cannot be presented to him. Nowhere will he be able to obtain a full range of what is available.

I wonder how it will work? I note that two years ago Sir Mark Weinberg who is now the deputy chairman of SIB, though he did not hold that office at the time, said: Most people do not enjoy shopping around for financial services. I believe that if an organisation they trust, acting through an individual with whom they have established a personal relationship, offers them a wide range of services and saves them from having to shop around, they will be extremely relieved".

I agree with him. Except in major cities I do not believe that people will get the spread of advice which I am sure that everybody intends them to have. At the present moment the ordinary people who are at all interested in financial services go to the building societies, the banks and the insurance companies in their town or the district where they live. Those are the financial institutions and the people with whom they are familiar and whom they trust. Those are precisely the people who, if they have any in-house schemes at all to offer, will be able to offer nothing else. I can only think that in those places there will be a little office and the manager will say, "You can go in there. We have a tied VDU on which you can tap up our independent agency and you will be able to read on the display unit all the other services that are available. Mind you, don't come back to me afterwards and ask me whether they are better than mine because I can't tell you!".

I do not think that there is any other way in which a person who lives in the kind of ordinary little place in which most of us live—not in the City of London and possibly not in one of the other major financial centres—will be able to obtain a full range of services. The employee in the branch office will not be able to help him to work the computer or do anything at all.

It is no use being wholly negative about this situation. I have looked very carefully at a powerful document that was produced by the SIB very recently (I think specifically for the debate on this Question), in which it is strongly argued that for this reason it has rejected the principle of disclosure which applies all the way through the rest of the regulatory system in the Financial Services Act. I hope that this rejection will be looked at again very carefully.

I appreciate that my noble friend Lord Lucas will tell me tonight that he can say absolutely nothing and will not say anything because this matter has been referred to the Director General of Fair Trading, who in due course will report to him. I have asked this Question tonight for exactly the same reason that my noble friend will give for not answering it tonight. If he could answer it tonight then the matter would probably have gone beyond repair. However, if the matter is still in front of the Director General of Fair Trading and no decision has yet been made, it may be that your Lordships can still bring some influence to hear on the decisions that will ultimately be reached by my noble friend in his department. If, as is the case under the Act, the Secretary of State can refuse a delegation order, which puts him into business, and there is a recommendation from the Director General of the Office of Fair Trading that the rules produced are anti-competitive, then he must be able—although the Act does not say so—to suggest to the SIB that there should be changes in the rules before he is prepared to recognise them. I wish that it had said so in the Act. It does not.

It seems to me to be an inevitable consequence of the legislation that if there is a major role, as is the case, for the Office of Fair Trading to play, it must be possible for its advice to be implemented somehow. I hope that my noble friend will be able at least to touch on this as I gave him notice of the point.

I come on to the slightly wider matter as to whether any of the rules can be changed. In general, before the Secretary of State can make a delegation order handing over a multitude of functions under the Act to the SIB, he has to be satisfied with the rules that the SIB has produced—Section 114(9). I think that the rules will not themselves be part of the delegation order and therefore there is some room for flexibility thereafter. Certainly my right honourable friend can reclaim the SIB's powers if, after it has taken over, he ceases to be satisfied with its rules—Section 115(5).

What we need to know, I suggest to your Lordships, is whether opportunities will exist before the delegation order is laid when I believe my right honourable friend will have opportunities to suggest to the SIB that there are still alterations that should be undertaken. Can we know that this is indeed the situation? I say this because some of the SIB's latest rules, which as I say were published about 10 days ago, contain material that is not in any earlier versions. Some of the embryonic self-regulatory organisations are looking hard to see whether they can apply them, as they will have to, if they are to be recognised in their turn. I therefore hope that there will be an opportunity to make further comments and suggestions that will be put into effect before the order is made. I hope that others will fill this out. I believe that it is timely to discuss this matter this evening.

8.3 p.m.

Lord Graham of Edmonton

My Lords, I think we could all agree with the last few words of the noble Viscount that it is a timely opportunity to express a point of view and perhaps bring some influence to bear on the final outcome.

Interests have been declared. I am a vice-president of the Building Societies Association. I have received its brief, though I shall not be following it in what I have to say. I also have strong connections, as the House knows, with the co-operative movement. There must be some aspects of the matter that touch upon the co-operative insurance society interests or the co-operative bank in one way or another. I have received no brief from them in this matter, but I declare that simply to be open and honest with the House. I am willing to listen to what the Minister has to tell us about what he can do at the end of the debate, apart from having listened to it.

The noble Viscount, Lord Colville of Culross, did not exactly give the game away but pointed out the dilemma. Let us go back to the debate that we had on 20th October last year, and what the noble Viscount asked for when the matter was introduced by the noble Lord, Lord Ezra, as a legitimate ploy—the same as tonight—to try to get some better understanding in the House of what was likely to go on outside the House when these matters were discussed. The noble Viscount, Lord Colville, said at col. 101 of Hansard: The only other chance that will occur for this House to express itself upon them is when the rules as a whole come forward as a statutory instrument for approval as they stand or not at all". He had been asked whether that was the position.

He continued: They will not be able to be amended and therefore what we need is some kind of flexibility between this evening and the time when the rules are finalised so that a good deal of further thought may go into this". I am certain that not only the noble Viscount but his friends and other interests outside the House have given a great deal of further thought to it. He said at col. 102: What we really want now is reopening of negotiations between the various people concerned and the SIB—the latter presumably being very interested in the protection of the investor". I cannot believe that his aspiration on those last few words has not been carried out; that is, a continuation of negotiations between powerful and legitimate national interests and the bodies that the House has seen fit to authorise setting up. Before I express a view, I wish to plead in aid the words of the noble and learned Lord, Lord Cameron of Lochbroom, the Minister then dealing with the matter. He referred to the discussion document and said at col. 103: The Bill provides that the Director General of Fair Trading should keep under review the rules, regulations and so on of SROs and a designated agency and that he must report to the Secretary of State if he thinks they are anti-competitive". The noble Viscount, Lord Colville, seeks to make the case that in essence that which is likely to flow from the existing 9th February paper is anti-competitive in the sense that it is unfair and unjurious to some parties. The noble and learned Lord, Lord Cameron, continued: The amendment prejudges the issue in one area and makes the director general's role nugatory as a result. The Bill provides that the Secretary of State shall not recognise the SRO or designate an agency unless he is satisfied that the anti-competitive effect is not greater than is necessary for the protection of investors". We need to have confidence that all the advice—this is what we seek tonight—is taken on board by the Minister and given proper weight along with the advice he receives from other sources. One of those sources is undoubtedly the SIB. Another source that helps the SIB to make up its mind is the SROs. I have received a brief from the Association of British Insurers. It is one of the large financial interests besides the banks and building societies which are crucially affected—perhaps underground—by the manner in which the matter will proceed.

The ABI says: we feel that now that polarisation has been SIB's declared policy for the best part of a year, and was accepted by the life offices last March, it would be impossible to make exceptions to the general rule at this stage without undermining the entire concept". Some noble Lord who follows me may tell me that the association does not know what it is talking about, and that it would not do what the association says it would—undermine the entire concept—if one made exceptions. But that is what the association tells me.

The association also tells me this: The concept of polarisation was accepted by ABI last March, having considered the views expressed in the House of Commons Standing Committee's debates. Since that date, life companies have been making the necessary, and in many cases extensive, adjustments to their marketing arrangements in order to comply with the polarisation requirements". The Minister and others may tell me that life officers can do things under the polarisation rules that other agencies such as banks and building societies cannot do. I shall be interested to hear whether that is the case. The ABI's final point is: To make an exception for banks and building societies would effectively undermine the whole concept of polarisation, given the large volume of life assurance business which these institutions transact through their branches, through their insurance broking subsidiaries, and in some cases through their direct sales forces on behalf of their life companies". No one will deny that the ABI speaks for the large insurance companies.

There are undoubtedly those who are advantaged and those who are disadvantaged, but not to a large extent, by the way that this provision operates. I had not given it a great deal of thought, but I like the idea of polarisation. There are many in this House, and I respect their experience, who know their way around the investment world and who do not need to take advice as earnestly as others. Those who need advice are often less able to take it, value it and understand it when it is given to them. Those who are deeply, professionally involved in the investment world know the value of advice. They know where to get it; they respect it and they act upon it. Sometimes they are right and sometimes they are wrong.

I am much taken by the sense of the Bill. It seeks to protect the investor. A great deal was said during our debates about it protecting the new breed of investor—the people who may not have been involved before in making simple decisions about what they want to do with small sums of money. The last thing I shall say is that there are hoards of people in banks, insurance companies or financial conglomerates who are there to mislead or give wrongful advice. I can see, however, that interests can often be better served by dealing with a matter one way rather than another.

The Consumers' Association is in no doubt that the polarisation route is the one which provides the best opportunity to satisfy one of the Bill's basic tenets. It tells me: At present, without polarisation, a potential investor may, justifiably, be unclear (or worse, misled) as to the status of the advice he is getting. For example, when a cold-call salesman comes to the `prospect's' home and offers the product of perhaps two or three companies, the would-be investor may well assume he is getting independent advice. Equally, when he goes to his bank and the bank's independent broking service recommends him to buy the in-group products, he would surely expect that they had been selected because of their superior qualities. This may not be so. For an individual to check himself whether the advice offered is indeed independent, or whether the products recommended are, indeed, superior is well-nigh impossible—particularly given the long-term nature of the investments under consideration. Polarisation would put an end to this potential source of confusion and misplaced trust in the quality and independence of the advice being given.". I understand that there may be anti-competitive aspects of polarisation. I should think that they would be taken care of by the Director General of Fair Trading. I accept that polarisation will restrict the way in which conglomerates, particularly banks and building societies, offer some services. Surely they have a choice. They may not like to make the choice, but they have it. The noble Viscount was clear and scrupulously fair when he said that the SIB said that the organisation had to be one thing or another. The choice is there.

A bank or financial service agency faced with having to act under the present rules (they are not the final version) must make the choice. It must either act in-house and declare it or work through an independent intermediary and keep its nose clean. There may well be some tie up and so forth.

The advice which is categorised as better than best advice is what I want to see provided. I am prepared to hear the Minister tell the House, not that these are early days but that this is not the end of the road. The SROs have been busy. They are earnestly anxious to serve the public and obtain Parliament's good will. They do not want to be seen to be in the pocket of or working at the behest of anyone. I hope that they will be seen to be powerful organisations.

In insurance, they accept and work under the rules. Banks and building societies may take a different view. With respect to building societies, however, only last year an enormous door was opened to enable them to expand. There must be a great deal of honest endeavour, and practical work must be done, by building societies before they start shouting about being hit by a provision which is basically designed to protect the investor.

8.17 p.m.

Lord Banks

My Lords, I am grateful to the noble Viscount, Lord Colville of Culross, for asking this Question tonight, even though I cannot agree with all that he said. I must begin by declaring an interest in that I am a registered insurance broker specialising in life assurance and pensions. I should like to make it clear that I speak only for myself. I do not seek to commit my noble friends in any way.

I support the regulation and registration of all intermediaries in this field which follows the passing of the Financial Services Act 1986. As we know, the SIB has been established. Its rules will be applied by the SROs within its jurisdiction. Underlying those rules, as has been clearly explained by the noble Viscount, is the principle of polarisation.

By the end of this year, every intermediary will have to be fully independent, offering the best advice across the board or he will have to be a company representative—the representative of one life office. Thus, those intermediaries with at present two or three agencies only will have to move one way or the other. All intermediaries must consider their position. The principle is that the client must know whether he is receiving impartial advice across the board or whether he is dealing with someone tied to a particular office.

I support that principle, but I am concerned about the effect of its application on small intermediaries. There is a danger of putting such a burden of expense and administration upon them that they will be forced out of business. General concern is felt about that at the moment. We have only to read the pages of Money Marketing week by week to see that that is so.

Chris Leach, who is president of the Life Assurance Association, is quoted as saying in that journal on 30th January that many intermediaries find FIMBRA—FIMBRA being the self-regulatory organisation which is expected to be the one for insurance intermediaries—too bureaucratic and do not understand the rules. An editorial in the same issue said: Practically every document that emanates from SIB these days brings some new horror for the independent intermediary … SIB's changing structure is unreasonably weighted against the intermediary sector. SIB appears to assume that intermediaries can easily afford to pay a substantial increase in their overheads; either that or SIB is deliberately aiming to drive some of the smaller firms Out of business". I understand that FIMBRA has to pay £1.25 million to SIB this year. There have been complaints about the cost of both SIB and FIMBRA.

A report in Money Marketing on 13th February said that FIMBRA is considering doubling or trebling its annual company membership charge. It is not surprising, therefore, that Derek Thomas, writing on 9th January, said small independent life and pension brokers could be an endangered species by the end of this year. Significantly, Teresa Hunt said on 6th February: As many as 20,000 jobs will be created in large firms of financial intermediaries by 1990 as an increasing number of small advisers are forced out of business". It may be inevitable that some of those advisers should go out of business or join larger organisations, but there is cause for concern. I wonder whether the Government are fully aware of the situation and whether they agree that it cannot be good for competition.

In those circumstances it is not surprising that small intermediaries view with a jaundiced eye the efforts of the large banking conglomerates and the building societies to escape the full effects of polarisation. It looks to them as though banks and building societies want to have their cake and eat it. If the concern of a bank is that its branches should give best advice across the board, it can opt for them to do so. It seemed to me that the noble Viscount did not make that point as clear as he might have done in his otherwise very fair picture of what polarisation meant. The bank manager could then offer the widest possible advice to customers backed by his group's independent intermediary. If the bank decided to restrict his role to that of representative of its own group life office, that would be its doing.

Even in those circumstances, as has been explained, the bank manager may still refer the customer to the group independent intermediary or to another independent intermediary. He can be the channel of communication too for passing the independent intermediary's recommendation to the customer. Once he has done that he must not offer further advice as to the placing of the policy, but he can discuss with the customer the impact on his general financial position of the recommendation. It is also important to remember that the need for a policy will have been discovered and discussed between the client and the bank manager before reference takes place.

I believe that conglomerates should be subject to the same rules as everybody else and that at all times the status of the intermediary should be clear. As the noble Lord, Lord Graham of Edmonton, pointed out, that is certainly the view of the British Insurance Brokers' Association, the Corporation of Insurance and Financial Advisers and the Consumers' Association. The latter feels that any marginal restriction of competition which is brought about by these rules is more than compensated for by the clarity of status which they would ensure.

In conclusion, I return to my first point and ask the noble Lord who is to reply who is going to control the controllers, and how effectively.

8.22 p.m.

Lord Tryon

My Lords, I think I shall be briefer than most of the previous speakers, and I do not wish to steal any thunder from the very senior bankers and others who will speak after me tonight, but I took some interest in this topic when we last discussed it on 20th October.

At that stage I described our discussion as being rather like Hamlet without the prince, because we were all waiting for the SIB rules. We now have the SIB rules, but they have gone almost nowhere towards dealing with the reservations which were expressed in particular by the banking community. It is becoming a little clearer, especially from what the noble Lord, Lord Banks, has just said, that we are in a battle here between the insurance industry and the banking industry. Let that debate continue. I have no interest to declare. As far as most of the Bill was concerned, I had endless interest to declare, but I have no very obvious interests in this respect. I am not a director of an insurance company or a bank, or not a UK bank.

However, it seems to me that there is a powerful argument for reconsidering the position of the high street bank manager. In the rules as they have been set out we appear to be moving into almost an Alice-inWonderland situation. That was vividly illustrated by a very good article in The Times on 20th January by Edward Adeane, which concerned an imaginary conversation between a bank manager and one of his clients. I commend it to the noble Lord, Lord Lucas, if he has not yet read it.

Despite what has been said on behalf of the insurance industry, bank managers are those to whom people around the country, particularly outside the big cities, turn for financial advice. Bank managers' hands seem likely to be tied by these rules. I am sure we shall hear more of that from the noble Lord, Lord Boardman, and others shortly.

The SIB rules are voluminous in size. Some of us have had a few days in which to look at them, and as a general comment I would say that they are very legalistic. Some of us had hoped that they would be confined more to simple principles, coupled with a lot of heavy surveillance.

I shall not produce many examples tonight as I appreciate that the rules are in draft form, and that there is a lot still to be done, but parts of them are extremely hard to follow. I would mention to the Minister page 224, section 5, categories of firm. I have tried that section on a number of highly intelligent people and they are completely unable to understand it. I do not expect an answer on that point tonight.

The more important point is the one which the noble Viscount, Lord Colville, raised in his remarks at the end of his full and eloquent opening to the Question. I should like to ask the Minister to what extent the SIB rules form part of the delegation order. When the delegation order is put before us the rules will be in their final form. That I appreciate. Shall we at that point have any opportunity to alter any part of the rules? Shall we have any opportunity to do so before that happens, or shall we have to take them in full or reject them in full?

This debate has given a good opportunity to ask those questions because there are a number of people who are still worried about this whole process.

8.30 p.m.

Lord Bruce-Gardyne

My Lords, I should also like to join in the thanks to my noble friend Lord Colville for raising this matter tonight. It is extremely pertinent, as various noble Lords have said. I should also like to thank the noble Viscount for the great clarity with which he spoke.

Before I proceed to the argument, I should once again repeat my own interest as a director of the TSB, which is certainly as concerned about this matter as any other banking group—and arguably more concerned. I have listened carefully to the arguments we have heard tonight. Like the noble Lord, Lord Tryon, I looked up the debate we had on 20th October. I notice that my noble and learned friend Lord Cameron of Lochbroom then said that there was far to go in the way of discussions between interested parties and the SIB—as indeed there was. However, I must say that the attitude of the SIB reminds one somewhat of the stance of an American ambassador who arrived in London many years ago and who was said to have taken up office at Winthrop House, or whatever it is called, with a policy of an open door and a closed mind.

The SIB has shown a willingness certainly to listen but very little flexibility in the interpretation that it has chosen to put on the rules. I find its explanations somewhat peculiar. Like other noble Lords, I have received a copy of the latest document from the SIB setting out its position. It refers to the fact that banks, and for that matter building societies with branch networks, feel that their local branch managers, can be relied upon not to succumb to the conflict of interest inherent in having both an agency and a company representative role in the field of life assurance and unit trusts". Its response to that is simply: be that as it may. It does not dispute that that tradition of trust and confidence exists. It simply says, "Be that as it may. We cannot see in effect any way of introducing a measure of flexibility in our rules on the subject of polarisation without unpinning our arrangements reached with the life assurance companies". Yet the fact is that the bulk of this document that we have received from the SIB is expressing caveats—not about the hazards with which customers may be confronted by uncertainties about the nature of the advice they may receive from bank managers or building society managers but about the hazard with which they could be confronted in dealing with life assurance salesmen.

The document says: Life assurance is an area in which the investor is particularly in need of protection … The costs are often concealed from the customer". What has the SIB done about this? What the SIB has done is to say that there is no obligation at all on the independent salesman of life assurance to declare the scale of the commission which he will receive from one product vis-ù-vis another. Yet surely that is a matter of crucial interest and concern to the customer and might legitimately be expected to influence the advice which the customer was given by such an intermediary.

The noble Lord, Lord Banks, said that the banks and building societies seem to want to have their cake and eat it. I suggest that it is more a question of the banks and building societies wanting the customers to have their cake and eat it, if that is possible. I am not at all clear from listening to the noble Lord, Lord Graham of Edmonton, for instance, whether even at this late stage there is really an awareness of precisely what the SIB is proposing. It is saying that there must be a clear obligation on the purveyor of unit trusts and life assurance policies to satisfy himself that what he is offering to the customer is the best for that individual customer's circumstances. I am sure that we would all say "Amen" to that. We would all agree with that; it must be right.

The SIB then goes on to say that under its rules, in the case of the building society branch manager or the bank manager who takes the option—as in practice he is bound to do—to sell in-house products, he is debarred from doing precisely that. If he were to come to the conclusion that an out-house product were better than any of the in-house products he could not sell it. He would be debarred from selling what in his judgment was the best. This seems to me to be an extraordinary way of going about it.

The noble Lord, Lord Graham, referred to the advice we have had from the Consumers' Association. The Consumers' Association makes it quite clear that what it objects to most are cold calls—the so-called foot-in-the-door salesmen. Again, many noble Lords may have sympathy with this view. But the SIB has sanctioned and agreed that the so-called foot-in-the-door salesmen shall continue to operate. For reasons which frankly I do not begin to understand, the Consumers' Association concludes that that is all right so long as the position of the bank manager or the building society manager is effectively polarised.

The conclusion seems to be—and frankly I find this bizarre—that you may not make a choice to go to see your local bank manager or local building society manager and have presented to you all the options with the best judgment that he can offer you of what is the most suitable product for your individual circumstances on an occasion of your own choosing. However, you may be interrupted in your admiration of "Coronation Street", or whatever it may be, by a cold-call salesman as an independent intermediary who can offer you any of a complete range of products; and if you were to ask him what were the relative commissions that he receives from those different products, under the rules he is entitled to tell you that that is none of your business. I find this the most extraordinary way to achieve satisfaction of the consumer's interests. That is surely what we are concerned with.

There is much in these documents that we have been given about the problems of definition and the need to avoid confusion in the eyes of the consumer. However, I beg my noble friend to take this point on hoard, as I am sure he has done. It seems to me to be crucially important for us to understand that there are literally millions of people—the kind of people to whom the noble Lord, Lord Graham, was referring—who do not have the necessary sophistication or access to sophisticated financial advice and who are accustomed to looking to their bank manager or their building society branch manager for that type of advice.

Lord Graham of Edmonton

My Lords, I am most grateful to the noble Lord for allowing me to intervene. The noble Lord certainly made the strong point that the Consumers' Association is vehemently opposed to the whole nexus of cold calling. There is no dispute about that. I rise now because on a previous occasion when I spoke in a debate I was less than fulsome in acknowledging that that was the standpoint of the Consumers' Association. Nevertheless, the noble Lord went on to relate its attitude to polarisation as somehow being contradictory to its attitude to cold calling. I shall need to read what the noble Lord has said.

I am asking the noble Lord whether the words which he has put into the mouth of the Consumers' Association—that is, ipso facto from what I have said on its behalf and what he has read in its brief—mean what he has told the House. I have a strong suspicion that he will tell us that that is not necessarily so.

Lord Bruce-Gardyne

My Lords, I shall read that intervention with a little care tomorrow morning, if the noble Lord will forgive me. I find the advice given by the Consumers' Association profoundly contradictory. That is the point that I am making. I do not understand how it can conceivably be construed as being a good defence of the basic interests of the consumer.

In conclusion I simply appeal to my noble friend to bear in mind the fact that there are millions of consumers who rely on the advice of their bank and building society managers concerning the comprehensive range of choices in this field. They will be hopelessly confused if they are told that their bank manager cannot advise them and they are sent off to intermediaries.

The noble Lord, Lord Tryon, referred to the fact that we shall eventually have the SIB rulebook before us. Yes, we shall, but it will be a take-it or leave-it job. My noble friend shakes his head, but when the order comes in we cannot amend it; we can accept it or reject it. Therefore in practice time is running short. It is crucial and I beg my noble friend to consider that an element of common sense should be brought into the argument even at this late stage.

8.42 p.m.

Lord Boardman

My Lords, I too declare an interest in this matter as the chairman of a clearing bank upon which these rules will have an impact. Like my noble friend Lord Bruce-Gardyne my interest is not just for the fortunes of the banks or building societies but it is essentially for the fortunes of the consumer who, I believe, will suffer severe penalties through the lack of competition and the like that will result from the rules as at present drafted. Many of the points were raised in the debate on 20th October. It is something of a disappointment that they did not provoke a response from the SIB until yesterday.

The noble Lord, Lord Graham of Edmonton, said that the point raised on 20th October opened up the field for further debate. I am sure that it is as disappointing for him as it is for me that we did not receive a response from the SIB until yesterday, and then only a disappointing one. My noble friend Lord Colville has done much by sparing the SIB the need to put its views on paper. However, the responses we have received do not give a real answer to the charge which has been made against the rules. They make no attempt to say why the present rules and the provisions of the Financial Services Act do not give the protection which I believe is essential, which is granted by the provisions and which would make polarisation unnecessary.

The requirements of the Financial Services Act and of the various rules are, first, that persons selling or introducing life assurance or unit trusts must give the best advice; secondly, that they must secure the best execution; thirdly, that they must disclose any interest that they have in the transaction; and, fourthly, that they must subordinate their interests to those of their customers. I suggest that that is a pretty effective control against the abuse which it has been suggested might otherwise arise. Perhaps I may add that in the case of banks—and I believe that it will shortly be the case in respect of building societies, if it is not so already—there is an ombudsman to whom they can appeal if it is thought that they have acted unfairly or improperly in any matter.

I contrast that position with that of the life insurance company representatives. My noble friend Lord Bruce-Gardyne pointed out that they are permitted to cold call; they are permitted to put their foot in the door. They do not have to disclose a commission that they are earning but can merely say that it is on some approved scale. As I see it, there is no obligation on them to give the best advice, to secure the best execution, to disclose the extent of their interests or to subordinate their own interests. If that is the yardstick which should be used—and I do not suggest that it is—I believe that it is quite wrong that one should then subject managers of banks, building societies and the like to a severe regime which inhibits them and makes it impossible for them to give proper wide financial advice to their customers.

Part of the problem is that the SIB inherited a whole set of proposals that came forward from MIBOC. I cannot now recall what MIBOC means but there is a translation which it would be inappropriate to use in your Lordships' House. An argument was put forward which your Lordships accepted, that cold calling could continue for those people. I find that somewhat remarkable in the light of the debate which we had and to which my noble friend Lord Lucas responded on the Financial Services Bill. However, that is the position.

I distinguish the position of a customer of a bank and his bank manager. It is not a one-off transaction. There is no related commission arising from that transaction which goes to the manager. There is a continuing long-term advisory relationship between the customer and the manager. It is the duty of the manager to establish a long-term, satisfactory link with the customer.

In my capacity outside the House complainants and dissatisfied customers tend to write to me, but I am not aware of complaints made against branch managers or bank managers for abusing their position between those products which they are selling as principal and those for which they are acting as agent. I have heard no such complaints. I believe that the position is very much different from that of door-to-door salesmen, against whom many complaints are made. I am sure that the noble Lord, Lord Graham of Edmonton, was referring to those people in the comments that he made. However, they are permitted to continue. As my noble friend Lord Bruce-Gardyne said, that is quite illogical.

My noble friend Lord Colville referred to the geographical aspect and the fact that in the City of London and in any large metropolis there are areas where, if one's bank manager cannot advise because he is forbidden to do so, one can go next door and get advice from an independent intermediary. However, there are vast tracts of the country where that choice is not available. There are areas where there is only one branch of a bank or building society and where the locals look to the manager of that establishment to give them wise and wide financial advice. Are those people to be told that they cannot be given advice and that they must take a plane or train to Edinburgh, or somewhere like that, where they may be given advice. The matter has not been thought through.

Perhaps I may turn to the link between life assurance and unit trusts. There is no direct link; they are different animals and different products, and they are usually used for different purposes. Life assurance is very often taken out in connection with support for a mortgage or for some other borrowing of that kind. Unit trusts are associated with investment. They are different products. Unit trusts are more akin to stocks and shares. In that connection your Lordships will recall that there is no division in dealing in those between a principal—a market maker—and a broker. They are required and were required by this Government to bring those two capacities into one. However, the distinction is being made here between unit trusts and life assurance but not with stocks and shares or PEPs. They will have many features similar to unit trusts.

I do not believe that this matter has been clearly thought through. Even if today my noble friend cannot go very far—I understand the limitations—I hope that he will at least say that he will consider very carefully the possibility of dual polarisation. By that I mean that unit trusts are in one pocket and life assurance in the other. Someone can be an independent intermediary for one and a company representative for the other. I do not believe that that goes nearly far enough, but I should have thought that it was certainly an elementary first stage in accepting what is wrong in the present system. It would represent some understanding of the practical work of these matters.

The noble Lord, Lord Tryon, drew attention to an article in The Times by Mr. Adeane which I hope my noble friend has read and will re-read. I also suggest that he reads the article by Christopher Fildes in the Daily Telegraph and the article in the Spectator. Those articles show what an absolute nonsense this is. I believe that when he has done that and when he has listened to the powerful arguments put forward by my noble friends, he will believe that it is essential to review the whole issue and the rules before they are cast in whatever stone they are to be cast in if the SIB is adopted as—the correct term escapes me.

Viscount Colville of Culross

The designated agency.

Lord Boardman

Yes, the designated agency. I ask my friend to take careful note of these points and indeed of what has been said both in this House and outside.

Lord Winstanley

My Lords, before the noble Lord sits down, I wonder if he will answer one question from his great experience in these matters. The noble Lord has referred to the wise advice of the bank manager to his client, and I accept that I rely on that wise advice very often. Many bank managers sell life insurance. My experience of those cases in which a bank manager has sold the wrong policy—I have come across many examples—is that he has done so not because of any advantageous question of commission rates, but merely because he does not know anything about life insurance. I wonder whether the noble Lord can tell me from his experience to what extent High Street bank managers are properly trained in the very complicated professional business of life insurance?

Lord Boardman

My Lords, obviously they cannot be masters of every part of the whole wide range of financial services. All bank managers have access to the best advice. If they are unfamiliar with a particular opportunity they should make sure that they have the best advice in order that they can give to their customer the quality of advice that he has come to expect.

8.53 p.m.

Lord O'Brien of Lothbury

My Lords, I, too, am grateful to the noble Viscount, Lord Colville, for raising the Question today, partly because I was not able to attend the debate on 20th October and therefore have so far made no observations on this subject at all. Like other noble Lords, I must declare my interest. Sunday next will be the 60th anniversary of the first day I spent in a bank in the City of London. I have been employed by that industry continuously to this day. Whether I shall be so employed tomorrow or the day after, in view of what I have to say tonight, remains to be seen.

For the greater part of the time I was a central banker. Therefore, some people would say that I was not a true banker but simply a supervisor and attempted controller of the real bankers. For the last 14 years, I have been trying to be a commercial banker. During the first half of that time, I was president of the British Bankers Association and therefore represented them all as best I could. Some may feel that that disqualifies me from talking on this subject. However, I propose to do so.

Over that long period, I have come to have a very high regard for the British banking system. It is a regard which I hope I have expressed and attempted to improve, believing that the banking system is best when it is providing the best possible service to its customers. Frankly, I was horrified, no less so than the noble Lords, Lord Bruce-Gardyne and Lord Boardman, by the polarisation proposals emanating from the SIB. This seems to be a case of a very energetic bureaucracy deciding that bureaucratic tidiness and logic arc the all-important matters and that there is no need to make bureaucratic rules tie in with the real facts of life.

All too often bureaucrats are unafraid of complication and complexity, which is a very serious sin in a bureaucrat. All the time he should be on the look-out for things he is trying to do which are far too complicated for the general public to absorb. This is one such case. The matter is wide and covers insurance companies and building societies as well as the banks. However, I should like to talk particularly about banks.

As we all know, in the years since the war, wealth has become much more widely distributed. Interest rates have increased a great deal and the need to manage financial assets has become more urgent for everyone. More people have opened bank accounts, particularly in the last 20 years. Where does the man who is unable to afford highly expensive financial advice go for advice? Many people have bank accounts, but they do not have solicitors, accountants or stockbrokers. Who advises them? The village parson? Certainly not. The bank manager advises them. Fortunately, bank managers are to be found throughout the country in the thousands of branches of our banks. They are banks of high repute.

As has been said, not all bank managers are equally good at giving this kind of advice. Indeed, that applies everywhere. One can go to the most expensive financial advisers in the City of London, but they do not always get it right. It is very difficult to give accurate and valid financial advice, day in, day out, over the years. However, the bank manager is the man available. He is the man who already has a relationship with his customer—very frequently a friendly relationship. I do not see why his ability to advise that customer should be cut down by these proposals which I find highly repugnant. I believe that sufficient could be done to protect the customer by instituting rules whereby the bank manager had to declare his interest in whatever products he was pressing on his customer. It would be a very sad day if the present proposals were to go through.

8.58 p.m.

Earl Ferrers

My Lords, it is always a privilege to hear the noble Lord, Lord O'Brien. Unlike the noble Lord, I have not had the privilege of being employed by the banking system for 60 years. I am quite certain, in view of what he has said this evening, that he need have no worries as to the future. I should declare an interest in that I am a director of an insurance company. However, it is not in relation to insurance companies that I wish to address my remarks this evening.

Judged by the list of speakers, my noble friend Lord Colville has clearly touched upon a raw nerve, and the House is indebted to him for having introduced the subject. He explained it with the clarity and, if I may say so, the simpleness which we are accustomed to hear from him.

Everyone can understand and applaud the Government's desire to increase the regulations in respect of financial affairs, especially when the pace of financial life has hotted-up so much in this computer age. The size, method and speed of transactions have been altered out of all proportion. Quite clearly, probity and the public must be protected. However, like many of your Lordships, I question whether the rules of the SIB have not gone over the top. They may be intended to ensure clarity in competition. In my view they will cause an unnecessary and monumental upheaval in the banks and building societies. which will be against the public interest. Far from protecting the public, the rules as they are at present will, in my view, totally confuse it.

I give an example that is on everyone's mind, that of a person who has, say, £5,000 and goes to his local hank manager to seek advice on how to invest it. The lucky owner of this sum of money knows his bank manager as a figure in the locality: he may know him socially and he trusts him. At present the bank manager may say, "You can put it in a unit trust. Our bank has its own. You can put it into life assurance. We have an insurance company". Or he can say, "But I am bound to tell you that there is an even better life assurance offered by another company and I would suggest that you put your money in that. I will arrange it". The bank manager gives his client the best possible advice, but under the new rules the bank manager is bound to declare the bank's interest. He will say, "We have a unit trust and a life assurance company and I would suggest that you go to those offices or I will ask a representative to see you. He will be working on behalf of our bank as a company representative". Or the manager can say, "I advise you to go to our broking company. Our man will show you what the market has to offer, but he is not a company representative. He is an authorised independent intermediary".

By this time the client is totally confused. He then goes to these different companies, all of which are at present owned by the bank, and is inundated and bamboozled by the technicalities of what they have to offer in a financial sphere with which he is not familiar. If he goes into the next room, as my noble friend Lord Colville suggested, and looks at a VDU, he will come out even more completely confused.

So what does this poor client do? He goes back to his bank manager and says, "I have been to these various companies of which you have told me. I do not know which is best. Give me your advice". Then the bank manager says "I can't. I'm not allowed to. The Government have prevented me from doing so. I used to be able to do so. Indeed I know how I would advise you, but if I do I shall be breaking the law". If the manager advises his customer to get a life assurance from a company which is not an in-house company he will be breaking the law as he is not an authorised independent intermediary. If he advises his customer to choose his bank's own product when he knows it to be inferior, he is breaking the law because he is not giving the best possible advice. As a result the bank manager gets it in the neck either way and so does the client.

I hope that the Government will seek to amend what is an absurdity. I hope that my noble friend Lord Lucas, will, if he cannot amend it this evening (of course he cannot) at least say what he can do, because he must do something.

The Financial Services Act is so complicated that, frankly, one has to be a financial whizz-kid to understand it. I listened with wonder and incredulity to the intricacies of the Bill as it went through your Lordships' House. I am bound to say that most of it went over the top of my head like the crack of rifle fire. Most of it was unintelligible to the average person, but this particular part is totally intelligible to even the simplest of people; including myself. I suggest that it is quite clear that these provisions are wrong, that they will work against the customer's interest, that they will work against the financial institutions' interests and that the best possible advice will not in the end be given.

I agreed with my noble friend Lord Bruce-Gardyne when he said that millions of people rely upon the advice of their bank managers. It is all very well to tell people to shop around. That is all right if one is buying soap powder. Financial guidance and investment require trust and confidence. These millions of people to whom my noble friend Lord Bruce-Gardyne referred do not want that trust and confidence dislodged.

9.5 p.m.

Lord Campbell of Croy

My Lords, I should like to congratulate my noble friend Lord Colville upon raising this subject this evening. He has described clearly the dilemma facing the Government because they are due shortly to take decisions. That is why this debate is so well timed.

The Securities and Investments Board, the SIB, has made recommendations in the interests of protecting investors and putting into effect the Financial Services Act. Those in the business of financial services, authorised persons under the Act, must be in one of two separate categories for life assurance and unit trusts. They must be either independent intermediaries or sellers of their own products. If they are offering their own schemes they will be debarred from discussing the purchase of the products of others who might be regarded as rivals. This raises difficulties and anomalies for financial conglomerates and especially for the high street banks and building societies. Again I declare an interest as a director of one of the largest building socieites.

Bank managers have for many of our citizens been a source of general financial advice, besides being in a position to offer the bank's own schemes in insurance and unit trusts. The noble Lord, Lord O'Brien, a few minutes ago outlined lucidly what banks had been able to do. Now that the Building Societies Act enables building societies to offer a range of financial services too, they will shortly find themselves in a similar position. If the present proposals are not changed they will have to set up separate bodies—one category to deal in their own products only and the other to give general advice on the products of others. This I suggest will cause harm to the interests of investors and customers which will greatly outweigh any benefit of supposed protection. No longer will the customer be able to receive general advice about his affairs from one manager over the whole field of opportunities—that manager of course being able to call on expert advice as required—always bearing in mind the manager's interest in the in-house products and recognising that of course the customer should be properly informed where the bank or building society has an interest of any kind in a scheme or product.

I shall not illustrate examples of the anomalous situations which could occur because they have already been graphically described in the article in The Times of 20th January by Mr. Edward Adeane which has been referred to by the noble Lord, Lord Tryon. There was an imaginary interview between a customer and a bank manager whose general advice he had been used to seeking for 20 years. The effect of polarisation would be to restrict the advice which could be given and in certain circumstances to prevent the best advice on what would be the most suitable for the customer from all the schemes and products available.

Where building societies are concerned, polarisation would run counter to one of the principles underlying the recently passed Building Societies Act to assist the public. The principle is that members of societies when visiting their branches can, at the counter or in the office, have the facility and convenience of financial services not previously available.

Where house buying is concerned, this is known as the one-stop objective. The customer no longer needs to be dealing separately with two, three or even four different offices. Polarisation would be a reversal of that principle.

Where life assurance is concerned, polarisation would mean either that building societies would have to become independent intermediaries or that they would have to be tied to one company only. For many societies this would mean that they would become tied agents of one company and the consumer would be offered less choice rather than more.

Another bizarre effect of the SIB's recommendations on building societies relates to the new power under the recent Act to offer personal pensions. If societies arrange insurance policies, which is part of their normal business, they would be prohibited from selling their own pension products through their branches. What can be the objection to a building society acting as an intermediary in life assurance while selling its own products in other areas?

When the noble Lord, Lord Ezra, raised this subject at the Report stage of the Financial Services Bill on 20th October, my noble and learned friend Lord Cameron of Lochbroom gave a reply which to me still left open the matter so far as the Government are concerned. He said the Government's view was that there should be safeguards so that the investor can be sure of getting genuinely independent advice. I am sure we all agree on that, but the proposals now put forward to achieve that end seem divorced from reality.

Cold calling is, I understand, what the Consumers' Association was particularly against. My noble friend Lord Bruce-Gardyne has already spoken on this. It is to continue under the proposed arrangements, but if it is to continue, it seems that the safeguard proposed in its place is polarisation. Polarisation has been put forward instead of a ban on cold calling.

What are the difficulties about rules for full disclosure? Would not this be a better alternative to polarisation? A bank, building society or other financial organisation should be required to tell the customer about any connection or association of its organisation with a product or scheme. That interest must be fully declared. The customer then has the widest possible choice, knowing in which products his adviser has an interest, near or distant. I hope the Government will consider that very carefully as the best of the possible choices.

9.13 p.m.

Lord Mottistone

My Lords, I too have to declare an interest but it is not quite such a detailed interest as those of several other speakers who are deeply involved in the businesses they were seeking to defend. I have a son who is an insurance broker but I hasten to tell your Lordships that I have never done business with him because I have been brought up never to do business with members of one's family. I think that is probably wise.

I have great admiration for the bank managers with whom I have dealt, who have all been of the outfit in which my noble friend Lord Boardman is such an important figure. I have always found that they have been jolly good at their job, as I understand their job, and certainly I have never sought to consult them on life assurance, or any other insurance for that matter, because I have never seen a bank manager as that sort of person.

There has been a great deal said for the banks and one wonders whether they are protesting a little hard. My noble friend Lord Ferrers told us a most moving story about what might happen to an unfortunate member of the public who went to his bank manager and was not able to get the results that he wanted. I did not quite recognise that as something that I saw happening every day.

When I was thinking what I might say to your Lordships, I thought I might see whether I could answer the questions that my noble friend Lord Colville had put to the Government. I confess that I interpreted his wording to be whether the rules gave the consumer adequate choice, but I do not think the answer, which in the main is that supplied by the SIB, makes much difference.

What it has suggested is that, on the one hand, polarisation does not reduce consumers' choice. The SIB estimates that there are well in excess of 5,000 independent intermediary firms, employing upwards of 50,000 people, that will be required to offer the best advice across the whole market without any restrictions or qualifications. I question what my noble friend Lord Colville said about vast tracts of the country without advice available. I do not believe that is so. Certainly wherever I have lived, worked or been, I have found that there have been insurance brokers to whom one could refer and there has been no difficulty in obtaining such advice. One has not had to go to one's friendly bank manager. In any case, my friendly bank manager has always been in London and I have communicated with him as necessary by letter. That is the choice part of it.

As to whether polarisation restricts, distorts or prevents competition, I am sure your Lordships have all been informed by the SIB, as I was, of its explanations. But I think it is worth putting them down on the record as a balance to the debate. In that connection it says that all rules and requirements are restrictive, and one would accept that. They are, and that is one of the problems. But it also says that without them markets could not operate and nor could investors be protected. Life assurance and unit trusts are an area where improved protection for the small investor is of paramount necessity and unbiased advice from an agent working entirely for the client is an important option. That surely is the burden of the proposed system that we are debating.

Lord Bruce-Gardyne

My Lords. I apologise for interrupting my noble friend. Would he say that advice would be likely, certainly or assuredly to be entirely unbiased when an independent agent received a commission of X in the case of one product and a commission of three-X in the case of another?

Lord Mottistone

Yes, my Lords, it would in this sense. I checked up on this point. As I understand it, there will be a normal commission rate, which admittedly will not be a public figure but will be agreed by the parent body which is to be allocated the duty of looking after this aspect. It will be known within the industry and known to my noble friend the Minister. But it will not necessarily have to be declared as in the normal case. But if there is a commission which is two or three times as much as the normal, a declaration will have to be made of exactly what it is. That part of the rules will have to be accepted. In that respect it will be made clear to the customer that there is a special bias. Polarisation is the only policeable way of removing bias.

There is an anti-competitive aspect in this. There must be, because any regulation of whatever sort has an anti-competitive element within it. But the anticompetitive cost in terms of constraint on the way intermediaries operate is small compared with the advantage to the consumer of the greater likelihood of a product best suited to his needs. That is the nub of the argument.

I do not wish to absorb any more time. However, my noble friend Lord Campbell of Croy, in his concluding remarks, asked, "Why not disclosure rather than polarisation". The argument is that where disclosure is allowed in the securities and money markets, a dual capacity operation is permitted because the announcement of dual capacity gives the client knowledge that it is there. However, in addition, and more importantly, it is easy to check on whether the best advice is given because all securities of a given type are identical—one ICI share at a given time is identical to another—and this can be readily checked. In life assurance, on the other hand, no two contracts are the same and the choice for the customer depends on long-term performance. Thus, it is extremely difficult to check whether the agent has done his best for his client unless one has polarisation.

Without wishing to burden your Lordships further, and because most of what needs to be said has been said, perhaps I may just summarise, in addition to what I have said about commission arrangements, on what I understand is likely to be the case for controlling the independent adviser. He would have to say that he was such on his writing paper and in dicussions with his customer. He would have to say that he was a member of an appropriate governing body—the body which must agree the normal commission rate. He would have to give evidence, or have evidence, of the steps he had taken to give the best advice if anyone challenged him as to whether or not it was the best advice.

It seems to me that the arrangements for controlling the independent adviser are going to be pretty stiff. If I take the remarks of the noble Lord, Lord Banks, aright, it will be unfair competition if the advisers have to compete against the bank manager, with his supporting expertise, on absolutely level terms. I suspect that this is the area where the noble Lord, Lord Banks, thought that many people might go out of business. One must be fair not only to the customer but also to the people supplying the information and the best advice which the customer really needs. I hope that the Government will not obstruct the introduction of polarisation.

9.23 p.m.

Lord Shaughnessy

My Lords, I did not have my name down to speak, but I ask the indulgence of your Lordships in hearing me for a moment. I am impressed with the concept of confusion involved in this discussion in the application of the Securities and Investments Board under polarisation. The brief states that, The investor will be confused as to the nature of the service available to him and as to the position of the person advising him and accordingly liable to make decisions based on erroneous assumptions". The prescription of the rules as they appear in the basic document is certainly one of confusion and whatever the potential veniality of an honest bank manager in advising his clients, I suggest that he is performing a better function than these rules would seem to imply.

9.24 p.m.

Lord Williams of Elvel

My Lords, we must be grateful to the noble Viscount for raising this Question. With great respect. I take issue with him on the question of timing. I am not sure that it is the right time for a debate when the Financial Services Act passed by Parliament is in the process of being implemented. The SIB draft rules are in front of the Office of Fair Trading, and it is at the point at which the Office of Fair Trading makes up its mind what is its view of these rules that I suspect the noble Viscount's Question might be more appropriate.

Under Section 122 of the Financial Services Act the Director General may publish his report. A Question of this nature coming at that time would certainly bring pressure to bear on the Director General to publish a report that otherwise he might not consider it appropriate to publish. Nevertheless, I have to apologise to the noble Viscount for pressing him before the debate on exactly what was the meaning of the second "they" in his Question. He was kind enough to explain that, having thought about it a little, "they" must mean the Government, since the Government were the only people who could do anything about it and that "they", as the noble Lord, Lord Mottistone, felt, could not mean the rules. I apologise if I threw some of your Lordships into confusion by my pre-debate intervention.

Had the noble Viscount not given me that interpretation of the second "they" in his Question, I should have had a great deal of sympathy for the Minister as the Government at this point have no case to answer. There is nothing that the Government either can or indeed should do about this. Parliament has passed an Act. The Act is in force, and that has to be the Government's position. As the noble Viscount pointed out, he did not expect to get a detailed answer from the Minister this evening and I am sure that the noble Lord will oblige the noble Viscount by not giving a very detailed answer.

As a number of noble Lords have said, this whole debate took place when the Financial Services Bill was before your Lordships' House. An amendment was introduced by the noble Lord. Lord Ezra. A number of noble Lords who have intervened this evening took part in that debate. The basic problem is whether bank managers. building society branch managers and certain others—I shall come to certain others in a moment—should have a treatment in the sale of life insurance and unit trusts different from the treatment of life insurance salesmen who may belong to other institutions.

When this question first came up in the Financial Services Bill I had a certain amount of sympathy for the case, and particularly for the TSB case which was explained very well to us at that time, that perhaps banks (and in particular clearing banks) and building societies were in a special position. If at the time the noble Lord. Lord Ezra, had been able to devise an amendment to the Bill which focused narrowly on banks and building societies and their branches it might have attracted a certain amount of support from this side.

On the other hand, when we looked at the possibility of drafting such an amendment, we found it impossible. In my view—and this is my first point—polarisation is indivisible. You either have polarisation across the range in the same product—life assurance or unit trusts—or you do not have it at all. I do not see how you can invent rules and regulations that are applied to one group of people selling product A that do not apply to a different group of people selling the same product. I find that a difficult concept and I do not see how it could be written into law. I would regard the thought that banks and building societies might be special cases in respect of polarisation as being something of a non-starter if polarisation is to apply at all.

Many noble Lords have commented on the virtues of high street bank managers. I have nothing against high street bank managers or indeed, if I may address myself to the noble Lord, Lord Campbell of Croy, against building society branch managers. They are all extremely worthy men. However, I am reminded of what the noble and learned Lord, Lord Templeman, said during the course of the Financial Services Bill. He made a very moving speech about the role of the family solicitor and how the family solicitor was the parent, guide and friend in all matters. I had a lecture earlier this afternoon from my noble friend Lord Morton of Shuna, who told me that the Scottish solicitor is much more of a friend and counsellor than the English solicitor and that the Scottish solicitor—I am sure that the noble and learned Lord the Lord Advocate will support my noble friend—is the person to whom everyone turns for proper financial advice, advice on marital affairs, and so on.

Lord O'Brien of Lothbury

My Lords, does not the noble Lord agree that only a minority of people employ a solicitor on a regular basis, whereas nearly everyone uses a bank manager?

Lord Williams of Elvel

My Lords, I have to disagree with the noble Lord, Lord O'Brien. A majority of people in this country do not have bank accounts. Indeed, although I do not have any figures in mind I suspect that at some time in their lives more people use a solicitor than use a bank. At the last count, some 40 per cent. of the population did not have a bank account. The building society movement is of course different because more people have a building society account, or share account, than have a bank account. Therefore I am not sure that the noble Lord's point is entirely correct.

We are dealing with a conflict of interests and I believe that every noble Lord who has spoken recognises that. There are two ways of dealing with conflicts of interest. The noble Lord, Lord Campbell of Croy, carefully set out that you either have some sort of rule or you have total disclosure. The noble Lord, Lord Campbell, and indeed other noble Lords said the answer in this case is total disclosure.

I am bound to say again that I share the doubts of the noble Lord, Lord Mottistone, about whether total disclosure is, first, possible, and, secondly, enforceable; and if disclosure is not possible and enforceable we must look again at rules. Nevertheless, there is something of a muddle. Noble Lords on all sides have expressed the opinion that through the publication of the SIB rules we have got ourselves into something of a jam. I should like to follow the noble Viscount, Lord Colville, the noble Lord, Lord Tryon, and the noble Earl, Lord Ferrers, along the path of what actually happens now to get ourselves out of this jam.

What happens if the Director General of Fair Trading, who is required to report on the SIB rules, advises the Secretary of State that polarisation rules are unnecessarily restrictive of competition? That is what the Director General is required to advise the Secretary of State on.

There are two possibilities. The Secretary of State may overrule the Director General. He may decide that although the Director General makes his point nevertheless it is important for the protection of investors that the particular rules in the SIB rule book should remain as they are and remove the words "unnecessarily restrictive". In other words, he can overrule the Director General and say that he will issue the delegation order with the rules as they are in the present rule book. In those circumstances and under the Act the delegation order would be to the SIB. The Act does not give the Secretary of State the choice of another designated agency provided the SIB satisfies the qualifications under Chapter XIV of the Act and under one of the sections of the designated agency provision.

Alternatively, the Secretary of State may decide that the Director General is right and that the polarisation rules are, for example, unnecessarily restrictive of competition. What can he do then? Clearly he cannot at that point issue a delegation order because he is prohibited from doing so by the Act. He cannot make an order changing the SIB rule book. He can only make an order changing the SIB rule book after he has made a delegation order making the SIB the designated agency. However, between the point at which he receives the Director General's report and makes a delegation order he has no power at all to change the SIB rule book.

Of course he has influence. The Secretary of State can say to the SIB, "Now, my friends, you are applying to be a designated agency and you want a delegation order from me. I have to tell you that I am not prepared to give you a delegation order and make you the designated agency unless you change your rules". As we know, the SIB is a private company, with directors like those of any other private company who meet and take decisions in the interests of their shareholders, as all companies do. At this point the directors say, "Well, we have considered this but we are not prepared to change our rules. We think our rules are perfectly satisfactory".

What does the Secretary of State do then? Either he climbs down and says, "Well, after all, I have thought again and I am prepared to overrule the director general", or he does not climb down and then he has to look for another designated agency; or if he cannot find another designated agency to designate, he has to do the whole job himself, which is where we were when we started to debate this Bill.

In my view all this could easily have been avoided by the simple procedure of the Government adopting what the Opposition wanted, which was statutory regulation and the SIB as a statutory body. Now, having come full circle, I ask the noble Lord whether my analysis of the Act is right. I believe it is and, like the noble Viscount, I have looked at the Act very carefully. If I am right, are the Government on the hook and would they not have done better to accept our view in the first place?

9.36 p.m.

The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Lucas of Chilworth)

My Lords, I knew that we should have an extremely well informed and expert debate this evening. I must confess that a couple of hours or so ago I was not so sure that it would be as amiable and good natured as it has turned out to be. Let me just dispose of the question that the noble Lord, Lord Williams of Elvel, posed in a fascinating speech in which he drew a hypothetical scenario. No, we are not on a hook.

Let me turn to the Question that is before us tonight. With regret I have to say to my noble friend Lord Colville of Culross that I am not in a position to give him a definitive answer and I think I should explain why. The House will recall that before the Securities and Investments Board can assume its regulatory functions under the Act is has to be designated and have functions transferred to it by order of the Secretary of State. Before that order can take effect, it has to be approved by both Houses of Parliament. Whatever else may be said, certainly your Lordships and Members of another place will have a further opportunity to debate this and any other matters relating to the designation of the SIB.

During the passage of the Bill Parliament also provided for a vetting process before the order can be drafted. Under the Act any rules, regulations and other guidance that the SIB proposes to make—and one might as well accept that it is the SIB which is the designated agency, or it certainly has applied to be so—have to be scrutinised by the Director General of Fair Trading. who will consider. whether … the rules, regulations, guidance … have, or are intended or likely to have, to any significant extent the effect of restricting, distorting, or preventing competition". I quote from the Act there. The director general will report to my right honourable friend the Secretary of State. The Secretary of State then has to consider the report and if he considers that the anti-competitive effects identified by the director general are significant, then the Act does not allow him to designate the SIB unless he is satisfied that this anti-competitive effect is—and again I quote from the Act— not greater than is necessary for investor protection". I have spelt out this process in some detail because it is central to the Question that my noble friend has asked. This process is under way. My right honourable friend the Secretary of State has received a request from the SIB for the transfer of powers under the Act and copies of the proposed rules, 'regulations and guidance. These were published on 12th December. If I may say something to the noble Lord, Lord Tryon, here, it is from that date until the end of this month—I may be wrong by a day or two—that the SIB asked for comment on the booklet. Voluminous it may well be, but there is adequate opportunity for comment to be made.

Viscount Colville of Culross

My Lords, this touches on the question that I asked my noble friend. The whole point is that the time is not adequate. It is far too short for the extreme complexity of some of these things to be followed through by embryonic SROs which are trying to set up their own regulatory systems. I know that a number have given notice to the SIB that they cannot do it in time. That is why I wish to know the machinery for doing it later.

Lord Lucas of Chilworth

My Lords, if my noble friend will perhaps allow me to continue a little further, I think that he will find his question answered.

The Director General of Fair Trading is considering the very question that is on the Order Paper tonight. I therefore hope that my noble friend will understand that, before the Director General has reported and before my right honourable friend has had the opportunity to consider the report, it would be wrong of me to answer it.

The noble Lord says that the period is too short. We have been considering this business now for nearly two years. With regard to the final rules, which are not very different from the draft rules that have been available to interested parties, I do not think that the period is too short. Representation can be made to my right honourable friend the Secretary of State up to and including the date at which an order is laid before Parliament. My noble friend and others have the opportunity to put their points of view when the order comes before Parliament, so there is plenty of time.

My noble friend Lord Colville raised two specific queries on which I ought to comment. I am not sure whether it was he or Lord Tryon who expressed concern about how polarisation might affect the less sophisticated, but both they and my noble friend Lord Bruce-Gardyne certainly spoke about the less sophisticated people who rely upon the local bank manager for advice. I will pass on the noble Lords' concern about rural areas.

I ought here to say something about the effect of polarisation. If a local bank branch—perhaps I may address this also to my noble friend Lord Boardman—acts as a company representative selling only the bank's products, the customer has two options if he wishes to obtain independent advice. He can contact an independent intermediary in the nearest town, or the local bank branch may refer him to the bank's separate, independent intermediary subsidiary, provided that it has one. As an illustration of the distance that a person may have to travel for independent advice, from Beccles to Edinburgh is something of an exaggeration.

With modern technology, that advice is available almost at the pressing of a switch. If the local bank branch is as isolated as noble Lords have suggested, it probably opens only three mornings a week, so the consumer cannot talk to his local, friendly bank manager as effectively as some people have suggested. I do not see great difficulty there. The consumer can do the two things I have suggested.

SIB's draft proposed rules will allow the local bank branch to act as a channel of communicatio between the customer and the bank intermediary, again provided that the local branch does not advise on the merit of the intermediary's recommendations. There is no restriction on the form of the channel of communication. It may be by computer, by the pressing of a button, by telephone or by letter.

My noble friend and others asked me about the scope for changing SIB's proposed rules, which are before the Director General of Fair Trading. Before my right honourable friend the Secretary of Stage can make an order transferring to SIB the functions made under the Act, he must be satisfied, as we know, on two counts in respect of the rules it proposes to make. First, he must be satisfied that the rules offer investors adequate protection and comply with the principles set out in Schedule 8 to the Act, which noble Lords will recall. Secondly, if after considering the report from the director general the Secretary of State considers that SIB's rules are likely to have significant anti-competitive effects, then, as I have explained, he must be satisfied that such effects are no greater than required for investor protection.

That brings me to the point on amending the rules about which my noble friend Lord Colville and the noble Lord, Lord Tryon, asked. The Act which Parliament has passed does not provide for SIB rules to be approved. That would be inconsistent with the concept of a practitioner-based framework. Rather. Parliament will be asked whether on the basis of the proposals put forward by SIB it wishes SIB to exercise the function of a designated agency, including the ability to make rules. As I explained, there are checks and balances before that stage is reached.

That consideration is under way. I cannot prejudge my honourable friend's decision. If he is not satisfied with SIB's rules on either of the two counts— the point about which my noble friend Lord Ferrers asked—I have no doubt that he will tell SIB so. It will then be up to SIB to produce proposals for rules which will meet the Act's requirements. Of course SIB, if that is what it is to be, must satisfy Parliament that it can exercise the relevant functions. At the end of the day, and this goes back to the point made by the noble Lord, Lord Williams, the Secretary of State can hold the authority unto himself. That is the ultimate sanction.

The noble Lord, Lord Banks. asked me about the costs of the regime. He and others will appreciate that it is unrealistic that the improvements in investor protection for which we are looking, and for which everybody is looking, can take place without some increase in costs. That is to be appreciated. I merely say to the noble Lord. Lord Banks, that we are aware of the concerns of the smaller intermediaries about costs and we shall certainly have to take them into account.

My noble friend Lord Bruce-Gardyne asked me about disclosures of commission and the ending of cold-calling. The noble Lord, Lord Graham of Edmonton, made a similar point. SIB's rules will be scrutinised by the Director General of Fair Trading and by my right honourable friend. In those circumstances it is difficult for me to comment on specific rules. We expect the rules to contain provisions for the disclosure of commissions by independent intermediaries. SIB also envisages a commissions agreement to reduce the conflict of interest for such intermediaries. There are rules to regulate cold-calling by salesmen. Let me add that the proposals are similar to those that the Government suggested in the White Paper of January 1985 which most of us have had the opportunity of discussing.

The noble Lord, Lord O'Brien, and my noble friend Lord Campbell of Croy, raised the point quite shortly but nevertheless succinctly that polarisation would upset the special relationship between a bank manager and his customer. I think I have partly answered that point in my earlier remarks. But perhaps we could all agree that, for many people, bank managers do hold a special position of trust.

It has been argued by some that because of that presumption of trust, there is a greater need for investor protection. In this respect, a balance has to be struck between the need to protect the consumer from biased advice on the one hand and the need to avoid over-regulation on the other. That is the balance currently being considered. I assure your Lordships that everything which has been said this evening will be taken into account and considered when the Director General of Fair Trading's report is to hand and my right honourable friend comes to consider all of these matters.

Finally, let me say that I have carefully noted what has been said. I appreciate that the new regulatory system will have far-reaching implications. We accept that our desire to improve the standards of investor protection is an aim which your Lordships and which Parliament has endorsed. There is no doubt that that will involve changes and some difficult decisions. Of course we want to take into account the views of all those who are affected by the changes. many of which have been put before us this evening.

Before reaching his decision on whether to make an order designating SIB, my right honourable friend will take into account not only the report from the DGFT to which I have referred but also the views which are currently being expressed outside your Lordships' House, and certainly those which have been so well expressed this evening. All the representations which we receive on this or any other aspect of SIB's proposals will be taken into account.

I have tried in somewhat difficult circumstances to explain to your Lordships how we see this process. I have said why I am not able precisely to answer the Question. My noble friend understands that. With that, I hope that those noble Lords who still have some problems uppermost in their minds will convey them to us so that we can give them the proper consideration that they deserve.