BRIEFING PAPER Number 8033, 15 August 2018 Financial Claims and By Djuna Thurley, Timothy Edmonds, Daniel Guidance Bill 2017-19- Harari and Richard Keen debates in Parliament Contents: 1. Part 1 – Background 2. The Bill: overview 3. Part 1 – financial guidance 4. The Bill: part 2 – Claims Management Services 5. Appendix 1 – Brady Review of CMC regulation 6. Appendix 2 – guidance and advice 7. Appendix 3 –Debt Arrangement Schemes in Scotland - www.parliament.uk/commons-library | intranet.parliament.uk/commons-library | [email protected] | @commonslibrary 2 Financial Claims and Guidance Bill 2017-19- debates in Parliament Contents Summary 3 1. Part 1 – Background 5 1.1 Statistics on personal debt and savings 5 1.2 Pensions statistics 12 1.3 The current financial guidance bodies 15 1.4 Plans for a single body 22 1.5 Claims Management Companies 24 2. The Bill: overview 30 2.1 Overview 30 2.2 Second Reading - Lords 32 2.3 Second Reading – Commons 35 3. Part 1 – financial guidance 40 3.1 Establishment of the single financial guidance body 40 3.2 Objectives 41 3.3 Functions 44 3.4 Pensions guidance function 51 3.5 Delegation to delivery partners 52 3.6 Debt respite scheme 53 3.7 Guidance and directions 57 3.8 Setting standards 57 3.9 Monitoring and enforcement of standards 58 3.10 Funding of the SFGB 58 3.11 False claims about the provision of information 59 3.12 Requirements on pension schemes to recommend guidance 60 3.13 Pensions cold-calling 66 3.14 Minor and consequential amendments 69 3.15 Power to dissolve the SFGB 70 3.16 Interpretation (sponsor department) 70 4. The Bill: part 2 – Claims Management Services 73 4.1 Transfer to FCA of regulation of claims management services 73 4.2 Power to restrict claims management charges 76 4.3 PPI claims and charges for claims management services: general 78 4.4 Legal services regulators’ rules: charges for claims management services 80 4.5 Cold calling about claims management services 81 4.6 Extent 82 4.7 Commencement 83 5. Appendix 1 – Brady Review of CMC regulation 84 6. Appendix 2 – guidance and advice 86 Regulated financial advice 86 7. Appendix 3 –Debt Arrangement Schemes in Scotland 88 3 Commons Library Briefing, 15 August 2018 Summary The Financial Claims and Guidance Bill [HL] 2017-19 was introduced in the House of Lords on 22 June 2017 and completed its passage though that House on 21 November 2017. It was introduced to the House of Commons on 22 November 2017 as Bill 131 and had its Second Reading on 22 January 2018. The Commons Committee had three sittings and ended on 6 February 2018. Report Stage and Third Reading were on 12 March and 24 April 2018. The Financial Guidance and Claims Act 2018 received Royal Assent on 10 May 2018. The Act has two parts: • Part 1 merged three existing government-sponsored guidance services - the Money Advice Service, the Pensions Advisory Service and Pension Wise - to create a new Single Financial Guidance Body (SFGB). This is to help “ensure that members of the public can access good-quality, free-to-client, impartial financial guidance and debt advice.” The provisions follow three government consultations. The SFGB is expected to be set up and operational from January 2019. (HL Deb 24 July 2018 c1601). • Part 2 made changes to the regulation of claims management companies (CMCs). CMCs provide advice and services to assist people in making compensation claims in various sectors, such as personal injury and financial products. The Government had expressed concern that “there is evidence of malpractice” in the industry. In March 2016, following an independent review, the Government said it would change the regulatory system for CMCs. Under the Act, regulatory responsibility passes from the Ministry of Justice to the Financial Conduct Authority (FCA). • Also in Part 2, complaints handling is transferred from the Legal Ombudsman to the Financial Ombudsman Service. The FCA is given the power to impose a cap on the fees that CMCs can charge for their services. Ahead of this, an interim cap on fees would apply to PPI claims. House of Lords stages The Bill was amended in the House of the Lords. Most of the amendments were to Part 1. These included opposition amendments to enable the Secretary of State to introduce a ban on pension cold-calling and to increase take up of Pension Wise. Both were replaced with government amendments with the same aim. The Government amended the Bill at Third Reading to enable the introduction of a ‘debt respite scheme’ in England, Wales and/or Northern Ireland. This would be designed to protect individuals in debt from further interest, charges and enforcement action for a set period and enable a realistic repayment plan to be put in place. The issue had been raised previously by many Peers, who pointed to the experience of such arrangements in Scotland. Other government amendments to Part One were to: • Make it explicit that the SFGB should target those ‘most in need’, particularly those in vulnerable circumstances (s2 (1) (d)); • Make it clear that public financial guidance is free and impartial (s3); Authors Djuna Thurley (financial guidance); Timothy Edmonds (claims management companies); Daniel Harari (debt and savings statistics); Richard Keen (pension statistics); Abigail Bremner, SPICe, Scottish Parliament; Lorraine Conway (debt respite scheme). Cover page image copyright - perzonseo.com – businesswoman working at laptop in office 4 Financial Claims and Guidance Bill 2017-19- debates in Parliament • Make it a specific offence for someone to create the impression that they are providing information, guidance or advice on behalf of the SFGB when they are not (s15 and 16); and • Ensure there is a public consultation before the Government can lay draft regulations to dissolve the SFGB (s24). Government amendments to Part 2 enable the introduction of an interim fee cap in relation to PPI claims and provide for FCA regulation of CMCs to extend to Scotland. House of Commons stages The main changes to the Bill at Commons Committee stage were government amendments to: • Require pension schemes to recommend guidance (s18 and 19); and • Provide for a ban on cold calling for claims management services (s35). Report stage amendments Government amendments at Commons Report Stage related to cold calling for pensions and other financial products (now s21 and 22) and to the take-up of pensions guidance (now s18 and19) – see sections 3.12 and 3.13 below. The Government made a statement on pensions cold calling on 12 July 2018 and launched a consultation on draft regulations on 20 July 2018. Once it has considered the responses, in the Autumn it intends to lay regulations under the affirmative procedure and, subject to parliamentary approval, bring the regulations into force as soon as possible thereafter. 5 Commons Library Briefing, 15 August 2018 1. Part 1 – Background The subject of personal finance encompasses many issues, many of which are often in the news and other media – like consumer affairs TV programmes. Some issues like financial education, capability and financial exclusion and inclusion have been looked at by policy makers over decades. The ease and availability of credit, over-lending and its attendant consequences of ‘problem debt’ found a renewed prominence when they were seen as both contributors to, and a result of, the financial crisis in 2008. There have been ongoing campaigns and concerns about the potential for consumer harm from particular forms of lending, such as payday loans. Further, the introduction of the ‘pension freedoms’ in April 2015 gave people more choice about when and how to access their pension savings, placing more responsibility on them for their decisions and raised questions about how well-equipped they are to make them. These matters are relevant to Part 1 of the Act, which creates the framework for a Single Financial Guidance Body (SFGB), ensuring that “people have access to the information and guidance they need to make the important and effective financial decisions that we all have to make at some point in our lives.”1 Part 2 focusses on claims management companies (CMCs) – a specific part of the consumer financial landscape which is seen to not be working well for consumers, particularly in respect of their remuneration as compared to the value of the service they provide. 1.1 Statistics on personal debt and savings What is personal debt? Personal debt2 is owed by individuals to banks or other financial institutions. It includes a wide range of borrowing, from mortgages to payday loans, car and other personal loans, credit card balances and bank account overdrafts. It can broadly be grouped into two categories: secured and unsecured. • Secured debt is a loan secured on an asset (the security for the loan). If the loan cannot be repaid, the lender will then be able to take possession of the asset. The most obvious example of secured lending is mortgages. In the UK, mortgages account for the clear majority of overall household debt. • Unsecured debt is lending provided to individuals that is not secured on an asset. Credit card lending and most forms of consumer credit lending are unsecured debt. 1 HL Deb 5 July 2017 c904 2 Personal debt is also often called household debt. In other words, debt that is owed by individuals rather than companies or the public sector. 6 Financial Claims and Guidance Bill 2017-19- debates in Parliament Trends in personal debt levels Statistics on the total stock of outstanding loans in the UK economy – the household debt level – are provided by the Office for National Statistics (ONS) and the Bank of England.