Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill

(Limited Text - Ministerial Extracts only)

2nd reading
Tuesday 8th June 2021 Commons Chamber

[The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)]

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

In the United Kingdom there are a wide range of opportunities for people to invest. The Government’s role is to try to ensure that the system of regulation and financial investment is suitably robust, so that individuals are treated fairly and have confidence in the financial system in which they invest. Unfortunately, no system of regulation can completely eradicate the risk that firms fail, or that there are bad actors intent on committing fraud. This short Bill is aimed at two areas where it is necessary for the Government to step in.

Clause 1 relates to a new Government scheme to compensate London Capital & Finance bond holders who lost money after the firm entered administration in 2019. Clause 2 will arrange a loan to the board of the pension protection fund to pay compensation to occupational pension scheme members who have been victims of pension fraud, following the recent High Court judgment in the case of PPF v. Dalriada. I will now expand briefly on those measures in detail.

[Gareth Thomas (Harrow West) (Lab/Co-op)]

The Minister will understand that part of the reason why we are here today is because of Dame Elizabeth Gloster’s excoriating report into the capacity of the Financial Conduct Authority. Is he certain that the FCA now has the powers and, crucially, the capacity it needs to ensure that consumers of financial services businesses are properly protected?

[Guy Opperman]

Yes, I believe that is the case. The Treasury and the FCA are working together. The FCA is under new management, as the hon. Gentleman will be aware, and there is an acceptance by the FCA of all the findings in Dame Elizabeth Gloster’s report. More particularly there is fresh thinking, one hopes, that will be applied going forward.

[Kevin Hollinrake (Thirsk and Malton) (Con)]

Will the Minister give way on that point?

[Guy Opperman]

For the last time, and very briefly.

[Kevin Hollinrake]

Powers are one thing, willingness is another. The FCA has shown a remarkable reluctance to hold people to account for incompetence or bad actors, as the Minister said. Will not those failings simply continue unless the FCA starts identifying individuals, within its own ranks or within the banks, for those failings, and holds them to account?

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[Guy Opperman]

Clearly, it is not possible to comment on specific future events, but Ministers are liable for the actions of civil servants, through vicarious liability, and we would expect regulators to take a similar approach and, putting it simply, to own the problems they are trying to solve. If that is a lesson learned from this sorry saga, in my humble opinion that would be a good thing. Clearly, it is for the FCA to take a good long, hard, look at itself, and other regulatory bodies, and decide how it will run itself going forward, with suitable input from Government.

[Neale Hanvey (Kirkcaldy and Cowdenbeath) (Alba)]

Will the Minister give way?

[Guy Opperman]

I will not give way any more. I apologise, but we are trying to do this whole debate in 58 minutes. Please bear with me.

As the House will be aware, on 19 April the Economic Secretary to the Treasury provided a written ministerial statement on the Government’s approach to setting up a compensation scheme for London Capital & Finance bond holders who lost money following the firm’s collapse in 2019. LCF was an FCA authorised firm, which sold unregulated non-transferrable debt securities, commonly known as mini-bonds, to investors. Sadly, 11,600 bond holders lost around £237 million when LCF went into administration. For some investors that will have formed part of an investment portfolio, but for others it will have represented a significant proportion of their savings.

Following LCF’s collapse, the Economic Secretary to the Treasury directed the FCA to launch an independent investigation into its regulation and supervision of LCF. As we have discussed, Dame Elizabeth Gloster led the investigation and concluded that the FCA did not effectively supervise and regulate LCF. The LCF business model was, it is accepted, highly unusual in both its scale and structure. In particular, the firm was authorised by the FCA, despite generating no income from regulated activities. That allowed LCF’s unregulated activity of selling non-transferrable debt securities, known as mini-bonds, to benefit from the impact of being issued by an authorised firm. While other mini-bond firms have failed, LCF is the only mini-bond firm that was authorised by the FCA and sold bonds in order to on-lend to other companies.

In response to the regulatory failings detailed in Dame Elizabeth’s report and the range of interconnected factors that led to losses for bondholders, the Government announced two things: first, they would establish a compensation scheme, and secondly, they would accept all of Dame Elizabeth’s report, as did the FCA. It is, however, important to emphasise that the circumstances surrounding LCF are unique and exceptional, and the Government cannot and should not be expected to stand behind every failed investment firm. That would, with respect, create the wrong incentives for individuals and an unacceptable burden on the taxpayer.

Clause 1 of the Bill, which is the LCF measure, covers two key elements. First, it provides parliamentary authority for the Treasury to incur expenditure in relation to the scheme. Secondly, it makes a minor technical change that disapplies the FCA’s rule-making processes for the purpose of the LCF compensation scheme. The Treasury intends to use part 15A of the Financial Services and Markets Act 2000 to require the Financial Services Compensation Scheme to administer the scheme at speed on the Treasury’s behalf. The scheme will be available to all LCF bondholders who have not already received compensation from the FSCS and represents 80% of the compensation that they would have received had they been eligible for FSCS protection.

Around 97% of LCF bondholders invested less than £85,000 and will not reach the compensation cap under either the Government’s scheme or the FSCS. The Government expect to pay out around £120 million in compensation to around 8,800 bondholders in total and are committed to ensuring that the scheme has made all payments within six months of this Bill securing Royal Assent.

As colleagues will be aware, this is a two-measure Bill, the second clause of which concerns the Department for Work and Pensions and involves loans to the board of the Pension Protection Fund. Clause 2 amends the Pensions Act 2004 by inserting a new section that will give the Secretary of State a power to lend money to the board of the Pension Protection Fund.

The Pension Protection Fund manages the Fraud Compensation Fund, which pays compensation to occupational pension schemes that have lost out financially due to dishonesty. When set up in 2004 by the Blair Government, the PPF and the FCF did not envisage that pension liberation schemes were in scope for FCF payments. This clause will allow compensation to an estimated 8,806 individuals who have been defrauded following the pronouncement of the recent Court judgment in the Dalriada case.

Pension liberation fraud involves members being persuaded to transfer their pension savings from legitimate schemes to fraudulent schemes, with promises of high investment returns or access to a loan from their pension scheme before the age of 55 without incurring a tax charge. The Pensions Regulator has now placed professional pensions trustees in charge of the affected schemes. Those trustees are seeking compensation on behalf of scheme members through the Fraud Compensation Fund.

Following receipt of a significant number of applications, the Pension Protection Fund sought guidance from the High Court in a test case on which schemes should be eligible for the Fraud Compensation Fund. The Court judgment in the case of the Pension Protection Fund vs. Dalriada was pronounced on 6 November 2020, and the High Court concluded that such pension liberation schemes would be eligible, subject to meeting eligibility criteria. The Government have decided to fully accept the Court’s judgment on this and are committed to ensuring that all those who have been victims of pension liberation schemes are able to claim through the Fraud Compensation Fund. However, it is estimated that claims will exceed £350 million, which is far greater than the £26.2 million of assets currently held in the Fraud Compensation Fund, hence the requirement for clause 2 of the Bill and the action that the DWP and the Government are taking.

This is a necessary, urgent and important Bill which will ensure financial protection and fair outcomes for those falling victim in these particular circumstances. My hope and expectation is that the Bill will receive widespread support, and I commend its contents to the House.

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[The Economic Secretary to the Treasury (John Glen)]

It is a great honour to speak in this debate and to have worked with the pensions Minister—the Under-Secretary of State for Work and Pensions, my hon. Friend the Member for Hexham (Guy Opperman)—to bring forward this legislation. Many Members of this House, if not all, will have constituents who have been affected by the issues that we have dealt with and discussed this afternoon.

I am pleased that the Bill has the support of Members across the House. I have listened carefully to the debate. Observations have been made about the FCA and about the House’s confidence in its conduct; I will seek to address those points and to respond to the important points raised by several hon. Members about the compensation scheme for London Capital & Finance.

Let me begin with the scope of the compensation scheme and what it means in relation to the Government’s approach to future firm failures—a point that the right hon. Member for Hayes and Harlington (John McDonnell) and others raised. The LCF is not the only mini-bond firm that has failed in recent years. The Treasury, in collaboration with the FCA, has examined every mini-bond issuer known to have failed in the past eight years. Following that detailed analysis, the Government are satisfied that the circumstances surrounding LCF are truly exceptional.

As hon. Members may already be aware, the issuance of mini-bonds is not regulated by the FCA. As my hon. Friend the pensions Minister set out, LCF was an FCA-authorised firm despite not receiving any income from regulated activities. LCF is unique in that regard; indeed, it is the only mini-bond issuer that was authorised by the FCA and that sold bonds to on-lend to other companies. That is important, because one of the central findings in Dame Elizabeth Gloster’s excellent report is that because LCF was authorised, the FCA should have considered its business holistically, including the unregulated activity of issuing mini-bonds. The FCA cannot be said to have the same responsibilities with regard to unauthorised firms. Although the Government have not seen evidence to suggest that the regulatory failings at the FCA caused the losses for bondholders, they were a major factor that the Government considered when deciding to establish the scheme.

I pause to acknowledge the representations made by the hon. Members for Strangford (Jim Shannon) and for Kirkcaldy and Cowdenbeath (Neale Hanvey) and by my hon. Friend the Member for Leigh (James Grundy). I will set out in due course, in the coming months, the details of how the scheme will operate. I am very happy to take correspondence on individual cases, but I think it would be inappropriate to try to address at the Dispatch Box this evening every single case raised. However, I have received and read many letters from individuals who have lost money after investing in LCF and other failed mini-bond firms, including Blackmore Bond and Basset & Gold, which were raised in the debate.

I sincerely extend my sympathy to all those affected, as I know that many individuals have suffered financial hardship—severe financial hardship, in many cases—as a result of their investment losses. However, I must be clear that the Government cannot step in to pay compensation in respect of every failed financial services firm. That falls outside the financial services compensation scheme, would create a moral hazard for investors and would potentially lead individuals to choose unsuitable investments, thinking that the Government would provide compensation in all cases if things went wrong.

The Government’s approach follows the historical precedent. I note that only three compensation schemes have been established in the past 35 years—for Barlow Clowes, a Ponzi scheme that failed in the late 1980s, Equitable Life and LCF—despite many investment firms failing over that period. The Government are also seeking to ensure that the situation never arises in the future. In April, we launched a consultation with proposals to bring mini-bonds into FCA regulation.

The right hon. Member for Wolverhampton South East (Mr McFadden) asked a number of questions about the Government’s confidence about the FCA’s capability. As the Under-Secretary of State for Work and Pensions, my hon. Friend the Member for Hexham mentioned, the transformation programme that the new chief executive, who has been in post for just over eight months, is undertaking at pace is designed to empower the organisation at all levels to hear the representations that the right hon. Member for Wolverhampton South East made, to act on them, and to deal proactively with the cases that are raised.

[Gareth Thomas]

It is encouraging to hear the Minister’s confidence in the transformation programme. Given the concerns that consumers might lose out in the demutualisation of Liverpool Victoria, will he sit down with the new chief executive of the FCA and go through how the FCA will ensure that consumers’ interests are properly protected if that demutualisation goes ahead?

[John Glen]

I thank the hon. Gentleman, as ever, for his representations. He has been a determined campaigner for that sector during my tenure. I have regular conversations, at least every six weeks, with the chief executive of the FCA, and we discuss a whole range of matters. I would be very happy to discuss that matter with him when I next speak to him in the next few weeks.

As Members from across the House have recognised today, the measure concerning a loan to the board of the Pension Protection Fund, set out in clause 2, is vital to ensure that those defrauded of their pensions by scam pension liberation schemes are able to access the compensation that they deserve. The Bill will ensure that those whose pensions have been unjustly targeted by fraudsters receive their pensions. We must continue to provide a safety net for people across the UK, who deserve to have confidence that they will have a pension pot for their retirement. I note that a number of observations were made about the ongoing challenge of dealing with the evolving nature of financial services firms and the sophistication of scams. The Under-Secretary of State for Work and Pensions, my hon. Friend the Member for Hexham, and I are working across Whitehall to bring an effective resolution to this matter.

I acknowledge that Members from across the House have supported the principles of the Bill, and I welcome the support that it has received. It will offer some relief to the enormous distress and hardship suffered by LCF bondholders and victims of fraudulent pension liberation schemes. It is an important Bill, and I want to move as quickly as possible from Royal Assent to enact it and deliver that compensation. I hope that right hon. and hon. Members will support it this evening.

Question put and agreed to.

Bill accordingly read a Second time.

Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill (Programme)

Motion made, and Question put forthwith (Standing Order No. 83A(7)),

That the following provisions shall apply to the Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill:

Committal

The Bill shall be committed to a Public Bill Committee.

Proceedings in Public Bill Committee

(2) Proceedings in the Public Bill Committee shall (so far as not previously concluded) be brought to a conclusion on Thursday 17 June.

(3) The Public Bill Committee shall have leave to sit twice on the first day on which it meets.

Proceedings on Consideration and Third Reading

(4) Proceedings on Consideration shall (so far as not previously concluded) be brought to a conclusion one hour before the moment of interruption on the day on which proceedings on Consideration are commenced.

(5) Proceedings on Third Reading shall (so far as not previously concluded) be brought to a conclusion at the moment of interruption on that day.

(6) Standing Order No. 83B (Programming committees) shall not apply to proceedings on Consideration and Third Reading.

Other proceedings

(7) Any other proceedings on the Bill may be programmed.—(Alan Mak.)

Question agreed to.

Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill (money)

Queen’s recommendation signified.

Motion made, and Question put forthwith (Standing Order No. 52(1)(a)),

That, for the purposes of any Act resulting from the Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill, it is expedient to authorise the payment out of money provided by Parliament of:

(a) expenditure incurred by the Treasury for, or in connection with, the payment of compensation to customers of London Capital & Finance plc; and

(b) loans by the Secretary of State to the Board of the Pension Protection Fund.—(Alan Mak.)

Question agreed to.

Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill (ways and means)

Motion made, and Question put forthwith (Standing Order No. 52(1)(a)),

That, for the purposes of any Act resulting from the Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill, it is expedient to authorise such levying of charges under section 189 of the Pensions Act 2004 and Article 171 of the Pensions (Northern Ireland) Order 2005 as may arise by virtue of that Act.—(Alan Mak.)

Question agreed to.

[Madam Deputy Speaker (Dame Rosie Winterton)]

I will now suspend the House for two minutes to make the necessary arrangements for the next business.