The Committee consisted of the following Members:
Chairs: Mr Laurence Robertson, † Hannah Bardell, Julie Elliott, Sir Christopher Chope
† Anderson, Lee (Ashfield) (Con)
† Ansell, Caroline (Eastbourne) (Con)
† Byrne, Liam (Birmingham, Hodge Hill) (Lab)
† Crosbie, Virginia (Ynys Môn) (Con)
† Daly, James (Bury North) (Con)
Doyle-Price, Jackie (Thurrock) (Con)
† Hodge, Dame Margaret (Barking) (Lab)
† Huddleston, Nigel (Lord Commissioner of His Majesty's Treasury)
† Hughes, Eddie (Walsall North) (Con)
† Hunt, Jane (Loughborough) (Con)
Kinnock, Stephen (Aberavon) (Lab)
† Malhotra, Seema (Feltham and Heston) (Lab/Co-op)
† Morden, Jessica (Newport East) (Lab)
† Newlands, Gavin (Paisley and Renfrewshire North) (SNP)
Stevenson, Jane (Wolverhampton North East) (Con)
† Thewliss, Alison (Glasgow Central) (SNP)
† Tugendhat, Tom (Minister for Security)
Kevin Maddison, Anne-Marie Griffiths, Tom Healey, Committee Clerks
† attended the Committee
Witnesses
Helena Wood, Associate Fellow, Centre for Financial Crime and Security Studies at the Royal United Services Institute (RUSI)
Duncan Hames, Director of Policy, Transparency International
Chris Taggart, Founder and Chief Strategy Officer, OpenCorporates
Elspeth Berry, Associate Professor, Nottingham Law School
Graham Barrow, Journalist and author
Public Bill Committee
Thursday 27 October 2022
(Morning)
[Hannah Bardell in the Chair]
Economic Crime and Corporate Transparency Bill
11:30
None Portrait The Chair
- Hansard -

Good morning, everybody. We will go into private session to discuss lines of questioning. With the agreement of the Committee, we will delay the end of each panel of witnesses by five minutes, because we have been held up.

11:30
The Committee deliberated in private.
Examination of Witnesses
Helena Wood and Duncan Hames gave evidence.
11:35
None Portrait The Chair
- Hansard -

I thank Members and those giving evidence for their flexibility in moving rooms, and I inform Members and those giving evidence that we will be in this room all day today. Could the witnesses please introduce themselves for the record?

Helena Wood: Hello, my name is Helena Wood. I am a senior research fellow at the Royal United Services Institute, where I lead the economic crime programme.

Duncan Hames: Hello, I am Duncan Hames. I am the director of policy at Transparency International UK.

Tom Tugendhat Portrait The Minister for Security (Tom Tugendhat)
- Hansard - - - Excerpts

Forgive me, Ms Wood; my hearing is not very good. Can you speak straight into a microphone?

Helena Wood: Yes.

Seema Malhotra Portrait Seema Malhotra (Feltham and Heston) (Lab/Co-op)
- Hansard - - - Excerpts

Q 170 Thank you very much for coming to give evidence today. I wanted to start by asking about the Bill’s reforms of information-sharing provisions—perhaps this is particularly to Ms Wood. In your view, do those provisions go far enough, and if not, do you have examples of where it is done better internationally? If information-sharing provisions are not improved, how much of a hindrance could it be to the effectiveness of the Bill?

Helena Wood: To place it in context, one of Britain’s great financial crime exports of recent years has been our joint money laundering information taskforce, which is one of the first public-private partnerships. That model has been replicated across the globe, with public-private partnerships now seen as a norm by the FATF, the international standard setter on tackling money laundering and terrorist financing. In one respect, we really have been a global leader in that regard. However, as with many British exports, we are now exporting that abroad and it is being copied and replicated at a speed and scale beyond what the UK is doing. Increasingly, we are seeing people moving from peer-to-peer information sharing towards a more collaborative data analytics model. I point to the models being set up in Holland and in Singapore as particularly groundbreaking in that regard.

Coming back to the provisions in the Bill, do they get us from where we are now on peer-to-peer information sharing, which is one thing, towards this world of collaborative data analytics, which we need to get to to really home in on financial crime? No, they do not. Although the provisions in the Bill will go some way towards increasing private-to-private information sharing and, in particular, the risk appetite in the banking sector, they really do not keep pace with the global standard.

What we would like in the next economic crime plan, which we hope to see this side of Christmas, is something that is much more ambitious. In many ways, I would say that while it is welcome, the Bill is a slight missed opportunity with regard to information sharing, given that it really does not push forward to this big data analytics model that others are moving towards.

Seema Malhotra Portrait Seema Malhotra
- Hansard - - - Excerpts

Q So your view is that we could be going further, and that we need to be going further.

Helena Wood: Absolutely. We have sat around for three years discussing information sharing in various working groups under the first economic crime plan, and it is a disappointment that all we have come up with is these one or two clauses of a Bill that merely take us towards quite analogue sharing between individual institutions. They do not take us as far as we should go.

I am not saying that at this stage, where that opportunity has been missed, we should push for something within the context of this Bill. These are really complex issues that require and deserve much further public consultation, particularly given the link with data privacy and individual rights of confidentiality, but we must see it in the next economic crime plan if we are not to get left behind. We invented public-private partnership, but we are really not driving that forward in the global context any more: we are being left behind. While this is a welcome step, and it is welcomed by the banking sector, it does not get us to where we need to be in 2025 and beyond.

Seema Malhotra Portrait Seema Malhotra
- Hansard - - - Excerpts

Q Could you be a little more specific about what you think would make a difference—what information is not being shared?

Helena Wood: Absolutely. On the information-sharing gateways that we have in place currently, I particularly point to section 7 of the Crime and Courts Act, which, although being used for JMLIT purposes—this public-private partnership—they were not designed for that purpose. There was an opportunity within the context of the Bill to push for something that really is fit for purpose and gives the regulated sector the confidence to share under a collaborative data analytics model.

We have seen others—I particularly point to the Dutch, who at the moment have some legislation going through, which really gives a lot more confidence to the regulated sector to share. The Transaction Monitoring Netherlands platform allows some of their biggest banks to share transaction monitoring data at scale to point to where the biggest risks are emerging. Would this legislation allow us to set up a similar shared utility? No. It would not give them the confidence. Although it takes us a step forward and should be welcomed, it is not taking us where we need to be. We need something much more ambitious that keeps pace with global best practices when we look at the next economic crime plan, which I believe the Home Office will be launching imminently.

Seema Malhotra Portrait Seema Malhotra
- Hansard - - - Excerpts

Q On the economic crime plan, you suggested that quite a number of commitments made in 2019 have not been implemented. Could you briefly say something about that? Then Duncan Hames might share, from Transparency International’s point of view, the top three changes that he would like to see in the legislation.

Helena Wood: I will start and then pass to Duncan. I would always say there is only so much that legislation can do. In many ways, as the Financial Action Task Force pointed to in the 2018 evaluation of the UK, we do have some of the best laws in place in the country. Although this law is absolutely essential in catching up with the threat, particularly around Companies House reform, we really do not have a problem with law; we have a problem of implementation in this country. We had an economic crime plan tracker, which is online and which you can scrutinise. It looked at all the 52 actions under the economic crime plan, and the most progress was made in areas of regulation and law—the bits that are quite easy and cheap to implement.

There was less progress in the areas of implementation, particularly around the enforcement of the existing laws in place. The big things that I would like to see prioritised outside the context of this particular Bill are things like policing reform, investment in the National Economic Crime Centre—I know you took evidence from them on Tuesday—and a real implementation of what we have got. That is not to say that this Bill is not necessary. It absolutely is, particularly around the huge gaps in Companies House capability and fundamental changes to its role, but none of this will come to anything if we do not invest in the enforcement response. I will pass over to Duncan, if I may.

Duncan Hames: We certainly welcome the Bill, and we welcomed the Government’s announcement that they intended to legislate for these reforms three and a half years ago. It is great that these are now before you, as Members of the House. The opportunity to address these issues dos not come along as often as it might feel that it has this year since Putin’s further invasion of Ukraine, so it is really important that we get reform of companies right this time rather than wait for things to be done later.

On what we would like addressed in the Bill, first, it is incredibly important that we do not allow a situation to develop where UK companies become the respectable front of otherwise secretive networks of corporates that provide the layering required to launder illicit funds. The use of corporate partners in offshore jurisdictions to control UK limited liability partnerships, for example, is a particular weakness that I can elaborate on.

Secondly, with these very welcome reforms, shareholder information will become the poor relation on the company register. That is a particular concern in instances where companies claim not to have a person of significant control, and shareholder information becomes our next best attempt to understand who is really behind those businesses.

Seema Malhotra Portrait Seema Malhotra
- Hansard - - - Excerpts

On the proposal in the Bill—

None Portrait The Chair
- Hansard -

May I say to the hon. Member that she has had quite a few questions and we are limited on time, so this will be her final question?

Seema Malhotra Portrait Seema Malhotra
- Hansard - - - Excerpts

Q This is just a quick follow-up for clarification. The Bill arguably makes shareholder information less transparent, because it takes away the opportunity to put information relating to shareholders on the central register.

Duncan Hames: A lot of information was collected on shareholders when this register was developed six years ago, and in many cases companies have been able to say, “There have been no changes.” That means there is a risk that information on shareholders has become quite dated, and finding what information there is involves tracking down PDF format documents that were uploaded a long time ago. There is an opportunity, whether in legislation or in practice at Companies House, to make sure that shareholder information does not become much less usable for investigation and due diligence.

On the third thing you asked me about, we think it is very important that Companies House has the powers and uses them to check the information, where it thinks necessary, that has been used to verify information by trust and company service providers, and not simply take that on trust where it has concerns or suspicions.

Alison Thewliss Portrait Alison Thewliss (Glasgow Central) (SNP)
- Hansard - - - Excerpts

Q I want to ask Duncan about Scottish limited partnerships and limited partnerships more generally. The Bill does not really crack down on the opaqueness of ownership. Could you explain a wee bit more to the Committee why that is a particular issue?

Duncan Hames: Limited liability partnerships have been a company entity available for the last 20 years or so, and 200,000 have been formed. We noticed that they kept appearing in revelations about major money laundering scandals. In the Danske Bank scandal, for example, the investigations found that UK limited liability partnerships were the vehicle of choice for the non-resident clients of its Estonian branch basically to hide their identity from those conducting compliance checks.

There are 1,600 LLPs that have appeared in these various scandals, but there are thousands upon thousands of UK limited liability partnerships that share the same offshore corporate partners. A pair of corporate partners registered in Belize are the controlling corporate partners of over 2,000 UK limited liability partnerships.

What is bizarre is that MPs have thankfully legislated to end secretive ownership of UK property, but we do not have the same requirements for overseas entities that control UK limited partnerships. As a result, we still have a veneer of UK respectability presented over what is essentially a secretive corporate network.

Alison Thewliss Portrait Alison Thewliss
- Hansard - - - Excerpts

Q Helena, in terms of tightening up Companies House registration, is there more that needs to go into the Bill to prevent abuse of the system?

Helena Wood: There are some fundamental flaws. Although this is a significant step forward from where we are, as we all recognise, there are some flaws in the model that has been designed. When the consultation was put out three and a half years ago, we advised against outsourcing ID verification checks to the trust and company service provider sector.

Our evidence for saying that was that there was an assumption in the model being developed that these sectors were largely compliant with money laundering regulations, but we know from the various scandals that Duncan has pointed to and the great investigative work by Duncan and others that that is not the case. I have referred publicly to some of that sector as a bunch of cowboys, and I would gladly go on the record to say that today. That comes from poor levels of compliance, which is the result of poor Anti-Money Laundering Council provision in the sector.

If we are to go ahead with this model where we outsource those checks to a sector that hitherto has not been known for its compliance with the standards, we need to do something outside the context of this Bill to really hammer that home. I particularly point to HMRC as the supervisor of the standalone TCSP sector. We really need to hammer down on compliance in that sector to raise standards overall so that HMRC can properly take on the role, although I restate that we initially advised against it taking on that role, given the current state of compliance in the sector.

None Portrait The Chair
- Hansard -

I call Eddie Barnes—[Interruption.] Sorry, I mean Eddie Hughes.

Eddie Hughes Portrait Eddie Hughes (Walsall North) (Con)
- Hansard - - - Excerpts

Q You slightly confused me there, Chair; I thought I had forgotten my own name.

When Seema was asking about data sharing, Helena, you were saying that the Government are not going far enough. It is odd for me to ask you to second-guess the Government, but why do you think we are not going far enough? Sometimes it feels to me that people are in a hurry for legislation to do everything that needs to be done to improve a situation, whereas that, sometimes, is almost counterintuitive because it is better to do it incrementally. Let us do some stuff, get it right, come back, revise, learn and move forward again. What are your thoughts with regard to their pace of movement?

Helena Wood: The pace of movement on information sharing? I think there is an inherent tension at the heart of all global anti-financial-crime standards, which is often with how we square the circle of data privacy. They are two often quite diametrically opposing concepts. We need to find a way to not rush into this. Your point is well made. If we are going to push people into sharing more individual personal data, we need to do so in a way that utilises the best technology to preserve the privacy of innocent individuals. We need to bring in the data privacy community to make sure that whatever we craft meets the needs of that community also.

We should not—I agree—push forward so quickly with something that is inherently complex. I absolutely do not think that we should be pushing for amendments within the context of this particular Bill; we need to be looking at the issue more broadly. We need to look at how the Data Protection and Digital Information Bill, which is currently stalled—I do not know what its future is—will also facilitate greater sharing for financial crime purposes while protecting individual privacy.

The simple fact is that this is a very complex and emotive issue that deserves due consideration and full public consultation. However, we have had three years. This was a key tenet of the economic crime plan that came to an end in July. There were multiple meetings to look at how we could do this and what we came up with were these two clauses, which, for me, are a missed opportunity, given that others have managed in the same timeframe to move forward with much further-reaching legislation, such as that currently being debated in Singapore and the Netherlands. I think we could go further than we need to, otherwise we get left behind.

Eddie Hughes Portrait Eddie Hughes
- Hansard - - - Excerpts

May I ask a very brief question on ID verification?

None Portrait The Chair
- Hansard -

I am very sorry, but we are going to have to move on to other Members. I will come back if there is time at the end for further questions.

Baroness Hodge of Barking Portrait Dame Margaret Hodge (Barking) (Lab)
- Hansard - - - Excerpts

Q I hope the Committee will look at our amendments on information sharing, the funding of enforcement agencies, shareholder information, Companies House checks and AML supervision; we tabled them in a spirit of improving the situation. I agree with all that.

I am going to ask about another issue, just to get it on the table. People engaged in the debate over dirty money are very anxious that we should move from just freezing the assets, particularly of the Russian Government and Russian oligarchs, to seizing the money so that we can use it—particularly for the reconstruction of Ukraine, when that war comes to an end. Can I have your views on that, starting with you, Duncan?

One final thing: a big thank you to both of you for the work your organisations do in exposing a lot of the problems and for the very positive attitude you have taken to establish solutions. Thank you to both of you, individually and to your organisations.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Hear, hear!

Duncan Hames: Thank you. I think it is important that we should continue to respect the rule of law and have a judicial basis for asset recovery. Too often, it is tempting to have a more administrative approach, and with that comes risks. It is very important that, as well as having the clarity of purpose to designate a whole substantial raft of individuals and entities for Russia sanctions, we have the determination to make those sanctions work.

We published some research just last month that found hundreds of millions of pounds’ worth of UK real estate that we were fairly sure was owned and controlled by individual entities that have been named under Russia sanctions. However, if you check on the Land Registry, there are not any of the typical markers to say that you cannot sell or transfer or trade this property. That is partly because of some of the very clever and complicated arrangements for their ownership, including using trusts.

In the work you are doing on the Bill, there is an opportunity to ensure that really important measures for global security, such as our Russian sanctions, actually work, bite and make it impossible for those who have moved large amounts of wealth out of Russia to continue to control it in the interests of their political sponsors.

Helena Wood: I could not agree more that we need to start moving from freeze to seize, but I echo Duncan’s sentiments that we must do so in a way that protects the very things we are trying to protect and do: the rule of law, due process and democracy. We should not push towards measures that effectively put in place a ministerial decree for confiscating individual assets and run roughshod over A1P1 principles.

That said, there is further we could go in UK legislation. Even with the advent of the much vaunted unexplained wealth order, our law enforcement agencies remain on the back foot. There is more we can do within the confines of European rights compliance-tested laws of reverse burden mechanisms to put law enforcement on the front foot.

Fundamentally, though, it is not going to be an easy fight to link those assets back to the criminality from which they once derived, given the difficulties of gaining evidence across borders. However, there are models we could replicate that have been tested for ECHR compliance, such as in Italy and Switzerland—I could name others. If the Committee will forgive me for trailing some forthcoming RUSI work, a paper is coming in November or December this year that sets out some recommendations of where part 5 of the Proceeds of Crime Act 2002 could replicate some of the principles of other regimes and push forward to at least put law enforcement on the front foot.

The other issue I would point to, which has already been partly legislated for, is cost protection for our law enforcement agencies. We have legislated for cost capping in cases involving UWOs, but they are not the right tool to use in all cases; I particularly point to the oligarchs, who do not fit under the definition of PEPs in UWO legislation. There is an argument for the Bill to potentially push for full cost capping of part 5 cases to increase the risk appetite of our law enforcement agencies to take those cases on in the first place.

James Daly Portrait James Daly (Bury North) (Con)
- Hansard - - - Excerpts

Q I want to go back to information sharing. My understanding of the Bill—please tell me if I am wrong—is that the clauses will allow

“direct sharing between two businesses in the AML regulated sector”

and

“indirect sharing through a third-party intermediary for businesses in the financial sector”.

That is what the Bill does. Putting it bluntly, what is wrong with that? What is the criticism of those aims and the things it allows businesses to do?

Helena Wood: Civil liability for confidentiality is one barrier. It is an important one, and removing it will hugely increase appetite, but it is not the only barrier. The boundaries within our data protection legislation are not explicitly clear; they are open to interpretation. We need more guidance, potentially from the Information Commissioner, to make clear what those boundaries are. We potentially need further clarification in the data protection legislation that is currently going through—

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q I am sorry to interrupt you—we are short of time. Subject to that, the things I have just read out are good, are they not? We should welcome them.

Helena Wood: They absolutely are, and I would not—

None Portrait The Chair
- Hansard -

Very briefly, because I have two more people to bring in.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Can we very quickly come to you, Mr Hames?

Duncan Hames: Helena is the expert on this particular subject.

Helena Wood: This is a welcome step forward. Others are going much further. The legislation that has been put forward in Singapore and Holland basically removes any barrier to information sharing by making it mandatory to share private-to-private in the context of the shared utilities that are being set up in those jurisdictions. Whether we should go down mandatory sharing is, as I have said, something that requires much further and longer public consultation. But we do need to look at that.

Liam Byrne Portrait Liam Byrne (Birmingham, Hodge Hill) (Lab)
- Hansard - - - Excerpts

Q Duncan, I think I heard you say that UK corporate structures were the structure of choice for money laundering in what was the biggest money laundering scandal in Europe. That chimes with a piece of work you put out on 10 October, which said that there are more than 21,000 limited liability partnerships that have red flags—characteristics of organisations associated with economic crime—and that economic crime could have cost tens or hundreds of billions of pounds. That is a hell of a state for this country to be in. Does the Bill fix the problem you have identified?

Duncan Hames: It is a serious matter, and this Bill doesn’t. Although, as you say, we published that report very recently.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Q Did you say “doesn’t”?

Duncan Hames: Doesn’t. What I said earlier was that if you use an offshore entity to hold UK property, as a result of legislation MPs passed this year you now have to register on the register of overseas entities who the beneficial owner of that entity really is. We find out who really owns bits of Britain. But you can control a UK limited liability partnership through offshore entities, and we do not find that out. There is no way of checking the information.

We are presenting a respectable veneer behind an otherwise opaque offshore corporate network. If we could require the same level of declaration around the corporate partners of those limited liability partnerships, then we would lift some of that veil of secrecy. Then maybe we would not have a situation where rogue bankers in Baltic states were getting their clients to use UK limited liability partnerships to get around the compliance checks in their own organisations.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Q So UK corporate structures are being used for the worst money laundering, pretty much, in the world and the Bill does not fix the problem?

Duncan Hames: Not yet. I hope you will be able to address that.

None Portrait The Chair
- Hansard -

For the final question I come to Tom Tugendhat.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q Clearly, Liam’s point is entirely valid, but it is worth pointing out that that was a scandal in Estonia, which was very strongly dealt with by the Estonian Government. It is important to recognise that it is not just a UK issue. That being said, the Bill does open up an awful lot of information. Mr Hames, can you tell me how your organisation is going to use that information to start to address some of those issues?

Duncan Hames: Yes, happily. We are quite a small organisation, but this is about the power of putting information in the public domain. The report that we were describing earlier is a form of network analysis; that is the sort of thing you can do if open data is published, rather than information in PDFs, which are essentially photographs of old documents.

Whether it is organisations like ours, or investigative reporters such as the Organized Crime and Corruption Reporting Project, civil society has shown its potential to help uncover those crimes if there is information in the public domain. If we want a spirit of partnership, and if Government want the private sector to be its first line of defence, then it is really important that everyone is equipped with the tools that they need and that the company register is providing accurate information, which has been checked, that they can rely on.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q Your point that this is a partnership is entirely correct. The Government have approached the issue in the way that we spoke about, you will remember, when I was doing a different job, as Chair of a different Committee. We spoke about the fact that the UK is a hub for so much of that crime for very obvious historical reasons, such as the depth of our capital markets, the use of the English language, the openness of our financial system and the importance of the rule of law. It is not simply a legal question—it is a cultural and a deep historic one as well.

Do you agree that those reforms begin that process and that fightback? Do they make a difference by scrubbing, as it were, the inside of the whitened sepulchre to ensure that we are exposing it to sunlight, so that organisations such as yours, the media, and many others around the world, will be able to identify where that money is going and from where it has come? This is also about jurisdictions overseas who are losing money through our system, not just about us who have to control it.

Duncan Hames: Yes, I agree. The Bill is beginning that. The challenge that we have is that it is six years ago that we last made reforms to Companies House, and I do not know when you are next going to get a chance to make further progress.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

I have only just come into post.

Duncan Hames: It is hard, as we are often told, for legislative time to be found. So please make the most of the opportunity and take it as far as you can. It was only this summer that the US Treasury issued a money laundering alert about evasion of Russia sanctions. In that, they identified UK limited liability partnerships as part of the typology of the financial logistics for evading sanctions.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q You will forgive me for recognising that there may be other jurisdictions closer to their home that are also involved in that.

Duncan Hames: But this is the jurisdiction that Members of our Parliament are responsible for.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q We must get this right, but it is an international problem that we must all get right.

Helena Wood: May I come in on that particular point around Companies House reform? The point has been made by others giving evidence here this week and I will make it again until it sticks. Companies House reforms mean nothing if we do not resource Companies House properly. Using that secondary legislation to raise formation fees to £50, at least, is absolutely essential—

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

That is absolutely true, which is why the partnership that we have to put in place alongside agencies, NGOs and journalism, to make sure the application programming interfaces are open is so important.

None Portrait The Chair
- Hansard -

Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions.

I very much thank our witnesses, Helena Wood and Duncan Hames, for their time, and I thank Members for their questions. We now move on to the next session.

Examination of Witnesses

Chris Taggart and Elspeth Berry gave evidence.

12:05
None Portrait The Chair
- Hansard -

We now hear from Chris Taggart from OpenCorporates and Elspeth Berry from Nottingham Law School. You are both very welcome; thank you very much for joining us this morning. Could you please introduce themselves for the record? We have until 12.35 pm.

Chris Taggart: My name is Chris Taggart and I co-founded OpenCorporates, the largest open database of companies in the world. Essentially, we take official company information, from Companies House and the equivalent of Companies House in about 140 jurisdictions, and we put it all in one place and make it freely available for everyone to use. About five million users a month use the data—everyone from journalists to law enforcement, regulators, banks, ordinary companies and so on. We are also a social enterprise: it is a company, but with public benefit at its heart.

Elspeth Berry: My name is Elspeth Berry. I am an Associate Professor of Law at Nottingham Law School. My teaching and research includes limited partnerships—well, all partnerships, including limited partnerships and limited liability partnerships, or LLPs—and my research in recent years has focused on limited partnerships and LLPs.

Seema Malhotra Portrait Seema Malhotra
- Hansard - - - Excerpts

Q First, thank you for coming to give evidence today; it is much appreciated. We have had some discussion on information-sharing; I think you overheard that. If there is anything that you wanted to add, rather than repeating what we may have heard, that would be useful.

I want to ask you a bit more about the lack of transparency when it comes to shareholders. How much do you see that as an issue? Can you suggest any specific measures to increase shareholder transparency?

Chris Taggart: I will maybe talk about the information sharing after. First, shareholding data is not even data. It is just a name; it is just some letters put together. We have opened the gates by allowing it to be just a transient historical record—you know, somebody owns shares in a company. They make a report. They put down a name; we assume that they put down their own name, but of course they can put down any name. But the shares are transferred the next day—maybe into a trust, maybe to somebody else—and there is no record.

At the moment, I think we have that with shareholding, particularly given the international context of cross-jurisdictional context networks and so on. Shareholding actually matters. If someone who runs a chip shop in south Wales or is a mechanic in Estonia, or wherever, owns the shares, they own the shares. That matters. We are not recognising this.

I absolutely welcome the Bill and think it is a huge improvement on where we are, but I think the shareholding is a particularly strong example of how there is essentially still the same problem, which is that Companies House is a historical record of information submitted by people, and the bad actors will always lie. We need to change things, so that it is much more difficult and risky for the bad actors to lie. I think that is the fundamental criticism of the Bill, which, by the way, I think is entirely welcome. It is an incredibly thoughtful and well-drafted Bill, but it is fundamentally coming from a different era. The Bill is a better horse and cart, and the criminals are driving around in fast cars.

Elspeth Berry: On the shareholder transparency point, I noticed that the identity verification is not being applied to shareholders and I think it could be, possibly subject to some de minimis requirements. If they come in as PSCs, which is possible, that also brings us to the problems with the PSC legislation, because the thresholds are, depending on which view you take, either woeful in terms of not catching enough people or should just not be there at all.

The third thing is that, for reasons I do not fully understand, I see that the central register of members is going. Some things now have to be central and some things cannot be central, and shareholders will not be central. I would also point out that the unique identifiers are not being applied to shareholders, although, in any event, they are apparently they not going to be made public. I am not a journalist, but I rely on the work of some fantastic investigative journalists and organisations to dig through that stuff and find out, “Well, that shareholder is appearing here as a partner, there as a director and there as another shareholder,” but that cannot be done.

Alison Thewliss Portrait Alison Thewliss
- Hansard - - - Excerpts

Q First, I want to follow up on that point about unique identifiers and how those would help. I have looked myself up in the Companies House register, and I appear as three separate people. Can you tell us what the benefits of having a unique identifier would be?

Elspeth Berry: The idea is that the John Smiths, the J. Smiths and the Mr Smiths can be linked. Where it is a common name—or an overseas name, where a person like me who was looking at this would not know it was a common name and might assume, “Well, that must be the same person,” when actually it is not, because it is such a common name—it is important to find links. I can see that it is important for Companies House as one of their red flags, and they are going to be able to operate this system, but only partly, because it will not apply to shareholders or partners. But outsiders—people who do fantastic work that Companies House can’t, doesn’t or won’t—are going to find it difficult, or at least as difficult as it is now, to do the work of trawling though everything.

Alison Thewliss Portrait Alison Thewliss
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Q Do you think it would be necessary for Companies House to set about the work of going backwards through the register? There are companies being registered every single day. The legislation comes into force and things going forward will be registered, but how much work does Companies House now need to do to go backwards through the register and get rid of all the guff information in there?

Chris Taggart: Perhaps not as much as you would think. Companies House currently has a thing called the personal ID, which is sort of inferred. It is not that somebody has confirmed they are this person, that they are the same as that person and that it has been identity-verified. By looking at the home address and other information that has been supplied and that they have, Companies House create a personal ID. We actually pull in information from the API and from various dumps. In some of those dumps, that information exists, but not in the normal stuff. So that information is there.

I would just back up what Elspeth said: not only is it essential, but I see no benefit otherwise. If you are a business trying to understand whether you want to do business with another company—this is not just about crime; this is about creating a great business environment—you can go to a director page on OpenCorporates and see other people with the same name. Okay, that is useful, but do you really want to be trawling through that and making a judgment call? It is almost like sending investigators off to try to understand whether they are the same. If this person has three other companies that all went bust owing money, you do not want to do business with them. I see no public benefit at all to keeping this identifier private and a secret.

Elspeth Berry: In terms of historic information, I think that has changed over time and gone in a bad direction. As I understand it, Companies House is now restoring some of the historic information, and it is important that that is available.

I would also raise the issue that there are provisions here for limited partnerships to be deregistered or dissolved. I think the provisions themselves do not do what it was hoped they would do. We also need to know how those are going to appear on the register, because that has been a problem with—shall I say—shady limited partnerships appearing and disappearing.

Alison Thewliss Portrait Alison Thewliss
- Hansard - - - Excerpts

Q Is there an amendment you would make to make that clearer?

Elspeth Berry: In terms of the historic record? I would think 20 years; I understand that has been done for a lot of company information. If we are now going to have a registry power to dissolve and/or deregister, it is a little problematic. All of that needs to be clear. We know that there has been a pattern of limited partnerships appearing and disappearing, perhaps ceasing to trade and perhaps coming back. We know that that is a pattern, which we want to see, and if 20 years has been the standard at various times for companies, why not for everybody?

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q I want to pick up on the question about Companies House. On Tuesday, Companies House described themselves as a passive organisation at this moment in time; potentially, they are now turning into—I do not know if this the correct word—an investigative or certainly proactive organisation. All that we have heard so far, which I fully accept, is that it has to be resourced. How do you think this change of culture and investigation will work with some of the problems that you talked about?

Chris Taggart: That is a good question. Certainly, we have been dealing with Companies House on quite a close level since we were founded 10 years ago. I have huge respect for them; they do really good work incredibly efficiently and so on. The challenge is that they are good people, but the people we are trying to stop are not good people, and they think in a different way.

What Companies House think they are doing is creating companies—when people think of companies, they think of a factory, a shop, a company providing services or manufacturing things, and so on—but what they actually do is create legal entities; they create things that have a distinct legal personality and limited liability. The criminals know that, they are using it and they are using networks of these things. More than that, we are talking about a situation where you start to think about things from a traditional company point of view—what we all used to think of as companies—but, actually, the legal reality is one of legal entities, so you need to start thinking about this in an entirely digital way, an entirely data way and an entirely legal way.

I will give you an example. Where a company has got assets—it has got things—there is a downside to it being struck off. If you are overseas and you create a UK company, and the company is struck off, as long as the money has come in and out before that, that is fine—you have done the job for the company. We need to have a change of mindset, and that change of culture will be as important as the powers that Companies House actually have.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q The reason I ask is that the example was given on Tuesday of a chip shop in Barnsley—great town that it is—has 50 legal entities registered to it. There are thousands of examples all over the country. It would take one investigator months to investigate the information for every separate legal structure attached to that chip shop. What do you feel about that, Ms Berry?

Elspeth Berry: There will always be a problem, but that does not mean we should not tackle it and it does not mean that we cannot tackle it, and I appreciate that the Bill is attempting to tackle it. All of the things it is trying to do are good, but almost all of them could be significantly improved. We have to deter the wrongdoers. We have to stop looking as though this is a good jurisdiction to do this in. For example, there have been arguments about the fees. It is generally accepted that they should go up, and if your business plan cannot cope with £100 or £500, what kind of businesses are being set up here?

If we are not checking the identity of shareholders and applying PSC legislation to partners, there are still so many loopholes. It is not that there is something there that would be a sanction if they ever caught you—we know this from police and crime; if people think there is only a vanishingly small chance of anyone ever noticing, it is worth taking the risk. I suppose that brings us back to the point about the registrar’s powers, which are great, but they are not duties in most cases. How will we know if she has done it, or what she can reasonably do to minimise the risks of various things—to check information?

One of the things we need is a clear database of things that are red flags—things that Transparency International and lots of journalists have identified that the registrar should be looking for, some of which the legislation still allows, such as things like overseas registries and multiple formations, and the use of company service providers. The problems with those were talked about during the earlier session, and the Bill is not going to entirely resolve those, if at all. If we can tighten down on a lot of those, we will reduce—never eliminate, but reduce—the amount of wrongdoing that is here because of problems we have either created or left in our laws.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
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Q I very much take your point, and I hope some of the amendments we put in address what you said about wanting to tighten up on the proactive role of Companies House.

I wanted to ask about shareholders and then about the disappearance of limited companies if they dissolve. I agree that shareholder information is really important—Usmanov brought that home to me. When we sanctioned Usmanov, he just gave everything to one of his daughters or something—anyway, it disappeared into other people’s hands. Can you explain a little what we need to do on shareholder information? At the moment, there is a 25% shareholding barrier. Should that be reduced to 5% or 10%? That is my question.

Then, on limited partnerships disappearing, that was brought home to me very much as a result of the terrible incident in Lebanon—the explosion in Lebanon. It was found that a British-owned company was behind that, with a beneficial owner in Cyprus who happened to be a corporate service provider. It then turned out that it was a nasty situation where the actual owners were some Syrians, and the fertiliser was not going anywhere near Mozambique—which was where it was meant for—but was being used for barrel bombs to kill Syrian citizens. The moment that happened, they tried to dissolve the company and get it to disappear, and obviously in that area of wrongdoing, we need to hang on to any knowledge that we have.

This is for both of you: what amendments do you think are necessary to enable us to stop people dissolving companies and to force information out, so that where there has been that terrible terrorist wrongdoing, we can pursue the wrongdoers? That said, I take the view that a lot of what we are trying to do is prevent these things from happening in future.

Elspeth Berry: On the PSC point, a reduced percentage would be a vast improvement, but I think a zero percentage could be considered. You can have a lot of influence in all sorts of ways while not necessarily hitting those targets, because you are connected with somebody else in a way that we do not catch through the legislation. But I certainly think that a reduction would be a big improvement to try and catch more people who are de facto PSCs, but not in law.

On the limited partnerships point, there are a lot of things we could do. The Bill makes a start in doing those, but given that a lot of this started with the limited partnerships consultations, I am slightly concerned that they got put aside because it was a case of, “Here comes all the corporate stuff,” and that is where all the money and excitement is. There is this small area of limited partnerships where there is a strong lobby for those people dealing with limited partnerships for particular purposes—quite legitimately—who do not necessarily want this to be made too difficult, but we get things like the restrictions on corporate partners not being applied to LPs. I had to read the provisions several times. I dread explaining them to my students, because of the difficulty in trying to get at who owns limited partnerships and who is in control of what is going on in them.

That level of “corporate partner on corporate partner on corporate partner” exists, and we know it is a problem. It is going to continue, depending on what we do with LLPs, and it is a big problem that they are just not in the Bill at all. It is like, “Oh, well, we’ll just apply the legislation to them later,” but which bit of the legislation? The corporate bit? The partnership bit? LLPs have a history of having the bits they want—the nice bits of corporate law and the nice bits of partnership law. Things can get missed because we think, “We have done the big task with the Bill.” PSCs can be applied to partnerships; they haven’t been here, and there is an assertion that it is not possible legally, but as a lawyer I would say that that is not correct.

You even have a provision here saying that people who have been disqualified under the company directors disqualification legislation can still act as limited partners. Limited partners have a limited role by definition if they are behaving properly—of course, they may not be—but even if they are behaving properly, a limited role is not no role for someone who has actually been disqualified from acting as a company director.

Chris Taggart: To pick up on an earlier question, the best information sharing is going to be information sharing in public. A lot of the great work that was done on people after the invasion of Ukraine was done using public domain information. There is a risk to lying in public. The fact that criminals will lie is also an opportunity to catch them out, because it is quite hard to lie consistently.

We get people all the time saying, “We don’t want our information to be on OpenCorporates”—even though it has come directly from Companies House and other places—“I don’t want people to know that my last two companies went bust,” “I used to have a company running a brothel in Germany, and I don’t want my new employees to know that” or, “I don’t want people to know that I am running a company on the side or working for someone else.” There is a cross-over here with data usage. When something is in the public domain, it needs to be functionally public. “Functionally public” means that you can use it and reuse it, and have it as data so that you can combine it with other datasets.

The shareholding data is so important, not just in and of itself, but because it allows you to ask, “Wait a minute. How is that happening with that?” Having it as data allows you to do that programmatically so that you can see trends.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
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Q Would you go down to zero—all shareholding data?

Chris Taggart: Yes. With shareholders, we ultimately need to get to a statement of fact—an authoritative record—so that what Companies House says is actually what the courts agree are the shareholders, and people cannot say, “We will move the shares, and then we will tell Companies House,” or, “We forgot to tell Companies House.” That will take work and time. We can extend the verification provisions for directors and PSCs to shareholders, at least over a de minimis amount, but ultimately we need to make Companies House the authoritative record of shareholding, so you are only a shareholder if you are on Companies House.

Elspeth Berry: On your question about dissolution, for limited partnerships it is a different issue because they are not an entity and you can still go after the partners, but of course that is why corporate partners are such a problem. Entities were a problem in Scotland some years ago. I am sure your Scottish colleagues can tell you more than I can about how that was dealt with after a fairly horrific criminal incident involving a lot of deaths. It was not possible to prosecute the partnership after it had dissolved. That is a problem with legal entity status, which is a whole big issue.

Seema Malhotra Portrait Seema Malhotra
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Q I have a couple of specific questions. First, do you think there should be any sort of limit on the number of companies or partnerships registered at one address? Secondly, should there be any sort of limit—perhaps one beyond which there needs to be an application to increase, under specific criteria— on the number of directorships that any one director can hold?

Chris Taggart: On the latter question first, I have been a director for some 20 years. The first time, someone sat me down and said, “This is what’s involved in being a director.” You think, “Wow, that’s kind of scary.” You have a fiduciary duty and you have to understand the company. If you are a director of 200 companies, I fail to see how you can perform that fiduciary duty, or those companies are, in some ways, just legal entities for some conduits for something. They are not actually in business; they are just conduits. I struggle when someone is a director of 200 companies: either those are just legal entities for some purpose other than as a normal company or they are not doing their job. It seems to me obvious that there is a challenge there. Whether that is a limit or whether that is actually holding directors much more personally liable for the wrongdoing of the companies, I do not know, but I think that there is something. There seems to be a contradiction there, fundamentally.

Elspeth Berry: I agree. I would have supported a cap on the number of directorships for exactly those reasons, in that I do not think a director can fulfil their duties if they have a lot of companies. However, if you are not going to have that, that certainly has to be a red flag for Companies House. It has to be a thing they will investigate and that they have the resources to investigate, which comes back to the problems that we identified earlier.

On the addresses, if you have a company service provider giving their address, it is quite possible you will have multiples and that might be okay if that is their business, they are doing it properly, they are AML regulated and all the rest of it. The problem is that we have seen in recent years that they are not. Again, that ought to be a red flag. In the limited partnership proposals, where you are trying to establish some real connection, economic or otherwise, with a particular jurisdiction within the UK or, at least, with the UK, that is one of the problems. One of the options on the list—they are all problematic—I personally thought that the principal place of business might be quite a good one, showing an actual connection, but I have been corrected in my beliefs by my journalist colleagues who say that almost all the wrongdoers were able to tick that box. I think it is a problem if you are saying that as long as somebody will pick up the mail here, that is okay. Again, that needs to be a red flag.

Tom Tugendhat Portrait Tom Tugendhat
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Q I am very interested in some of the identification elements that are raised. How much of a difference will the verified identification make to the identification of individuals?

Chris Taggart: There are two issues. I watched some of the previous witnesses and the things that came across were issues to do with identification and resourcing and I back up both of those things. On identification, allowing the corporate service providers to essentially say they have done something seems both a huge vector for misuse and also unnecessary. The technology allows us to look like we are using one company when we are signing up online and so on, but it is all authenticated with another company. They could be using Companies House back ends or banks’ back ends—we could have that authority and those standardised processes—and still you would appear to be transacting with a corporate service provider.

Having corporate service providers doing the identity verification seems like we have walked away from doing it properly. Once you allow corporate service providers to play a significant role, particularly on identity, I think we have a bit of a problem. Assuming that loophole is closed, this is really good, but it is still state of the art two, three or four years ago, and I think we need to start using digital identities. We need to make sure that, with somebody’s identity, they are not saying one thing on this hand and not saying another thing on that hand. Again, the unique identifiers—

Tom Tugendhat Portrait Tom Tugendhat
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Q Mr Taggart, you will be aware that there is wider debate about unique identifiers because it ties in personal privacy aspects in healthcare, insurance and, in fact, every part of your life. Every single country that has introduced them has had a privacy pay-off. That is one that you may or may not be willing to address, but it is not just simply a question of companies.

Chris Taggart: Absolutely, but I think there are technical ways of doing that. It does not have to be one ID that everyone can see—

None Portrait The Chair
- Hansard -

Order. I am very sorry. That brings us to the end of the time allotted for the Committee to ask questions. I am very grateful to our witnesses for giving evidence.

Examination of Witness

Graham Barrow gave evidence.

12:35
None Portrait The Chair
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We will now hear from Graham Barrow, a journalist and author appearing via Zoom. We have until five past 1 pm. Could you introduce yourself, Graham?

Graham Barrow: Thank you. I suspect I am probably unique among all the different people giving evidence because I am effectively a private citizen. I am not actually a journalist. I write, but not in a professional capacity. I am just somebody who became obsessed by what was happening at Companies House and have spent much of the last five years rooting away in the darker corners of it, to establish exactly how bad things are there.

Seema Malhotra Portrait Seema Malhotra
- Hansard - - - Excerpts

Q Thank you, Mr Barrow, for giving evidence today. To pick up on your point about becoming obsessed, I think that is an understatement of the contribution you are now making, which seems to be identifying so much more than Companies House is doing itself and documenting the flaws in the current system. Why do you think that is the case? You have played a very important role in documenting some of the most blatant abuses of the Companies House registration systems. How concerned should we be about the large number of companies you have identified that are incorporated in offshore jurisdictions with weaker money laundering laws than we have?

Graham Barrow: Thank you. Let me pick up on both of those questions. I think the reason why I have been successful is because I have a mandate to go wherever I want to and do whatever I want to. I also ought to congratulate Companies House because a lot of what I now know is through the release of its advanced search function, which has transformed our ability to understand networks of suspicious companies.

I really want to emphasise this idea of the network. No criminal ever set up one company. It is just not how it works. They work in networks of companies. At £12 a go, it is probably the cheapest way of organising a criminal network. Of necessity, they leave company DNA behind them. I guess I have a capacity for identifying that DNA and extracting it from the background noise at Companies House.

Your question about offshore entities is really interesting. I came into this five years ago very much thinking about what you have just been talking about—limited partnerships and limited liability partnerships. They feature prominently in a lot of the reporting. I think part of the reason for that is that they are, by and large, a very small subsection of the entirety of what is incorporated in Companies House. Therefore, the focus has been on some of that DNA that is exhibited by LLPs and LPs.

Before now, we have had very few tools that could establish the role of limited companies. To give that some context, since 1 January 2000, about 10 million companies have been incorporated at Companies House, of which about 5 million are still active. The loss rate is very high; it is consistently 50%. Nine and a half million of those companies are limited companies. That is an exceptionally difficult body of data to trawl through to establish suspicious activity.

I think one of the reasons why perhaps some of the stories I now re-tell on social media are novel is simply because we have never been able to extract those signals from the Companies House data before. For whatever reason, I appear to have a brain wired in a particular way that allows me to do that, and I have a very good relationship with Companies House. We share information quite regularly.

Alison Thewliss Portrait Alison Thewliss
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Q Thank you, Graham, for coming to give evidence and for all the work you have been doing on the Companies House register. You have exposed quite a lot of companies that are essentially fake. They do not really exist—they are not real companies. Some of them are set up to imitate existing companies. Can you tell us a bit more about the extent of that and the scale of the work that the Companies House register will have to undergo to have a register that has integrity?

Graham Barrow: Where do I start? The scale is enormous. Even today, I have been looking—I have a company that tracks new company registrations. I can tell you that 20 or 30 companies have been set up in Leeds and in Birmingham today that have used real peoples’ names and addresses, some of them for the fifth, sixth or seventh time. One gentleman is 92 years old and has just had his name used for a second time. It is an absolute scandal what is going on. I would say that at least 1,000 people every week have their names used as directors on companies without their knowledge or permission. You are talking about potentially 50,000 people a year. It is on an unimaginable and wholly unreported scale.

Alison Thewliss Portrait Alison Thewliss
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Q Presumably very little of that gets picked up by way of an offence. It is an offence to make a false filing to Companies House.

Graham Barrow: No, and there are a whole range of reasons why, one of which is that you would need to identify the problem in the first place in order to understand that it is an offence. How do you deal with thousands of weekly company registrations that are clearly breaching the false declaration rules? It would overwhelm you. I think one of the conversations we probably need to have is that you are not going to address the problem instantly.

One of the things that will happen when this legislation is enacted—and I am massively supportive of it—is that company registrations will fall off a cliff to begin with. At this point, I do not think people realise just how many registrations currently would just not go ahead because it is not worth meeting, or they will not meet, those requirements. Will it have an economic impact? Absolutely not, because none of them were ever set up to do anything commercially relevant in the first place. I would not worry about it, but I do worry that the reaction to potentially a 30% or 40% drop in company registrations may force people to start rethinking the tenets of this, but they should not. I do not think you will see any economic consequences.

Alison Thewliss Portrait Alison Thewliss
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Q Are there additional measures in the Bill that you think would be useful to shut that door on new companies?

Graham Barrow: I think there have been a couple of opportunities missed. You have been talking about PSCs, but what I have not heard yet is the fact that there is no minimum age to be a PSC. That is an issue, because you can be a shareholder and PSC at the age of zero. I do not know how you going enforce the identification verification for somebody who has absolutely no documentation. I do not see that addressed in the Bill. That is my first point. Secondly, I see nothing in the Bill to address statements of capital. I think that is problematic. At the moment the record is held by a gentleman from Equatorial Guinea who registered a company with £670 trillion of capital. That is a pretty neat trick, because that is 10 times the global GDP.

The other one that worries me, and this is something that I would like to talk about, is burner companies. That is a phrase that I have come up with; it means companies that start out with no long-term use whatsoever. There are elements within the Bill that allow grace days for conforming with requirements. If you are a burner company, it is fantastic because you have no intention of conforming. All you need, effectively, is to get that registration document to do whatever it is you want to do with it—and there are a range of things that you might what to do with it—and then you have no further use for it. Allowing grace days for conformance is potentially problematic. Those are my top three. I am not going go down the route of allowing CSPs—that has been done to death. It is obvious that it is a difficulty because you have no history of assertive regulation outside of the FCA and banks. We are aware that has not worked desperately well by the level of fines that are being administered. I think there is a bit of a hit-and-hope model, which in the end is unlikely to translate into any sort of useful outcome.

None Portrait The Chair
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I have asked for the volume to be increased, because I know that some Members are struggling to hear.

Graham Barrow: I will move my microphone closer.

None Portrait The Chair
- Hansard -

Yes, if you could speak directly into your microphone, we would be very grateful.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
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Q Thank you, Graham, for all the work that you are doing. Even the suggestions you have made are very sensible. Obviously the data that is collected is important, but one of the ways in which we think we can tighten up the provisions a little bit is to increase the duties of Companies House to check. In a way, that is what you do. You go into these massive datasets and decide, “What the hell am I going to look at?” Can you give us some ideas as to how we could hone the measures to ensure that there is a red flag way—call it what you like—of going in and checking on everything?

Graham Barrow: Absolutely. What I am looking at is probably not even 5% of what I could look at in terms of suspicious activity and red flags. I have not the hours in the day; bear in mind that I do not get paid for any of this, so it is a labour of love, or whatever. There is a sensible answer, which is that we are now in a world where data is manipulated really easily and in bulk. Therefore, something that my company has done is to design algorithms that looks at clusters of red flags. If all we look at, Dame Margaret, is red flags, we are going to be overwhelmed. We have to accept that we cannot address every issue straightaway, which means that we need to look at clusters of red flags, which, taken together, can indicate significant organised crime or corruption that is being utilised through the formation of companies.

This year I have seen one organised crime group create about 1,500 companies, using data that they have stolen from two major global organisations. These are HR files, so the data is replete with all the personal information of those employees, who have then found themselves directors of companies that have been registered to empty shops, which have then been used to access banking, particularly overdrafts or other banking credit. There are about 1,500 companies, and the average overdraft might be £5,000 to £8,000; you do not need too many of them to be successful to understand that millions of pounds are being extorted or fraudulently obtained from banks through this ease of use.

Something else that is really important is the ID&V piece. If you have stolen ID&V data from, for example, a company’s HR files, the implementation of proof of life at the same time—that is, you do not just have the documents, but can prove it is you by having some form of selfie or other real-time interaction—is vital, because these people do not just set up companies; they open banking with them. Banks can be criticised, but they do an awful lot more due diligence than Companies House. If these people are opening bank accounts, the ID&V they currently have is clearly high quality. We must bear that in mind.

Gavin Newlands Portrait Gavin Newlands (Paisley and Renfrewshire North) (SNP)
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Q A lot of the issues that the Bill rightly seeks to address are fairly high-level economic and corporate crimes, which are huge issues—and we are talking about huge amounts of money—but they do not directly have an impact on the vast majority of our constituents. One issue that does is phoenixing companies. Does the Bill do enough to address that type of issue?

Graham Barrow: Probably not. We have done some analysis of phoenix companies. For example, I think that something like 30,000 companies on Companies House have changed their name for fewer than seven days and then changed it back to its original name. That is a variety of phoenixing by which you disappear from your company name for a few days and then come back again. As you will probably know, Gavin, every year on Companies House there are thousands of proper phoenix companies—those that have dissolved and reopened, either geographically close or at the same address with virtually the same name. It is a real issue, and it is part of the whole broader issue of company name observations. There was a piece on “You and Yours” on Radio 4 a few weeks ago about a lady who had Asda Ltd registered to her terraced house in Huddersfield. She received 7 kg of post and all sorts of other things, and bailiffs turned up at her door.

The Bill does include the ability for Companies House to reject similar names, but if you have 3,000 companies a day—and that extends to companies across the world that may have similarities—I do not see how you are going to enforce that reasonably. There is just too much volume and too many potential comparative data points to compare them to. That is a huge issue, and one that inserting a little bit of friction between application and registration would help to address. At the moment, the focus is entirely on speed of getting on to the register. Putting in a bit of friction to do some proper checking would be a good idea.

Gavin Newlands Portrait Gavin Newlands
- Hansard - - - Excerpts

Q What specific amendments would you suggest for the Bill to address it a lot better?

Graham Barrow: Being clear that a company will not be allowed on to the register until those full checks have been made would be one. I would also be a lot stricter about the ability for people to register a company that has significant similarities to a previously registered and dissolved company. That may need a bit of crafting, in terms of the words, but I do not think that is beyond the wit and wisdom of people.

Companies House refused to dissolve or eject Asda Ltd because it was not close enough to Asda Stores Ltd, which is the actual name of the well-known supermarket. That seemed to be a bit of a nonsense. I am not saying that Companies House did not apply the law correctly; it suggests the law is not very good in terms of the intellectual capital.

There is a guy in Cheam who has legitimately registered Renault Ltd, Volkswagen Ltd, Adidas Ltd and Asda Ltd—which he re-registered after Asda Ltd in Huddersfield got struck off. That is simply nonsense. Intellectual capital is clearly being compromised by those registrations, yet we do not currently have the powers to deal with it. I know there is wording in the Bill on this. Obviously, the proof of the pudding is in the application of that, but I would like to see it tightened.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q Thank you, Graham. I think you have answered this question, but, in layman’s terms, if Fred Bloggs from Bury—my constituency—who has led a blameless life and is 95 years of age, finds that his name is down as a director of, or linked to, any company or legal entity that has sent a supporting application to Companies House, how does this Bill assist him?

Graham Barrow: I guess the Bill is trying to assist by not allowing that to happen in the first place. That is the premise, is it not—that you should not be able to get somebody without their clear permission?

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q Forgive me for interrupting, Graham—it is just because of time. When we look at red flags in various ways, we obviously talk about identification, but if the information produced is “Fred Bloggs of this address”, where would the red flag come?

Graham Barrow: That is a difficult one to answer, because very often the address that appears on the public register is not their own address. However, it is potentially likely that a residential address appears on the non-public aspect of the register, because that is often the conduit for getting access to banking, as they will do electronic identification checks against somebody’s residential address rather than other elements.

At the moment, there is one piece that is rightly hidden from public view, which is the director’s residential address. That is almost certainly used by criminals where they have access to it, because that opens up access to banking. If we are not successful in stopping fraudulent use of directors’ names and addresses, the Bill needs to be looked at carefully in its ability to give redress to that, without, of course, allowing people with rather ulterior motives trying to remove legitimate directors because they have some sort of vendetta.

We should always remind ourselves that, in our attempts to correct all of the bad stuff, we must not make it possible for people to use those corrections to then make life harder for the people who are doing the job legitimately. That is an ongoing discussion, I think.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Thank you, Graham.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q Could you give some live examples as to how you would use various aspects of the powers in the Bill to improve your ability to track? Of course, we have spoken on numerous occasions about the partnership that we need. If I may say so, Graham, you are an extremely active tracker of companies, and, I would therefore say, one of the top of the class in the public-private partnership.

Graham Barrow: That is kind. You must understand that I am a private citizen, so I do not have access to huge swathes of information that I would love to be able to get hold of to give a much rounder view of that. Companies House, of course, does, so there are some interesting things that it will have, such as email addresses, IP addresses and credit card details.

There are some important provisos there. Do not allow people to pay for their enrolment through a pre-paid credit card. That would be a bad thing. Do not allow people to apply through a virtual private network—a VPN. That would be a bad thing. Do not allow people to apply through something like Proton Mail or an encrypted mail account. That would be a bad thing. What we need is transparency in all those things so that we can aggregate that data with, for example, data from His Majesty’s Revenue and Customs, voter roll data and other data, to get a much more rounded picture of people who are applying for company directorships.

Now, that only works here in the UK. It is worth bearing in mind that about 150,000 company incorporations every year emanate from outside the UK. That adds further difficulty. There were 50,000 applications from China last year, so that is clearly a problem. Incidentally, those numbers soared after China banned cryptocurrency at the end of September last year. There was an extremely easy to observe uptick in UK corporate registrations from Chinese individuals.

The Bill will start to address such a range of issues. I think it will be the first of many if we are really going to make our corporate environment safe and secure, and start tackling economic crime and the abuse.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q I am very pleased to hear that. You are challenging me as Security Minister. You speak against cyber-security, which is an enormous element of the defences that we need for other areas of crime. I am sure you would not be recommending to anybody that they should never use VPNs or encrypted emails.

Graham Barrow: No. I am saying that for the purpose of registering a company in the UK, you should not be afforded that benefit.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

I understand the distinction. I just wanted to make the point. As you can understand, it would raise other difficulties.

Graham Barrow: Absolutely.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q I am very grateful for your input. I wonder whether you could say a little bit more on the issue of shell companies and how they are used. You will know very well the work of people like Oliver Bullough, Tom Keatinge and Luke Harding.

Graham Barrow: They are good friends.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

They are brilliant. These people are quite literally on the frontline of our democracy, defending our freedom by defending our corporate integrities. Their work is extraordinary important. I would be grateful if you would say a little bit more about shell companies.

Graham Barrow: I count all those people as friends. Oliver and I exchange daily emails. We work very closely together. The last time we met was on a bus.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

I should put on the record that he is a friend of mine as well.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Of lots of us around the table.

Graham Barrow: Shell companies are containers. Effectively, it is a container for assets. They are used in a whole variety of ways. They are used, clearly, as conduits for corrupt and criminal funds to be moved around the world. They are also used just as a container to access banking and do as I have just described—a one-off hit to get a bank account open and get an overdraft.

I have seen physical evidence of a company being incorporated to an address of somebody in Cardiff who knows nothing about it; on the same day, they open a bank account with one of our high street banks, and on the same day, they remove the automatic £8,000 overdraft that came with that bank account. Then they disappear, and of course it turns out that they were untraceable because none of the details they provided were real. That is a shell company, because that is not doing any normal commercial activity.

The Committee mentioned addresses earlier. I am sure some members of the Committee will know that there are addresses in central London that are home to 100,000 companies. That is clearly a matter of concern, particularly with the proportion of those companies that are registered from some of the more remote parts of the world—places you would struggle to find on a map—that concentrate at those addresses.

We need to be quite clear about the legitimate use of corporate service provider addresses. Some of our banks now provide that as a service. That is fine. There is one firm that offers this thing called a non-resident package, which should immediately make your ears prick up. Somebody from outside the country can register a business and be given the business bank account for a fixed fee. That bothers me hugely, because it makes me ask why.

The thing about shell companies is that they are not always easy to identify at the point of incorporation. We are getting very good at it, but it is still not an exact science. It is about lifetime analysis of a company’s behaviour, as well as some of the red flags that are raised at the point of incorporation.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q Thank you very much indeed. The amount of data coming out suggests that this legislation may do something to inform people about things such as phoenixing, which you have mentioned. Clearly, there are many aspects to that and I am not going to pretend for a second that the Bill answers every single one—it does not—but it certainly goes some of the way towards ensuring that people can be better informed when they enter into future agreements. How would you say that the information alongside the verification assists you?

Graham Barrow: It probably does not assist me an awful lot, because I do not have access to a lot of the other data that particularly members of JMLIT, and other law enforcement and Government organisations, have access to. As a private citizen, I will not have access to that much more information. That is probably a good thing, because I am already drowning in information. For a man who is going to be 70 next birthday, it is not exactly the retirement that I had planned. In a way, I think the best thing I can do is help to inform and educate others so that as the Bill starts to generate that information, some of which I will not be privy to, I can at least help people to understand better how to analyse and aggregate that information to extract signals.

Ultimately, there will be too much information to do everything with, so it is about how we organise ourselves, particularly at the point of incorporation, so that instead of waiting for a problem and going back to see how it happened, we identify that problem in the process of being set up, and start proactively managing the people who are part of organised crime or corruption and are using or abusing Companies House to do that. We have never done that before, to the best of my knowledge, but we are now in a situation where we can start doing it.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q I want to take you back to the work you did on Deutsche Bank. First, what additional powers did it lead you to think you needed? Secondly, how did the FCA respond—what was lacking or worked well there?

Graham Barrow: Dame Margaret, you ask me a tricky question because I worked at Deutsche Bank, and some of what I know is privileged and I cannot talk about it. In fact, my work in Deutsche Bank is what has led me to be sitting here, because it was while I was there working on the Russian mirror trades that I realised that two completely different firms had filed exactly the same set of accounts—identical accounts—signed by the same person. My rather naive reaction then was, “How on earth did this happen?” I know better now. That person’s name is in the public domain: it is Ali Moulaye. He is a dentist who currently lives in Belgium and has been written about frequently. I kind of discovered him, in a way. He has signed more than 10,000 sets of accounts on Companies House on behalf of at least 2,500 limited liability partnerships, a significant proportion of which have, sadly, been named as being involved in various laundromats.

One issue was that all those accounts were filed on paper and were then scanned in as an image, not as a machine-readable document. That is a really big disadvantage, because it prevents people such as me, or those with access to clever technology, from reading those documents into artificial intelligence engines and performing deeper analysis on them. It is a very difficult problem. It would be a wonderful thing—although I suspect quite labour intensive—to retrospectively digitise all those old PDFs, because there is a huge wealth of intelligence still residing in them that we truly do not understand. That is also very much true of limited partnerships, which still can only file on paper. The only way to incorporate a limited partnership is on a paper application. That makes reading the data on those registration forms extremely difficult, which is why lots of it has remained hidden for so long.

None Portrait The Chair
- Hansard -

If there are no further questions from Members, I thank the witness; Graham, thank you very much for your time.

13:04
Ordered, That further consideration be now adjourned. —(Nigel Huddleston.)
Adjourned till this day at Two o’clock.

Financial Services and Markets Bill (Fifth sitting)

The Committee consisted of the following Members:
Chairs: Mr Virendra Sharma, † Dame Maria Miller
† Bacon, Gareth (Orpington) (Con)
Bailey, Shaun (West Bromwich West) (Con)
† Davies, Gareth (Grantham and Stamford) (Con)
† Davies, Dr James (Vale of Clwyd) (Con)
Docherty-Hughes, Martin (West Dunbartonshire) (SNP)
† Eagle, Dame Angela (Wallasey) (Lab)
Grant, Peter (Glenrothes) (SNP)
† Griffith, Andrew (Arundel and South Downs) (Con)
† Hammond, Stephen (Wimbledon) (Con)
† Hardy, Emma (Kingston upon Hull West and Hessle) (Lab)
† Hart, Sally-Ann (Hastings and Rye) (Con)
† McDonagh, Siobhain (Mitcham and Morden) (Lab)
† Mak, Alan (Havant) (Con)
† Morrissey, Joy (Beaconsfield) (Con)
† Siddiq, Tulip (Hampstead and Kilburn) (Lab)
† Tracey, Craig (North Warwickshire) (Con)
† Twist, Liz (Blaydon) (Lab)
Bradley Albrow, Simon Armitage, Committee Clerks
† attended the Committee
Public Bill Committee
Thursday 27 October 2022
(Morning)
[Dame Maria Miller in the Chair]
Financial Services and Markets Bill
Clause 21
Digital settlement assets
Question proposed, That the clause stand part of the Bill.
11:30
None Portrait The Chair
- Hansard -

With this it will be convenient to discuss the following:

That schedule 6 be the Sixth schedule to the Bill.

Clause 22 stand part.

Andrew Griffith Portrait The Financial Secretary to the Treasury (Andrew Griffith)
- Hansard - - - Excerpts

Good morning, Dame Maria. It is a pleasure to serve under your chairmanship once again. I thank all hon. Members who are with us again today.

The Government believe that certain cryptoassets and distributed ledger technology could drive transformational changes in financial markets, offering consumers new ways to transact and invest, and that such technology could pose risks to consumers and financial stability. The Bill therefore allows the Government to bring digital settlement assets inside the regulatory perimeter.

In the first instance, the Government are focusing on fiat currency-backed stablecoins used primarily for payment. These are a type of digital settlement asset that could develop into a widespread means of payment and potentially deliver efficiencies in payments. Clause 21 extends the scope of payment systems legislation so that digital settlement asset payment systems and service providers are subject to regulation by the Bank of England and the Payment Systems Regulator.

Today, the Bank of England regulates systemic payment systems and service providers to those systems, where the Treasury makes an order recognising a particular payment system. That is subject to a high bar. Among other criteria, the Treasury must be satisfied that a system’s potential failure may cause disruption to the stability of the financial system.

Clause 21 also extends the scope of the Financial Services (Banking Reform) Act 2013 to ensure that relevant digital settlement asset payment systems are subject to regulation by the Payment Systems Regulator. That will help to protect user interests, promote competition and encourage innovation.

The changes made by clause 21 and schedule 6 will ensure that digital settlement asset payment systems and service providers are regulated to the same high standards as traditional payment systems.

Clause 22 allows the Government to bring digital settlement assets into the UK regulatory perimeter where they are used for payments. Secondary legislation under this clause could give the regulators powers over payment systems and service providers in order to mitigate conduct, prudential and market integrity risks. It could also allow the regulators to place requirements on firms in relation to appropriate backing assets and capital requirements to manage potential stability risks.

Given the nascent and rapidly evolving nature of the cryptoasset market, these provisions give the Treasury powers to amend the definition of “digital settlement asset” through secondary legislation. That is necessary to ensure that regulation can keep pace with the fast-moving nature of the market. The affirmative procedure will apply to any statutory instrument that seeks to amend the definition.

Clause 22 will also allow the Government to apply existing administration or insolvency regimes to digital settlement asset systemic payment systems and service providers to manage potential failures. The clause therefore provides the Government with the necessary powers to ensure that our legislative approach to digital settlement assets is flexible and responsive, and fosters competition and innovation in this fast-evolving sector. I recommend that the clauses and schedule stand part of the Bill.

Tulip Siddiq Portrait Tulip Siddiq (Hampstead and Kilburn) (Lab)
- Hansard - - - Excerpts

It is a pleasure to see the Minister still in his place. I speak to clauses 21 and 22 and schedule 6 together.

Properly regulated innovations that have emerged in the crypto space, such as distributed ledger technology, have the potential to transform our economy and the financial services sector. As the Minister will know, many innovative companies are embracing different forms of blockchain to improve transparency in finance and create high-skilled, high-productivity jobs across the UK. However, I draw his attention to the recent collapse in the value of cryptoassets, including several stablecoins, which has put millions of pounds of UK consumer savings at risk. I am sure he is aware that the crypto trading platform Gemini estimated that as many as one in five people in the UK could have lost money in the crash. Do the Government agree with Gemini’s estimate? If so, does the Minister agree that the recent crisis in crypto markets demonstrates that so-called stablecoins are not necessarily stable, and that their instability can pose a significant risk to the public? How did the recent collapse in the value of cryptocurrencies inform the Treasury’s approach to clauses 21 and 22?

The Opposition have yet to be convinced that Ministers have acknowledged the scale of the threat that cryptoassets can pose to consumers and our constituents. In our Public Bill Committee evidence session, Adam Jackson of Innovate Finance, which is the trade body for UK fintech businesses, pointed out that the Bill has failed to set out how regulated stablecoins will interact with a future central bank digital currency. Can the Minister shed some light on that interaction? I also hope he can explain why the Government have opted to bring only stablecoins within the regulation. I am sure he is aware that the EU has just agreed to a comprehensive regime for regulating crypto exchanges and cryptoassets more broadly, and Joe Biden has said that he is looking to do something similar, but the UK will not even be consulting on a comprehensive regime until later this year. Does the Minister agree that this risks leaving our country behind in the fintech and blockchain race?

Even more importantly, does the Minister agree that in the absence of a comprehensive regulatory regime, the UK risks becoming a centre for illicit finance and crypto activity? I looked at the analysis from Chainalysis—a global leader in blockchain research—which pointed out that cryptocurrency-based crime, such as terrorist financing, money laundering, fraud and scams, hit an all-time high in 2021, with illicit finance in the UK estimated to be worth more than £500 million. In the absence of a comprehensive regulatory regime, how do the Government think they are going to protect our consumers from such threats?

Will the Minister shed a bit more light on his strategy? Does he believe that the definition of “digital settlement assets” in clauses 21 and 22 is broad enough for regulations on a wide range of cryptocurrencies, other cryptoassets and crypto exchanges? Finally, on pacing this work, I want to know his intention. How long will the public and the fintech sector have to wait until the regulators are given the power that they need to regulate the types of cryptoassets that I have referred to?

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

I thank the hon. Lady for her comments. In truth, I agree with the assessment that she has set out. The approach taken in the Bill is to start with stablecoins and those that are most likely to be used as a means of settlement. That is what the Government are taking powers for in the Bill. As she says, we have committed to come back and consult on the issue before the end of the year. The nights are getting darker, so she will not have long to wait.

I am mindful of the opportunities and threats that the hon. Lady set out well when citing the evidence that the Committee heard, and it is my intention that the Government now move at a greater pace than is currently provided for in the Bill, which has been in gestation for some time. We will come forward with the consultation, which will happen before Parliament rises for Christmas. It will be a really good opportunity for us to continue to discuss how we can address some of the issues.

The reason we have started with stablecoins is that there are challenges in bringing them into regulation for the first time. The hon. Lady would not want us to rush, because by bringing them into the regulatory perimeter, we confer a status on them that may lead to some of the consumer harms she mentioned. The Government’s position is to start with the most stable, least volatile coins, which are likely to be used by intermediaries as settlement currencies, and then to go forward and consult from there.

I think I have addressed most of the hon. Lady’s comments. I do not disagree with her about the scale of the threat. There are other measures, including those that regulate the online promotion of cryptoassets, that will help to protect consumers who suffer harm.

Angela Eagle Portrait Dame Angela Eagle (Wallasey) (Lab)
- Hansard - - - Excerpts

Will the Minister give us a little more flavour on how he sees the evolution of this area? Does the clause give him enough powers to go with that evolution, or will we need to legislate again as the landscape changes? It is clear that we have to avoid the potential harm of allowing consumers to think that all digital coins are somehow the same. We know what Bitcoin is, and do not need to spend much time talking about it. We would not want to give people the impression that it is safe to indulge in investing in it.

At the same time, both sides of the Committee realise that digital payment systems and coins are a huge and rapidly developing area that national Governments must get a grip on. That is why we all welcome the fact that the Bank of England is looking at launching its own non-fungible token, or whatever we want to call it. We have to keep a very close eye and watch this space to see how it evolves. Will the Minister give us an impression of whether the clause is evolutionary enough for his purposes in that rapidly changing environment? Might he want to change it through some later piece of legislation?

Finally, we all know how much energy is used in the creation of Bitcoin. I confess myself ignorant about whether the creation of other non-fungible tokens is as energy intensive as the creation of Bitcoin. Perhaps the Minister can enlighten us. There is a green side to the issue as well.

Emma Hardy Portrait Emma Hardy (Kingston upon Hull West and Hessle) (Lab)
- Hansard - - - Excerpts

My point is further to those made by my hon. Friends the Members for Hampstead and Kilburn, and for Wallasey. My hon. Friend the Member for Wallasey asked whether the definition was evolutionary enough, and I want to pin down the Minister’s response. Does he believe that the definition of “digital settlement assets” is broad enough to allow for regulation to cover the wide range of cryptocurrency, other cryptoassets and exchanges?

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

I thank hon. Members for their contributions. As currently envisaged, the definition successfully encompasses what it intends to today. The definition starts with the most safe, least volatile domain, which is the use of digital settlement assets. The Bill confers secondary powers, which are subject to the affirmative procedure, that allow the definition to change elastically over time. It is right that Parliament should have the opportunity to look at such changes. That achieves the balance that Members on both sides of the Committee seek. It does not rush headlong to confer legitimacy.

The hon. Member for Wallasey rightly raised the point about the energy used. The truth is that we do not know, but we all suspect that the activity is highly energy intensive. Partly due to the lack of regulation, there is no real data other than anecdotes that one hears that suggest the process is very intensive—even getting into whole percentages of world energy consumption, according to some anecdotes. That is the process of mining that things like Bitcoin and Ethereum are associated with.

11:45
A stablecoin issued by a central bank or another asset-backed vehicle would not necessarily have the attribute of mining, but I think both sides of the Committee should approach the issue with humility, because we are at the start of a potentially profound journey of change. On both sides, we wish tentatively to seize those opportunities and not, as the hon. Member for Hampstead and Kilburn said, fall behind the markets, but also to proceed cautiously. I think the clause and this aspect of the Bill achieve that purpose.
Tulip Siddiq Portrait Tulip Siddiq
- Hansard - - - Excerpts

The Minister has talked about regulated stablecoins, but I did not get an answer to my question about how they will interact with the central bank digital currency that we know is very much on the horizon. Have the Government thought about that?

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

Stablecoins and central bank currencies are both new forms of money. They differ in the issuer: a central bank versus a private issuer. It is likely that a central bank digital currency would simply exist and be regulated alongside that. This is an area where the Government’s thinking continues to evolve. It is something that we will do in conjunction with the Bank of England, and therefore the hon. Lady will appreciate that I would not make commitments unilaterally, but we have committed to publishing a consultation later this year. The Government’s stance can fairly be described as forward leaning in this space, but there is more work to do. It is not a trivial exercise to create a new central bank digital currency. My own hope is that it is a “when”, not an “if”, but the hon. Lady will indulge me if I say, “Let’s wait for the joint Government and Bank of England consultation,” which she will not have to wait that many weeks for.

Question put and agreed to.

Clause 21 accordingly ordered to stand part of the Bill.

Schedule 6 agreed to.

Clause 22 ordered to stand part of the Bill.

Clause 23

Implementation of mutual recognition agreements

Question proposed, That the clause stand part of the Bill.

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

Having left the EU, we have a unique opportunity to take the approach to the UK regulatory framework that most suits our markets. The Financial Services and Markets Bill is delivering on that and will support efforts to build on our historic strengths as a global financial centre. That includes developing our relationships with jurisdictions around the world, attracting investment and increasing opportunities for cross-border trade.

Mutual recognition agreements are one of the tools that the Treasury has to support the openness of the UK’s international financial services, alongside free trade agreements, financial dialogues and equivalence regimes. MRAs are international agreements that provide for recognition that the UK and another country have equivalent laws and practices in relation to particular areas of financial services and markets regulation. They are designed to reduce barriers to trade and market access between the UK and other countries. The UK is currently negotiating its first financial services mutual recognition agreement, with Switzerland.

Giving effect to MRAs, including the agreement being negotiated with Switzerland, is likely to require amendments to domestic regulation. Clause 23 therefore enables changes to be made through secondary legislation to give effect to that agreement and future financial services MRAs. That secondary legislation will be subject to the affirmative procedure, to ensure parliamentary scrutiny of the proposed changes. That will be in addition to the parliamentary scrutiny of the mutual recognition agreement that Members will be familiar with under the Constitutional Reform and Governance Act 2010, known as CRaG. Parliament will, therefore—I am anticipating questions that hon. Members may raise—be able to scrutinise MRAs in the usual way before this power is used to implement the ratified agreements.

Clause 23 can be used only to implement MRAs relating to financial services, not to make broader changes to legislation or to implement any other form of international agreement. Each financial services MRA will be different, but it is anticipated that clause 23 will allow the Treasury to confer the necessary powers or impose duties on the financial services regulators to give effect to the MRA. That could include a duty to make rules on a particular matter—for example, rules governing cross-border provision of particular financial services by overseas firms.

The clause requires the Treasury to consult the relevant regulator before imposing any duties. In financial services regulation, market access between the UK and other jurisdictions is generally delivered through the UK’s equivalence framework for financial services, and the mechanisms under that framework are primarily found in retained EU law and based on the EU model of equivalence. The MRAs negotiated by the Government may in some cases go further than, or simply function differently from, those equivalent mechanisms. The clause therefore includes the power to modify the application of existing equivalence mechanisms, or to create new mechanisms to reflect what has been agreed in the relevant MRA.

Together, those provisions ensure that the UK can negotiate and deliver ambitious MRAs and implement the agreements in a timely manner that maintains the UK’s credibility in negotiating future MRAs. I therefore recommend that the clause stand part of the Bill.

Tulip Siddiq Portrait Tulip Siddiq
- Hansard - - - Excerpts

We support clause 23, but how does the Minister think it will help the UK to secure international trade agreements that are favourable to the UK’s financial services sector? I ask because the Government have made very little progress on securing trade deals for the City, including with the EU, which remains, as I am sure he will agree, one of our most important export markets.

We completely recognise that regulatory divergence with the EU on areas such as fintech and Solvency II will help boost our competitiveness on the world stage. However, we cannot ignore the fact that Europe will always remain an important market for our financial services sector. Last year, exports of financial services to the EU were worth more than £20 billion—I am sure that the Minister knows that—which was 33% of all UK financial services exports. I have been speaking to the sector and it is disappointed that the Government have so far failed to finalise a memorandum of understanding on regulatory corporation, or to negotiate mutual recognition with the EU of professional qualifications for our service sectors. I want to hear more about that from the Minister.

Since 2018, the value of UK financial services exports to the EU has fallen by 19% in cash terms, and very little progress has been made in securing trade deals around the world for our financial services. Will the Minister tell us how the clause will help secure important agreements with the EU? I also want to hear more from him about how he hopes it will turn around the Government’s record on boosting financial services exports.

Angela Eagle Portrait Dame Angela Eagle
- Hansard - - - Excerpts

I want to focus on parliamentary scrutiny of these changes. They are quite technical, but they could be very important, including for consumers. If we do not get them right, they could have unintended consequences for financial stability and so on, because of the range of agreements under discussion. One assumes that those negotiating the agreements have a reasonable model of what they want to achieve, but that will also be the case for those with whom we are negotiating. The context is about gaining an advantage in the international competition for financial services. Indeed, both Front Benchers have hinted at that. If we are looking for a competitive advantage and growth, that kind of struggle for an advantage has obvious implications.

Until we left the EU, much of the negotiation on the financial directives that were promulgated went on within the European Commission. The UK had a great deal of influence over how those directives were negotiated, but it did not always win out; for example, the markets in financial instruments directive was a cause of some consternation for our financial services, because it did not fit with our kind of plan. We were always the country with the largest financial services sector, and were mostly likely to be impacted by agreements and compromises that did not clearly represent our best interests. We can now hope to move back towards that position, if we can come to an agreement. However, as my hon. Friend the Member for Hampstead and Kilburn said, we are constrained by the fact that a great deal of our financial services activity happened within the EU. I suspect that the divergence is likely to become greater over time. What does the Minister think would constitute a timely attempt by Government to ensure proper parliamentary scrutiny of these things? Aside, that is, from Parliament potentially debating 50 pages of extremely technical statutory instruments.

We know that the Treasury Committee will have a say, but some of the changes negotiated in these agreements with other countries may have important impacts on consumer rights, and larger number of Members of Parliament might want a say on them. Perhaps the Minister could say how he envisages the process going forward. I presume we will have some agreements—there has been a slow start. How can Parliament keep an appropriate eye on the philosophy behind the agreements, and the way in which they are going, as we diverge more from our closest partner?

Emma Hardy Portrait Emma Hardy
- Hansard - - - Excerpts

I want to probe the Minister a little further. Obviously, it is a huge disappointment that we do not yet have a memorandum of understanding with the EU. Will the Minister indicate when we will have one?

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

The hon. Member for Hampstead and Kilburn is right about the significance of the European Union member states as trading partners for our financial services. It remains the Government’s intention to form the closest possible relationship with those partners, and to help our financial services businesses access those markets in the most frictionless way. Both sides will have to be involved in reaching any agreement. I do not want to stray too far off the point, Dame Maria, but yesterday I met my German counterpart; Germany is probably the state with the biggest market for financial services. I hope the Committee will take that as a statement of our intent to negotiate as many agreements as possible, whether at national or EU level.

As I said, it is not the Government’s position to diverge for divergence’s sake. The hon. Members for Hampstead and Kilburn, and for Wallasey, accurately identified some of the provisions on which there may be opportunities to diverge, based simply on a different fact pattern in our financial services industries.

Emma Hardy Portrait Emma Hardy
- Hansard - - - Excerpts

It is positive news that the Minister has met his German counterparts. Could he give any indication of the progress made towards a memorandum of understanding, and of when we might see one with the EU?

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

The hon. Lady will forgive me, but I cannot give an indication of timing. However, I will undertake to engage with the Treasury Committee, whose acting Chair is with us today, as we go through that process. To speak to the point made by the hon. Member for Wallasey, we have a diligent Treasury Committee that exercises oversight of this area. I consider it unlikely that we will suddenly procure an MRA that blindsides that Committee, and I certainly undertake to keep it informed, so that the detailed parliamentary scrutiny provided for in the Bill is adequately exercised.

Angela Eagle Portrait Dame Angela Eagle
- Hansard - - - Excerpts

I thank the Minister for giving way. Flattery will, of course, get him everywhere. Given the nature of that complex negotiation, might it be possible for him to undertake to give the Treasury Committee a heads-up on progress before agreements are made, so that we can try to ensure that we can encompass appropriate consideration in our heavy workload?

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

I will not fully bind the Government on that, but the hon. Lady makes a reasonable point. These are not matters of overly partisan division between us, and it would certainly be our intention to do that, so that the scrutiny under CraG, and the scrutiny required by the affirmative procedure, can be carried out, and so that the right resources can be dedicated to it.

The hon. Member for Wallasey talked about these MRAs being a struggle for advantage. There is that element to them, but another key element is that they are mutual. It is certainly not the Government’s position that they are a zero-sum game. The objective is to procure such agreements with as many different jurisdictions as possible, so that, as the hon. Member for Hampstead and Kilburn mentioned, we can grow our sector and boost exports of not just financial services but related professional services, which the UK is extremely fortunate to have.

Question put and agreed to. 

Clause 23 accordingly ordered to stand part of the Bill.

None Portrait The Chair
- Hansard -

We now come to amendments 43 and 45, in the name of Peter Grant. Would any member of the Committee like to move them? If not, we will move on to amendment 46.

Clause 24

Competitiveness and growth objective

Stephen Hammond Portrait Stephen Hammond (Wimbledon) (Con)
- Hansard - - - Excerpts

I beg to move amendment 46, in clause 24, page 37, line 13, leave out “facilitating” and insert “promoting”.

None Portrait The Chair
- Hansard -

With this it will be convenient to discuss the following:

Amendment 47, in clause 24, page 37, line 31, leave out “facilitating” and insert “promoting”.

Clause stand part.

Stephen Hammond Portrait Stephen Hammond
- Hansard - - - Excerpts

It is a pleasure to see you in the Chair, Dame Maria, and to serve under your chairmanship. I would again guide the Committee to my entry in the Register of Members’ Financial Interests.

For many of us, chapter 3 of the Bill is hugely important because it looks at the accountability of regulators. As the Bill could hugely increase their powers, the themes that many of us explored during the evidence session—of transparency, accountability and proportionality—are fundamental. Clause 24 deals with the secondary objective. Regulation and regulatory culture are some of the biggest factors affecting the competitiveness and attractiveness of a jurisdiction.

This is not about a race to the bottom. Any jurisdiction that is not well respected and well regulated, with tough regulation and an independent regulator, will fail on the international stage. It is about ensuring the regulator’s accountability, particularly for the objective. We heard evidence from major City trade organisations last week, and Emma Reynolds from TheCityUK said to us:

“it is important that the regulators are not marking their own homework”––[Official Report, Financial Services and Markets Public Bill Committee, 19 October 2022; c. 18, Q28.]

Charlotte Clark from the Association of British Insurers made a similar point.

It is clear that there is a track record, but we must make sure that the regulators stay on track and are held to their duty regarding the new secondary objective. Amendments 46 and 47, which are fairly simple, would change “facilitating” to “promoting”. Facilitating almost implies letting something happen, perhaps through disregard. There should be active promotion of the secondary objective to remain internationally competitive. Internationally, we would not be alone in taking such action. The Swiss Financial Market Supervisory Authority is required to take particular account of the effect that regulation has on competition, innovation and the international competitiveness of Switzerland. There is a very similar objective for the Monetary Authority of Singapore, and no one anywhere will suggest that those are not well regulated, competitive international markets.

London trade bodies, such as the London Market Group, suggest that in the UK, some regulatory costs are up to 14 times what they are in other places around the world. When we look at the one-size-fits-all approach sometimes taken by the Financial Conduct Authority, it is clear that a distinction needs to be drawn. If we are not careful, the objective could be subsumed in others and forgotten. If we want London to be the global financial centre, we should have regard to the secondary objective. I want the Bill to set out more clearly regulators’ accountability for this objective, the intention, and regulators’ role regarding the objective.

Craig Tracey Portrait Craig Tracey (North Warwickshire) (Con)
- Hansard - - - Excerpts

As ever, it is a pleasure to serve under your chairmanship, Dame Maria. I refer to my interest, which I declared at the start of Committee proceedings. I welcome the Bill, and particularly clause 24 because of its competitiveness duty, for which I have campaigned for quite some time. I would prefer it to be a primary objective, and perhaps the Minister will look into that, but if we keep it in its current form, then we have to go further for it to be meaningful. There must be proper metrics to ensure that the regulator follows up on it. For that reason, I support the amendments put forward by my hon. Friend the Member for Wimbledon.

In the evidence sessions, I was surprised to hear that the FCA was not aware of any other regulator that had a competitiveness duty. That is quite worrying. It seemed slightly detached from what our competitors are doing. We need to ensure that the FCA is pressed hard on this issue, and that there is a clear, stated objective for them to promote competitiveness in the industry. To be clear, this is not at all about lowering standards. The FCA said in its evidence that it considers jurisdictions such as Hong Kong, Japan, Singapore and Australia to be robust financial centres. They all have a competitiveness duty, so a duty of that kind can be beneficial.

Let me put this into context by giving the example of insurance-linked securities. The FCA created regulations regarding them, which Singapore then lifted—took and used. Because of Singapore’s competitiveness duty, we lost one firm midway through the process. In the same timeframe, 15 firms have been regulated there, against five in this country. The estimated loss is around $700 million. That is money out of our economy that could come our way with just this simple change.

There is a similar story on captives. We do not have any set up here. The reason cited is over-burdensome regulation. The industry agrees that there needs to be regulation, but it needs to be proportionate, and we need to ensure that it does not block investment in this country. I hope the Minister will consider the amendments and see what can be done to strengthen the measures.

Angela Eagle Portrait Dame Angela Eagle
- Hansard - - - Excerpts

I approve completely of having a competitiveness and effective competition analysis duty being attached to the regulators, and for them to report on it annually, which would allow us to see how much they are taking account of it. I would also like them to be thinking about financial inclusion, but that comes later in our proceedings.

Will the Minister tease out a little for the Committee how he thinks the regulator can go about discharging that duty safely? We have seen some of the carnage caused by bad regulation in the energy sector, where a superficial view of competition has led to problems in that market, with companies collapsing. There is an obsession with the idea that competition is about the number of firms, whether or not they are sound. If something similar were to happen in this context, it could be even more serious and even more costly. I broadly support the aims of clause 24, but would welcome the Minister’s thoughts on how the problems and the bad effects in the energy market caused by the regulator’s misguided attempts to prove that there was competition—the trap of thinking that competition is just about the number of firms—can be avoided in this context.

Tulip Siddiq Portrait Tulip Siddiq
- Hansard - - - Excerpts

I will speak to clause 24. I was going to speak to amendment 43, but it has not been moved.

We strongly welcome clause 24. We are completely committed to supporting the City to retain its competitiveness on the world stage and we support the new secondary objective for regulators to consider competitiveness and growth. However, I hope the Minister will agree that financial stability and consumer protection must always remain the priority for our regulators. Any compromise on those important objectives would be self-defeating. The competitiveness and global reputation of the City depends on the UK’s reputation for strong regulatory standards.

Although supporting the financial services sector to thrive and grow will be key to delivering the tax receipts that we need to fund public services, it will not be enough. To get the economy growing, the Minister knows that we need to harness the power of the City to drive growth in every part of the economy and the country. The financial services sector will have to play an important role in driving our transition to a low-carbon economy and creating the green jobs and businesses of the future. Perhaps the most interesting part of the new secondary objective is how our regulatory system can incentivise medium and long-term growth beyond the financial services sector in the wider economy.

12:15
I want to talk about the legislation. Regulators are currently mandated to report progress against their objectives to the Treasury via their annual reports, but I want the Minister to set out how regulators will be held to account specifically on how they have considered medium and long-term growth in the so-called real economy. What metrics does the Minister anticipate will be used to assess such progress or lack of progress? The hon. Member for Wimbledon referred to TheCityUK, which called in its written evidence to the Committee for the elected Government and parliamentarians to be given greater powers in the Bill to require regulators to report their performance against specific criteria and metrics. That could include—this is my example, not that of TheCityUK—metrics on how the PRA and FCA’s regulatory activity has considered the need for sustainable investment in the UK economy in sectors beyond the financial sector. Has the Minister considered TheCityUK’s suggestion, and does he believe it could be an effective way to hold regulators to account on their objective to consider medium and long-term growth in the UK economy?
Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

I thank my hon. Friends the Members for Wimbledon and for North Warwickshire for raising some important matters, and those on the Opposition Front Bench for their support for clause 24. They clearly speak with a great deal of authority from their own experience, and the Government will take away their points and consider them further. Let me describe the clause, and then I will try to come back to the points that have been made.

The Bill asserts our domestic model of financial services regulation, whereby the Government and Parliament set a policy framework within which the regulators are generally responsible for setting the detailed rules. It is therefore necessary to ensure that the regulators’ objectives, as set out in the Financial Services and Markets Act 2000, are appropriate, given their expanded responsibility and the UK’s position outside the EU. The Government believe that the regulators’ current objectives set broadly the right strategic considerations, but we also consider it right that the regulators’ objectives reflect the need to support the growth and international competitive-ness of the UK economy, particularly the financial services sector. I welcome Members’ support for that.

The clause introduces new secondary objectives for the FCA and PRA in relation to growth and competitiveness. The new objectives will require the FCA and PRA to act in a way that, subject to aligning with relevant international standards, facilitates the international competitiveness of the UK economy, including the financial services sector, and its growth in the medium to long term. For the FCA, that objective will be secondary to its strategic objective to ensure that markets function well—I believe the hon. Member for Wallasey mentioned the importance of that, which is clearly paramount—and to its three operational objectives, which sit below the strategic objective, to ensure that consumers receive appropriate protection, to protect and enhance the integrity of the financial system, and to promote effective competition. Again, the hon. Member for Wallasey mentioned financial inclusion, and we will talk about that when we debate later clauses. For the PRA, the growth and competitiveness objective will be secondary to the PRA’s general objective to ensure that UK firms remain safe and sound, and to its insurance-specific objective to contribute to the securing of an appropriate degree of protection for those who are or may become policyholders.

The new objectives do not require or authorise the FCA or PRA to take any action inconsistent with the existing objectives. I will come back to the hon. Member for Wallasey on that, but they are subordinate objectives and secondary to their financial stability and prudential objectives, which they talk about. The new objectives will give the regulators a legal basis for advancing growth and international competitiveness for the first time. It does not go quite as far as my hon. Friends the Members for Wimbledon and for North Warwickshire have suggested in the amendment. Nevertheless, it is a significant enhancement in that respect on the status quo. As they said, it moves us in line with other international jurisdictions. That is a balanced approach. By making those objectives secondary, we are nevertheless giving the regulators an unambiguous hierarchy of objectives that prioritises safety and soundness, and market integrity. I therefore commend clause 24 to the Committee.

Amendments 46 and 47 seek to amend the new secondary objectives and require the regulators to promote, rather than facilitate, the international competitiveness of the UK economy and its growth in the medium to long term. The wording of the objectives in clause 24 aligns with the PRA’s existing secondary objective, which is to facilitate effective competition. The vast majority of respondents to the November 2021 future regulatory framework review consultation supported the Government’s proposal to introduce new secondary objectives for the FCA and the PRA to facilitate growth and competitiveness.

I reassure my hon. Friends about the importance of the Government’s plans on growth and competitiveness. We expect that there will be a step change in the regulators’ approach to the issue that will be similar to the change that took place following the introduction of the PRA’s secondary competition objective in 2014, which led to a significant number of new policies to facilitate effective competition. I therefore ask my hon. Friend the Member for Wimbledon to withdraw the amendment.

In responding to the hon. Member for Wallasey, I will not assume to myself a degree of expertise about the energy market or any failings in that market. However, I completely agree about the need to avoid an overly binary or unbalanced approach to competition in any market. I think we all agree that we need to get the right balance. On how the regulators can safely advance the objectives, my response is as follows: with a balanced approach; with the right level and volume of resources, in terms of both the quality of expertise and the people they attract and retain; and with good governance. The hon. Lady herself, like all Members of Parliament, is also part of the regulators’ governance model.

Tulip Siddiq Portrait Tulip Siddiq
- Hansard - - - Excerpts

The Minister sounds like he is closing his speech, and I have not heard what he thinks about TheCityUK’s suggestion of asking regulators to report their performance against criteria and metrics. Before he finishes, will he give us his opinion?

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

The hon. Lady is right to pull me up on my failure to address her point, although later clauses and amendments also address it. I am familiar with TheCityUK’s proposal, and the Government are prepared to look at that area. She gave an example of the regulators helping the real economy through sustainable investments, and potentially reporting some metrics against that. That is worthy of consideration.

Stephen Hammond Portrait Stephen Hammond
- Hansard - - - Excerpts

I should have said at the beginning that I warmly welcome clause 24. The purpose of the amendments was to tease out the Minister’s exact thoughts. I was pleased to hear that he thinks there is regulatory step forward. I was also pleased to hear that the Government may look again at some of the wording in chapter 3. Will he meet me and colleagues, perhaps next week, or some time in the future? With that, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 24 ordered to stand part of the Bill.

Clause 25

Regulatory principles: net zero emissions target

Question proposed, That the clause stand part of the Bill.

None Portrait The Chair
- Hansard -

With this it will be convenient to discuss clause 26 stand part.

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

I will speak to clauses 25 and 26 in order. As I set out in previous comments, the Government remain committed to reaching net zero greenhouse gas emissions by 2050, as set out in section 1 of the Climate Change Act 2008. Clause 25 reflects the Government’s commitment by introducing a new regulatory principle for the FCA and the PRA to contribute towards achieving compliance with the net zero emissions target. FSMA 2000 sets out eight regulatory principles that the FCA and the PRA must have regard to when discharging their functions. These existing principles aim to promote regulatory good practice across the regulators’ policy-making. The principle in section 3B(1)(c) of FSMA 2000 requires the FCA and the PRA to have regard to the desirability of sustainable growth in the United Kingdom economy in the medium or long term.

The November 2021 future regulatory framework review consultation proposed amending the sustainable growth principle to explicitly incorporate the UK’s statutory climate target. Following feedback to the consultation, and given that the Bill introduces new secondary objectives for the FCA and the PRA to facilitate international competitiveness and growth in the medium to long term, clause 25 removes the sustainable growth principle for the FCA and the PRA to avoid unnecessary duplication.

Clause 25 replaces the sustainable growth principle with a new regulatory principle to require the FCA and PRA to have regard to the need to contribute towards achieving compliance with section 1 of the Climate Change Act 2008. This new regulatory principle will cement the Government’s long-term commitment to transform the economy in line with our net zero strategy and vision to make the UK a net zero financial centre by ensuring that the FCA and the PRA must have regard to these considerations when discharging their functions. A similar requirement will be introduced for the Bank of England and the Payment Systems Regulator, which we will cover in more detail later.

Clause 26 makes consequential amendments to FSMA 2000 to take account of the new regulatory principle in clause 25, and the new growth and competitiveness objective for the FCA and PRA in clause 24. Clause 26 also requires the FCA and PRA to explain how they have advanced the new growth and competitiveness objectives, as well as their existing statutory objectives, in their annual reports to the Treasury, which are laid before Parliament. This requirement aligns with the PRA’s current reporting requirement for its secondary competition objective. I therefore commend clauses 25 and 26 to the Committee.

Emma Hardy Portrait Emma Hardy
- Hansard - - - Excerpts

I have not tabled an amendment to the clause, but the Minister will be aware that on Second Reading there was a huge amount of support across the House for strengthening these proposals on net zero and nature. I hope we will see some movement on these issues as the Bill progresses through Parliament.

I want to start by saying why net zero and nature matter and looking at the situation in France and Germany. The German regulator already has a sustainability objective, with a focus on combatting greenwashing. The French regulator already looks at overseeing the quality of information and has set up the Climate and Sustainable Finance Commission. I want the Minister to note that our competitors are already moving ahead in this area.

One thing that came out of the written evidence, which I have just been re-reading, was the need for net zero transition plans and the establishment of a transition plan taskforce. The Minister has not really mentioned that. The purpose of the transition plan taskforce was to look at a gold standard for climate transition plans, but it is not stipulated in the Bill that companies will be expected to develop these and move them forward.

Disappointingly, although the Bill talks about net zero, it says nothing about nature. I wish I could recall who from the Bank of England came to give evidence to the Treasury Committee, but it was incredibly interesting to hear that, in looking at the risks to our country and our future financial sustainability, it is starting to look at the risk to nature and what the decline in nature will cost us all. We have heard much about climate change and the obvious risks it poses to our country and our financial sector, but people are starting internationally to look at the impact that a decline in nature has on our economic wellbeing. Again, nature is not mentioned in the Bill at all.

12:30
I raise this not because it is woolly and we like nature—although I do like nature—but because there is an impact on our economy. I think that needs to be addressed. As I said, there is a lot of support for that. There are huge opportunities too. We need only look at the problems our country has had over the past 12 years with low growth, and at the current economic situation and the decisions the Chancellor of the Exchequer will have to make. Surely something that would boost our economy, which looking at net zero and nature has the potential to do, should be taken more seriously by the Government.
Fifteen years ago, Sir Nicholas Stern described climate change as “the biggest market failure” we have ever seen. If we do not address nature now, we will be having the same conversation in 15 years about why we did not take the opportunity of this Bill to address it seriously. As I said, I have not tabled amendments at this point, but there is always Report stage if we do not feel that these issues are being taken seriously enough by the Government.
Craig Tracey Portrait Craig Tracey
- Hansard - - - Excerpts

I will speak specifically to clause 26. It is really welcome that this measure has been brought forward, but I have a big worry that the wording of the clause is open to interpretation. I have therefore tabled a new clause that we will get to later. The main change is to amend the wording in the clause that the regulator has complied with the competitiveness duty, “in its opinion”. I think that is quite worrying. There is a worry that it will turn into a tick-box exercise. As Emma Reynolds from TheCityUK pointed out, there is concern that the regulator will end up marking its own homework. The regulator was not even aware that other jurisdictions had international competitiveness duties.

We should also find it concerning that Charlotte Clark from the ABI said in her evidence that she could not recall a new insurance company being set up in this country in the last 10 to 15 years, yet they are being set up in other countries, including in the EU—countries with which we have equivalence. The main reasons seem to be the time that it takes to get regulated and the cost. As my hon. Friend the Member for Wimbledon said, in some instances it is up to 14 times more expensive to get regulated here than in similar jurisdictions that are similarly robust.

I therefore think that the provision needs to be much tighter and to have some proper key performance indicators and metrics. It was good to hear the FCA say that it was looking at those, but we need to set them out clearly. The types of thing that could be in there are an understanding of who is leaving the country for other regimes and why; rule monitoring and evaluation; the level of duplication in the rulebook; the speed and responsiveness of the regulator; and our success in attracting new applicants. As I said, I have a new clause, which we will come to at the end, but it would be great if I could meet the Minister beforehand to talk this through and to see whether it can be incorporated into the Government’s thinking.

Angela Eagle Portrait Dame Angela Eagle
- Hansard - - - Excerpts

Again, there is largely agreement about the aims of clauses 25 and 26. We are on the cusp of a complete transformation in the way our economies have to work. Sometimes, I think we do not quite understand the extent of the transformation that will be needed and the speed at which it will have to be done, given that we are so behind in our attempts to reach net zero and avoid catastrophic climate change. It really is the last few hours, in terms of the biodiversity and climate stability of the Earth, for us to be able to do this.

The scale of the required transformation is mind-boggling. Virtually every piece of infrastructure in existence in our society will have to be transformed. That will have to be done through public-private partnerships, investment to lead the market in areas where there is market failure and investment in innovation in financial services to help to provide that investment, but also through proper regulation, which is what these clauses are about. All those things have to be done in a timely way to create the circumstances for realising all the capital investment potential that will be needed to make this change happen, especially in established economies with old infrastructures, which are often the largest emitters of carbon, as it happens. All of that has to be done virtually in parallel, so that we can try to reach these important targets.

It is very important that, through these clauses, the Government have agreed to incorporate the legislative target of reaching net zero by 2050 into this part of financial services law. However, they have amended it by replacing what was there before—the “have regard to sustainable growth”—with the target. Is that the right way to go about it? By getting rid of that “have regard”, do we lose an opportunity to make progress, rather than just focusing on a future output? That is not a philosophical question; it is a practical one. Why have the Government decided to replace the “have regard”, rather than enhance it? Will the Minister reassure us that, in the context of having to retool the way we do almost everything in all our infrastructure, we could not have gone with both? Will there be the potential for people to think, “We’ll put everything off until closer to 2050,” because the “have regard” has been replaced with an end-date output target? Can the Minister justify why the Government thought that was the best approach?

When regulation is being refocused on net zero, there will be those who wish to greenwash what they are doing—I will use that phrase; the Minister understands what it means—in order to continue to attract investment and piggyback on the good will of people who wish this change to happen when, in the case of those companies, it is not happening. I suspect there is a little bit of that going on at the moment. How does the Minister envisage enforcement mechanisms and proper regulation being put in place to ensure that greenwashing is not going on everywhere? Such greenwashing would move us away from meeting the target. Not only would it be to the detriment of consumer interests; it would squeeze out more genuine activities, firms and investment if it were allowed to be too prevalent.

Stephen Hammond Portrait Stephen Hammond
- Hansard - - - Excerpts

I am not sure whether I am supposed to, Dame Maria, but I refer the Committee to my entry in the Register of Members’ Financial Interests.

Like many Members, I welcome the thrust of clause 25 and think it is important that we are setting the principle of net zero in legislation. However, I agree with my hon. Friend the Member for North Warwickshire. Clause 26 amends FSMA 2000 in relation to the content of the annual report. I will not go through all the arguments that we may well make when my hon. Friend’s new clause is debated, but I want to register with the Minister my concern about the phrase “in its opinion”. There is a reputational risk for the regulator, as much as for anyone else, if someone were to examine it later. I will not detain the Committee any longer, but I will want to speak to this point quite extensively when my hon. Friend’s new clause comes up.

I ask the Minister to look at the phraseology and consider whether it is appropriate. As we have all said in Committee, during the evidence sessions and in widespread discussion of the Bill, the need for clear metrics, regulatory transparency and regulatory accountability is key. That is one of the things we have all welcomed in the Bill.

Tulip Siddiq Portrait Tulip Siddiq
- Hansard - - - Excerpts

We welcome clause 25 and the new regulatory principles for the FCA and the PRA, which will require the regulators, when discharging their general functions, to have regard to the need to contribute towards compliance with the Climate Change Act 2008—legislation that, I remind the Minister, was brought in by a Labour Government.

However, we think that the Bill lacks ambition on green finance. The Government promised much more radical action. We were promised that the UK would become the world’s first net zero financial centre, but we are falling behind global competitors. In the evidence session, William Wright, the managing director of the New Financial think-tank, stated that the UK is a long way behind the EU on both the share and the penetration of green finance in capital markets. Research by the think-tank has suggested that green finance penetration in the UK is at half the level of the EU and roughly where the EU was four years ago.

I will discuss what the Opposition would like to see in the Bill on green finance when we discuss new clause 9. For now, will the Minister set out what assessment he has made of the impact that clause 25 will have on investment decisions and other financial service activities in the sector?

In the evidence session, William Wright suggested that there is “a disconnect” between the Government’s stated position that the UK is already a global leader in green finance and the ambition for the UK to become the leading international green finance centre. Does the Minister really believe that the provisions in clause 25 are sufficient to close that gap? How much further will the Government go on this agenda? Does the Minister think we have been as ambitious as possible in the Bill, considering that the problem is on our doorstep and is so important for future generations?

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

A lot of valuable points have been raised by Members on both sides of the Committee. This is the right moment for colleagues to make those points, and I hope it is acceptable to the Committee if I take some of those points away and follow up with further information later, rather than dismissing them trivially here.

The hon. Member for Kingston upon Hull West and Hessle raised something that is close to many of our hearts: nature. She is quite right that the Bill is focused on net zero and climate. She is absolutely right that we cannot achieve our climate goals without acknowledging the vital role of nature. That should concern us all, as it is part of the carbon ecosystem. I will take her points away to see whether there is anything else that can be done. I hope she will accept that the datasets and the maturity with which some aspects can be measured are not as sophisticated as in the science of climate change. That might be one impediment to the Government moving forward and baking it into statute, but I will take it away and follow up with the hon. Lady.

The hon. Member for Wallasey is absolutely right about the transformative scale of moving to a low-carbon economy. It will change every single aspect of how we generate energy, the activities we engage in, the homes we live in and our financial centre. We are at one on that. I believe that the wording of the clause and the replacement of the “have regard” achieves that objective, combined with the legislative commitment—by the Labour Government, if the hon. Member for Hampstead and Kilburn so wishes—that is being incorporated into the duty by reference. It does do that. There is an ambition there, and we should seek to satisfy it.

12:45
I heard my hon. Friends the Members for North Warwickshire and for Wimbledon; it is, of course, right that nobody should mark their own homework. I will meet my hon. Friend the Member for North Warwickshire to discuss his new clause. Again, I will take that away and see if there are ways to incorporate it on Report.
Having taken a very consensual approach, I take deep issue with what the hon. Member for Hampstead and Kilburn said about our credentials as Europe’s leading—if not the world-leading—centre of green finance. Rather than take up the Committee’s time this morning, I will write to the hon. Lady and set out what I believe to be the true position, because we do have a proud record. While there is always more to do, I do not think that we should talk ourselves down on that.
Tulip Siddiq Portrait Tulip Siddiq
- Hansard - - - Excerpts

Obviously I do not want to offend the Minister, but I point him to the facts. I would like to hear what he has to say in response to the evidence given by William Wright, who, I would point out, is not a Labour MP but is independent. The think-tank’s research found that green finance penetration in the UK is at half the level of the EU, and roughly where the EU was four years ago. When the Minister writes to me, will he point me to specific evidence that contradicts what we heard in the evidence session?

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

I will. I look forward to writing to the hon. Lady to set out my case.

The hon. Member for Kingston upon Hull West and Hessle mentioned transition plans. Our progress on those is absolutely on track and I look forward to that being another area in which the UK is leading.

Question put and agreed to. 

Clause 25 accordingly ordered to stand part of the Bill. 

Clause 26 ordered to stand part of the Bill. 

Clause 27

Review of rules

Question proposed, That the clause stand part of the Bill.

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

Clause 27 inserts four new sections into FSMA 2000 to ensure that the FCA and the PRA review their rules regularly, so that they remain fit for purpose. It is important for the FCA and the PRA to regularly review their rules after implementation to ensure that they remain appropriate and continue to have the desired effect.

Regular reviews improve ongoing policy development by providing the evidence to make better decisions and helping to develop a better understanding of what works, for whom and when. There is currently no formal requirement for the PRA or the FCA to conduct reviews of their existing rules. Proposed new section 3RA will introduce a requirement for the two regulators to keep their rules under review. There are a range of approaches for assessing the effect of rules, from monitoring a set of indicators to an in-depth assessment of the effect of a rule from both a qualitative and quantitative standpoint.

The Government expect that, under this new requirement, the regulator will decide on the most appropriate approach on a case-by-case basis. The requirement to keep their rules under review should lead to a more systematic approach by the FCA and the PRA, in turn improving regulation, as any ineffective or outdated rules will be removed or revised more consistently.

Alongside that requirement, proposed new section 3RB requires the regulators to publish a statement of policy on how they intend to conduct rule reviews. That will provide clarity and transparency for stakeholders on how and when rules are reviewed, thereby increasing confidence in the regulation of financial services. Under these new requirements, how and when the two regulators review their rules to assess whether they function as intended will be an operational decision for the regulators.

In addition to the new legislative requirements, the regulators have confirmed that they will consult publicly on the statement of policy to ensure that stakeholders have an opportunity to contribute views as the regulators consider their approach.

I reiterate that, as set out in the Government response to the November 2021 FRF review consultation, and in response to calls from industry, the FCA and the PRA have committed to ensuring that there are clear and appropriate channels through which industry and other stakeholders can raise concerns about rules. Those channels will be set out in policy statements in due course. However, without further provision, there will be no formal mechanism for the Treasury to require the regulators to conduct reviews of their existing rules.

As the FCA and the PRA take on increased regulatory policy-making responsibilities following the implementation of the FRF review, there may be occasions when the Treasury considers that it in the public interest for the regulators to review their rules—for example, when there has been a significant change in market conditions or other evidence suggests that the relevant rules are no longer acting as intended.

Proposed new section 3RC of FSMA provides for more effective regulation by allowing the Treasury to direct the regulator to review its rules when the Treasury considers that to be in the public interest. Proposed new section 3RD requires the regulator to report on the outcome of the review and the Treasury to lay that report before Parliament. Any reviews initiated under the power will be conducted by the regulator or, where appropriate, an independent person. The regulator will be responsible for deciding what action to take, if any, in response to any recommendations arising from the review. This measure offers a new avenue for challenge of the regulators’ rule making, where that is required, while maintaining their operational independence.

Respondents to the November 2021 FRF review consultation felt that there should be further measures on accountability, although there was no consensus on what they should be. The Government considered the responses and decided that, while we must still uphold our commitment to independent regulation, the accountability framework needs further strengthening, so on Second Reading the Government announced our intention to bring forward an intervention power to enable the Treasury to direct the regulator to make, amend or revoke rules when there are matters of significant public interest. The Government will provide a further update on that power in due course. With that in mind, I recommend that the clause stand part of the Bill.

Angela Eagle Portrait Dame Angela Eagle
- Hansard - - - Excerpts

I have a few questions. The measure is sensible, but at the same time, it can be read as being quite sinister. Perhaps it depends on how the power will be used. The past is not filled with massive numbers of examples of the regulator falling out with the Treasury or the Bank of England, so the measure seems rather like a sledgehammer to crack a nut. The powers are to be used in exceptional circumstances, but those circumstances are not really defined; the Minister’s comment on that would be interesting.

If the measure is a sledgehammer to crack a nut, does it risk giving the impression that regulation in this country is not independent and can be overridden when that suits a Government, rather than when that is in the public interest? Might this compromise outsiders’ views of how our system is regulated? In other words, the cost-benefit analysis of whether the measure is an appropriate reaction might be in the balance. Will the Minister say a little more about how he perceives the power being used and what “exceptional circumstances” are?

We would still like to see what the intervention power that the Minister keeps talking about would actually look like. He has not come forward with the wording of it. Today, we will be halfway through the Committee proceedings on the Bill, and past the time when it may be relevant. Will he bring that wording back on Report, or will we see it while we are still in Committee?

Tulip Siddiq Portrait Tulip Siddiq
- Hansard - - - Excerpts

We support the powers granted to the Treasury in clause 27 to require the regulator to conduct reviews of existing rules. We think that is a proportionate and sensible approach. We agree that mechanisms should be available to allow Ministers to ask a regulator to think again about a rule that may not be working in the public interest. However, while it is important that regulators are held to account, does the Minister agree that the operational independence of regulators must be paramount? Does he therefore agree that, with the powers to direct rule making already included in the Bill, a so-called intervention power would be unnecessary and dangerous?

During the evidence session, the deputy governor of the Bank of England, Sir Jon Cunliffe, said that an “intervention power” risked undermining perceptions of the central bank’s 25-year-long independence. He warned that, in turn, it would undermine the global reputation of our financial services sector. Even though the Minister was there, I will quote him:

“That credibility of the institutional framework is very important to the competitiveness”––[Official Report, Financial Services and Markets Public Bill Committee, 19 October 2022; c. 39, Q76.]

of the UK. Martin Taylor, a former Bank of England regulator and chief executive of Barclays said that, while it would not necessarily turn us into “Argentina or Turkey overnight”, that would be the direction of travel if such a power were introduced. I ask the Minister once again, echoing what my hon. Friend the Member for Wallasey said: why does he believe that the powers in clause 27 are not sufficient, and why do the Government continue to ignore the advice of the Bank of England?

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

We have debated this matter under a number of clauses already. My commitment to table the draft wording of the proposed intervention power during this Committee remains. That remains the intention. I do not accept the characterisation of a sledgehammer and a nut. What we are doing in the whole of the Bill is giving vast new powers to the regulators that were previously held and exercised, with potential oversight and intervention, from Brussels. We are bringing that into the UK rulebook. The proposed power here, and any proposed intervention power, is a proportionate response to the significant expansion in regulations of financial services, which touch and are capable of touching every aspect of human life in this country.

It is important that we give the Government of the day, subject to Parliament, that failsafe ability. It may one day even be the hon. Member for Hampstead and Kilburn who is exercising that power, and she may be grateful for the foresight of this Committee in providing that, with the caveat that this is clearly anchored in the public interest. That is a well-understood concept. I do not want to rehearse all the points that the Committee heard from witnesses, but it is the Government’s view that this power is necessary. To the extent that we seek to go forward with what is called the public interest intervention power, beyond merely directing regulators to look again at rules, we should discuss that again in the context of what the checks and balances on that would be.

Tulip Siddiq Portrait Tulip Siddiq
- Hansard - - - Excerpts

I am not sure, but I think the Minister was advocating for a general election; I am not putting words in his mouth. I understand what he is saying, but we asked the witnesses to come and give evidence for a reason, so he needs to respond to the concerns of those witnesses, who were clearly concerned about this intervention power. Those two key witnesses said they were worried about undermining the independence of the Bank of England. What is the Minister’s opinion about that?

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

The Treasury has consulted widely on the future regulatory framework. One of the key points made by all the industry participants, very few of whom were part of the witness sessions—although we did hear from two particular witnesses, we did not hear the same volume of responses as in past consultations—was that industry is firmly of the mind that this is proportionate and potentially required.

I will clarify a couple of things for the Committee, because these matters are often misunderstood. First, we have operationally independent regulators. That is absolutely right, and no one is seeking to interfere in the findings of any particular regulatory review with respect to an industry participant. Secondly, none of this speaks to the scope of the Monetary Policy Committee. Sometimes the debate is couched in terms of monetary policy independence. What we are actually talking about is the regulatory rulebook. There are large public policy considerations for the insurance industry, for example, and in relation to consumer duty matters, such as access to cash and consumer protection, which we will debate in later sittings. Those are all matters that the Government consider and will continue to consider, notwithstanding the evidence given in that witness session. That is the right, proportionate response.

I should clarify that the hon. Member for Hampstead and Kilburn will get her general election in due course, but I fear she will have some time to wait.

Question put and agreed to.

Clause 27 accordingly ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(Joy Morrissey.)

13:01
Adjourned till this day at Two o’clock.

Economic Crime and Corporate Transparency Bill (Fourth sitting)

Thursday 27th October 2022

(2 years ago)

Public Bill Committees
Read Full debate Read Hansard Text Read Debate Ministerial Extracts
The Committee consisted of the following Members:
Chairs: Mr Laurence Robertson, † Hannah Bardell, Julie Elliott, Sir Christopher Chope
† Anderson, Lee (Ashfield) (Con)
† Ansell, Caroline (Eastbourne) (Con)
† Byrne, Liam (Birmingham, Hodge Hill) (Lab)
† Crosbie, Virginia (Ynys Môn) (Con)
† Daly, James (Bury North) (Con)
Doyle-Price, Jackie (Thurrock) (Con)
† Hodge, Dame Margaret (Barking) (Lab)
† Huddleston, Nigel (Lord Commissioner of His Majesty's Treasury)
† Hughes, Eddie (Walsall North) (Con)
† Hunt, Jane (Loughborough) (Con)
Kinnock, Stephen (Aberavon) (Lab)
† Malhotra, Seema (Feltham and Heston) (Lab/Co-op)
† Morden, Jessica (Newport East) (Lab)
Newlands, Gavin (Paisley and Renfrewshire North) (SNP)
Stevenson, Jane (Wolverhampton North East) (Con)
† Thewliss, Alison (Glasgow Central) (SNP)
† Tugendhat, Tom (Minister for Security)
Kevin Maddison, Anne-Marie Griffiths, Committee Clerks
† attended the Committee
Witnesses
Angela Foyle, Chair of ICAEW’s Anti Money-Laundering Committee, Institute for Chartered Accountants England and Wales (ICAEW)
Mike Miller, Economic Crime Manager, Institute for Chartered Accountants England and Wales (ICAEW)
Peter Swabey, Director, Policy & Research, Chartered Governance Institute UK & Ireland
Catherine Belton, Journalist and author
Professor Jason Sharman, Professor of Politics, University of Cambridge
Public Bill Committee
Thursday 27 October 2022
(Afternoon)
[Hannah Bardell in the Chair]
Economic Crime and Corporate Transparency Bill
Examination of Witnesses
Angela Foyle and Mike Miller gave evidence.
14:00
None Portrait The Chair
- Hansard -

We will now hear oral evidence from Angela Foyle and Mike Miller from the Institute of Chartered Accountants in England and Wales. We have until 2.20 pm. Could the witnesses please introduce themselves for the record?

Angela Foyle: I am Angela Foyle. I am the head of risk management and economic crime at BDO Global, but I chair the economic crime sub-committee of the Institute of Chartered Accountants in England and Wales.

Mike Miller: My name is Mike Miller. I am the economic crime manager working within the Institute for Chartered Accountants in England and Wales.

None Portrait The Chair
- Hansard -

Thank you very much. I will first call Liam Byrne.

Liam Byrne Portrait Liam Byrne (Birmingham, Hodge Hill) (Lab)
- Hansard - - - Excerpts

Q 213 Thank you, Ms Bardell. Starting with you, Angela—thank you so much for coming to give evidence. First, what are the perceptions around the world of London, in particular, as a centre for money laundering? How serious a problem do people abroad think that we have here?

Angela Foyle: Publicly, it is stated that London is one of the key capitals of money, but that is partly because it is the largest financial centre in the world, so you will inevitably have dirty money flowing through. There is that view. It is something that the US, in particular, has made comment on at times. On the other hand, when talking to Europeans, we are also recognised as being at the forefront of introducing legislation in relation to money laundering regulations and enforcing them, to some extent, compared with other jurisdictions. It is a bit of a mixed bag, depending on who you are talking to and in what context.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Q You used the word inevitable in your answer. Is it inevitable that there will be lots of dirty money on the scale we have flying through London today?

Angela Foyle: I think what I meant by that is that it is inevitable that you will have some illicit finance where there are significant movements of finance. I am not saying it is good—I think it is wrong. I think we should stop it to the greatest extent that we can, but where do you hide a tree? It would be in a wood. So, where are you going to hide dirty money? It is going to be somewhere where an awful lot of money is flowing through.

It is not that I think it is a positive thing at all; I think it is very negative. I actually spend most of my working life trying to see how we can prevent accountants and others—I have forgotten the word I mean—unknowingly getting involved with it. It is a problem for London that we have to be acutely conscious of, and therefore we have a greater responsibility, in many ways.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Thank you—that is well put. Mike, what is your view on that?

Mike Miller: I agree with Angela. London is such a large financial centre and there is such a volume of money moving through it that there inevitably will be, as Angela said, some money that is not well sourced and not well processed. That being said, we work very hard, particularly at ICAEW, to try to clamp down on it. Illicit finance and illicit transfer of funds affect the profession particularly badly. They put people in a very difficult position, both reputationally and legally. You will find the vast majority of chartered accountants and other professionals do not want to engage in unprofessional and malicious practice when it comes to that finance. We work very proactively with Committees, Parliament and across Government to make our representations about how this can be more effectively countered.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Q Angela, we heard evidence on Tuesday from UK Finance that it was concerned that the verification regime proposed in the Bill is much weaker than the regime used across the AML regulated sector. What is your view on that? Are you worried that a two-tier verification regime is emerging here?

Angela Foyle: It is interesting, because we would probably put it the other way around. The standard—sorry, I beg your pardon, I was thinking about the earlier Bill. Yes, this Bill has two forms of verification, by either Companies House or authorised corporate service providers. It does not appear to have the wording that would be in the money laundering regulations, which requires there to be reasonable verification measures using a risk-based approach. I think those kinds of words always assist, so that you actually have to assess and understand the risk surrounding the people you are trying to verify first, and therefore, if necessary, enhance your level of verification.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Q Do you think that is a weakness in the Bill that we should think about strengthening?

Angela Foyle: Around verification, yes. There is a spectrum, however. Requiring that someone has to verify, that is, prove, that that is true goes beyond what is possible for an accountant. I can look at documents. I can take careful measures to ensure that those documents are, or appear to be, valid, but I cannot actually ever say with 100% certainty that x is x; I can simply say that I have done the following work and, based on that, these are reasonable measures on the risk basis. I certainly think that is an area that could be, at the very least, clarified as to the standards expected to ensure that they are consistent.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Q That is very useful. Finally, the folks from Lloyds bank, and others, described how easy it is to move money through a network of banks and then consolidate it into a final bank, from which bad people may take their money out. We were worried about the way in which proxies in particular could be used by bad people to help with this kind of mechanism. In the Bill, we have a definition of “person with significant control”, which is someone with about 25%. Is that too high?

Angela Foyle: It is based on the Financial Action Task Force standards on beneficial ownership, which looks to people who own 25% or more, in some cases, or more than 25% in others. It is one of those challenging issues because, in relation to things such as proxies, often it is not the about the levels that a person owns, it is the fact that x purports to be the person who holds it, when actually they actually do so on behalf on y, which can be very difficult to track through.

Many people look below 25% in any event just to make sure. Particularly with sanctions, they will have a look there. But 25% is a global norm and changing it might cause other challenges. This is the question: are you satisfied that you understand who the people that you are dealing with are, and who is behind them, at all times? It is not necessarily a question of whether it should be 20%, 5% or 25%. It is a hard one for me to answer because I work with 25%, but I will generally have a good look around to see what else there is.

Alison Thewliss Portrait Alison Thewliss (Glasgow Central) (SNP)
- Hansard - - - Excerpts

Q In your evidence to the Committee, you said that you wanted Ministers to amend the legislation to ensure that accountancy firms are in the scope for indirect information-sharing provisions. Will you tell us a bit more about why that is important?

Mike Miller: Indirect information provision essentially relates to a third-party database which would allow the easier sharing of information between financial firms. The ones that are already mentioned include banks, crypto exchanges and various different entities that could be privy to malicious financial movements, essentially. The accountancy sector has not been included in that, so for the purposes of a lot of the work that we are doing about the open sharing of information with law enforcement, between bodies, between other firms, it would be helpful for the streamlined moving of information. It would certainly help accountancy firms to identify more quickly, and thus reduce the likelihood of, any bad transactions taking place. An accountancy firm could avoid getting embroiled in things it does not wish to get embroiled in if it had pre-emptive access to any intelligence—that may have been discovered by a bank, for example, looking in more detail at specific financial transactions than accountancy firms tend to—that indicated that it should not be doing business with particular entities.

Alison Thewliss Portrait Alison Thewliss
- Hansard - - - Excerpts

Q Thank you, that is useful. As one of the organisations under the OPBAS umbrella, how do you feel that is going with anti-money laundering supervision because there has been some criticism of that regime and its efficacy? Looking at the 2019-20 figures, I understand that you cancelled 10 memberships and issued 39 fines totalling £117,000 to members. What does that stand at now, and is it an effective deterrent?

Mike Miller: I do not have the up-to-date figure with me today, but I can come back to the Committee with that in writing. Generally, in OPBAS, we are obviously very supportive on the need to have professional bodies for oversight of regulation for anti-money laundering. There is obviously a Treasury consultation going on into the potential restructuring of OPBAS. We have been working closely with it to ensure that our members are represented, but also so that it will be the most effective oversight that it can be.

ICAEW is the largest supervisory body in that space. We are very proactive in taking a risk-based approach. We cover a lot of firms, and it is necessary that a lot of those inspections are carried out based on where we assume there is a higher level of risk of illicit financial transactions. Whether that should be changed is obviously something that we will come back to in the consultation.

We have been speaking regularly to Treasury and other groups. They are collecting intelligence to try to determine, I think, some concrete proposals before they put it out to consultation, but we are very supportive of OPBAS. We continue to work closely with it and have a strong supervisory body in place for the PBSs.

James Daly Portrait James Daly (Bury North) (Con)
- Hansard - - - Excerpts

Q Under the Bill exemptions from the main money-laundering offences would apply in two sets of circumstances. One is when a regulated business ends a business relationship with a client or customer and hands over property worth less than £1,000 for that purpose. The second is where a regulated business is dealing with property for a client or customer and prevents access to property of equivalent worth. Do you have any view on those exemptions and how they would potentially affect your profession?

Angela Foyle: I am not so sure the first one will affect us, at £1,000. The second one may facilitate certain activities for our insolvency practitioners, particularly where they are appointed in circumstances where they know that there has been some form of fraud—be that tax fraud or what is often called “fresh air invoicing” or invoice discounting fraud, where there is a set amount of money that is known to be tainted—because, currently, all of the assets of the insolvent entity can often be tainted, and defence against money laundering applications have to be made for each and every transaction done. By having that, they will be able to ringfence certain amounts that they know to be tainted—they would obviously do investigations to ensure that they have got that amount correct—and then deal more quickly with creditors and others with the remainder of the funds. In that sense, we certainly welcome that amendment. It is one that we raised with the Home Office, alongside the banks and, I believe, the Prison Service may have wanted it as well.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q Time might mean that you will be not be able to answer this question as fully as you might wish. However, on where we are now, and where the Bill will take us, the general view that we have heard from witnesses is that it is good—maybe as a starting point to go forward from. In a few sentences, will you explain how you think the Bill will affect your profession, for good or for bad?

Angela Foyle: There are a number of areas in which it will affect us. We are very much in favour of the changes to Companies House, I must say, and of giving additional powers to it. We are incredibly supportive of that.

One example that we can give relates particularly to the misuse of registered offices. All the firms have found instances of people effectively putting their address as offices of accounting firms, presumably to give them credibility. In some cases, that is linked to using names similar to either regulated or existing lawful businesses. Again, that is clearly intended to facilitate fraud. Currently, it can take months to get people off that address, but with the additional powers, we are hoping that that can be done much quicker.

Similarly, with other misuses, such as the inability to contact businesses, there is also the identification of directors to ensure that you are dealing with the people that you think you are. Even if those perhaps could be strengthened in some ways, I think there is a lot that is positive in the Bill. It is a staging post, but it is a really important one.

Mike Miller: I agree with Angela, particularly on the point about Companies House. We are definitely behind the reasons for and the principles of the Bill; we are very supportive of all that it seeks to do. We have been saying for quite a while that some of these measures are overdue, particularly those on Companies House, as Angela mentioned. We have proposed some tweaks for a few areas, particularly around verification, as we have touched on before. There is going to be a two-tier verification in the sense that Companies House will be responsible in some way or another for the verification of those that are registered in the UK. For overseas entities, that is a bit more of a challenge, because they require legal verification and we currently think that the legislation is such that it does not really allow a reputable business to take on the level of risk of a new client unless they have a particularly established relationship.

We have made some recommendations to our members that they need to exercise extreme caution taking on new clients solely for the purpose of verification. That is so the system works; it is not so that they avoid it. It is so that it does not, first, stop people being able to do business in the UK when they rightly should be able to, and secondly, so that if the larger, more reputable firms do not offer that service, then it becomes something that is picked up by those that we may not necessarily want to offer that service.

We have also recommended a couple of areas where we think it could be strengthened, particularly around notifying Companies House of a change of auditors, so there is a two-pronged approach. That is so that companies themselves, for example Angela’s firm, knows that they have been assigned as an auditor, to make sure that is correct and they audit the company, and for Companies House to make sure that a company is audited as it should be. We think that would reduce the likelihood of discrepancies coming in, going forward. However, overall, we are generally supportive.

James Daly Portrait James Daly
- Hansard - - - Excerpts

That is very helpful. Thank you.

Baroness Hodge of Barking Portrait Dame Margaret Hodge (Barking) (Lab)
- Hansard - - - Excerpts

Q ICAEW represents what proportion of the accountancy profession, do you reckon?

Angela Foyle: I do not know the proportion, but there are about a hundred and something thousand members.

Mike Miller: Yes, about 110,000 members. I am not sure of the proportion.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q You do not know the proportion, but the truth is that there will be people who are financial advisers and accountants who are not members. You have a policing role, but if they are not your members, they are not policed.

Angela Foyle: Not by the ICAEW, but there are other institutes out there.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q Yes, but you are the big one.

Angela Foyle: We are the bigger one, but they may be by someone else. There are also people who are not regulated by any professional body who can call themselves accountants as well.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q Quite. We know that most accountants are brilliant people who make sure we do not make mistakes when we fill in our tax return and all that sort of stuff. However, we know from all the leaks that there are a lot of bad apples in the accountancy world.

There are two things I wanted to ask. One is about the current system of regulation. You as professionals play a role in the system. What changes would you make to ensure the current regulation encompasses all those who call themselves financial advisers or accountants? Secondly, how good are you at your policing role? You obviously have a lobbying role and looking at both your CVs, you are on the lobbying side to make sure regulation fits what your profession wants. I am much more concerned about the policing role. Can you tell me how many people in the last year have been suspended, or whatever it is you do to them, if they have been found guilty of engaging in, facilitating or colluding with economic crime or money laundering or anything like that?

Angela Foyle: I do not think we have the numbers for the people this year.

Mike Miller: We do not have the numbers up to date for this year.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q I had them, but unfortunately I have lost them. I think it is about 10 or 15.

None Portrait The Chair
- Hansard -

I am going to have to curb this and move on very briefly to Tom because we have to finish.

Tom Tugendhat Portrait The Minister for Security (Tom Tugendhat)
- Hansard - - - Excerpts

Q This is a very brief question. What difference will this make to the solicitors’ profession as well? You will have noticed that there is not only a control of accountancy but an increase in penalty to solicitors’ regulations.

Angela Foyle: Neither of us is part of the Law Society so we cannot speak for them, but clearly, that was something that was thought to be necessary as a deterrent. Although I expect most of them are likely to be regulated by the Solicitors Regulation Authority for money laundering, rather than the Law Society. However, it must have been a gap that was thought to be necessary to fill. I really do not know, otherwise; I am speculating.

None Portrait The Chair
- Hansard -

Thank you very much. That brings us to the end of the time allotted for the Committee to ask questions. I thank our witnesses on behalf of the Committee for their evidence.

James Daly Portrait James Daly
- Hansard - - - Excerpts

On a point of order, Ms Bardell. As a result of Mr Tugendhat’s question, I had better declare an interest: I am a practising solicitor.

None Portrait The Chair
- Hansard -

Thank you very much. That will be put on the record.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Can I ask something wicked? Can the witnesses provide written answers to my questions?

None Portrait The Chair
- Hansard -

They can indeed.

Mike Miller: I am very happy to.

Angela Foyle: Could we possibly have your question in writing, just to remind us?

None Portrait The Chair
- Hansard -

We will arrange for the questions to be delivered to you in a written format and additionally distributed.

Examination of Witness

Peter Swabey gave evidence.

14:21
None Portrait The Chair
- Hansard -

We will now hear oral evidence from Peter Swabey of the Chartered Governance Institute UK & Ireland. I hope I have pronounced your name correctly.

Peter Swabey: It is pronounced “sway-bee”, but that is fine. I am used to all sorts of things.

None Portrait The Chair
- Hansard -

Q Thank you very much. We have until 2.50 pm for Members to ask questions. Could the witness please introduce themselves for the record?

Peter Swabey: I am Peter Swabey, and I am the policy and research director at the Chartered Governance Institute UK & Ireland. The institute is the professional body for people who work in governance, which includes company secretaries and governance professionals in all sectors.

Seema Malhotra Portrait Seema Malhotra (Feltham and Heston) (Lab/Co-op)
- Hansard - - - Excerpts

Q Thank you very much, Mr Swabey, for coming to give evidence. Could you say a little about what you do in relation to issues around economic crime? What is the view of your members about what more needs to be done and whether there is enough going on in the Bill? Do you have two or three things that you think need to be improved?

Peter Swabey: The institute and its members look at governance. Effectively, they are the people who are responsible for filing documents at Companies House and for advising boards on good governance. In that sense, they are perhaps less directly involved in economic crime than some of the other bodies you are hearing from.

From our perspective, the Bill is a really good effort. While I was sitting at the back, somebody said that it was regarded as a starter for 10. I think the Bill is a really good start on a lot of things that a lot of people have been thinking that Companies House should have been doing all this time—indeed, many people thought Companies House was doing it all this time, but it has not had the powers to do so. From that perspective, giving Companies House some of those powers is a really big step forward. There are a few things that I would perhaps have done differently, but that is in the realm of detail.

Seema Malhotra Portrait Seema Malhotra
- Hansard - - - Excerpts

Q What about gaps?

Peter Swabey: The big gap, from my perspective, is around the role of the company secretary or governance professional in the Bill. We were just hearing a bit about the arrangements for who is allowed to deliver documents for the authorised corporate services professionals. In most companies, it would be the company secretary who takes responsibility and ownership for doing that. That is something that we would like to see more specifically included in the Bill. The Government’s intention may be to include that in the regulations that the Secretary of State has the power to make. That is fine—that is regulations—but I would much rather see it in the Bill and, ultimately, the Act.

Seema Malhotra Portrait Seema Malhotra
- Hansard - - - Excerpts

Q To be a bit more specific, what more do you suggest should be in the Bill?

Peter Swabey: For me, it should reference the role of the company secretary. I have a slightly wider issue than that. The Companies Act 2006 got rid of the requirement for a company secretary in all companies. That was deregulatory—that was fine—but we now rely much more on the reporting that companies do and the filings that companies make, so I believe there should be a requirement for a company secretary, not just in public companies, as there is now, but in larger private companies that also have to meet some of these requirements.

Alison Thewliss Portrait Alison Thewliss
- Hansard - - - Excerpts

Q We heard earlier about some of the deficiencies in the way that documents are delivered and uploaded to the Companies House website, and how they can be used thereafter. Are there practical improvements that could be made to improve that situation, both at your end of the process, in the filing, and for the use of those documents at the other end of the process?

Peter Swabey: Yes, I think there are. We have regular engagement with Companies House and that is one of the things that it is seeking to tackle already, but will also seek to tackle through the powers and resources that it will hopefully get as a result of the Bill. It would great if everything that has to be filed at Companies House can be filed electronically. There are still a number of things that cannot be. Again, that may be changed as a result of the changes that Companies House are making to their system but, as we stand at the moment, there are things that cannot be filed electronically.

In terms of use, there is a question that companies sometimes get feedback on from shareholders, which is on the availability of information, particularly about retail shareholders, and particularly for those companies that have large registers of members. Individuals on this Committee, or me, or whoever—their name and address might be at Companies House in respect of a holding of 100 shares in a company. If it is a big public company with millions and millions of shares, that is probably not that helpful. There are people who buy copies of the register for commercial purposes. It would be quite useful to tighten that up.

Alison Thewliss Portrait Alison Thewliss
- Hansard - - - Excerpts

Q We have heard an awful lot about deficiencies in the register in terms of the information that is on there and the practical difficulties that that causes for companies who wish to interrogate the information for their own due diligence. Is that an issue you have come across?

Peter Swabey: Yes, I think it is. It is an issue in a couple of ways. We just heard about the challenges in correcting deficient information. There are a number of plcs that have reported that their registered office address has been used for companies of whom they have never heard. If you are a plc with a large number of subsidiary companies, that could quite easily be overlooked by people. As somebody said in the last session, that is then used to give credibility to the potentially fraudulent company that is being set up. Being able to fix that more quickly is certainly an advantage.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q One of the things we have talked about with every witness—you will probably give a similar answer, Mr Swabey—is that we all want to see Companies House resourced to be able to carry out the requirements in the Bill. One witness this morning made reference to the sheer volume of companies and legal entities that are registered at Companies House on a daily basis. If one of the consequences of the Bill is that registration at Companies House takes longer because people have to go through the regulations and comply with other duties, is there any consequence to that?

Peter Swabey: I think it makes it a little more difficult for some people. I am a company secretary, so I would argue that you simply have to plan it all a bit better, and perhaps think about some of that a little more in advance. It will mean that some corporate transactions that you can currently deal with very quickly by simply having a meeting in a room and agreeing that so-and-so and so-and-so are the new directors will now have to go through a process. We are all hoping that, as promised, Companies House will manage the verification process for new directors expeditiously so that that will not hold things up unduly, but it is an additional factor to bear in mind.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q In layman’s terms, and very briefly, if I want to register a legal entity and I employ you or somebody else to do that, what information is submitted to Companies House?

Peter Swabey: You have to name the directors. You have to give some sort of evidence that the directors are real people who you know, so some piece of personal information about them. That might be their eye colour or their national insurance number. Nobody actually checks that, by the way. You just have to fill the box in. You have to have a registered address for the company and a few other details, but it is a relatively simple process.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q So such a process—light-touch regulation at its finest—is certainly open to fraudulent activities.

Peter Swabey: I think it is fair to say that at the moment it is nothing like as secure as any of us would like it to be, and the Bill is a big step forward in tightening that up. I would still like to see it go further in some ways.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q It is the beneficial ownership that is revealed to Companies House, not necessarily even all the directors, as I understand it. The way you are talking, you obviously deal with big companies. The whole purpose, which I think we all share across the room, is that we want SMEs and the growth of new companies. The idea that every SME will have a company secretary is not really a viable alternative. That means it is really important that we can have faith in the company service providers, who are the people who check the data. Given the way the Bill is constructed, do you think you would have such faith, in particular given all we know from the Panama leaks onwards?

Peter Swabey: It is really important to make sure that the hoops through which those authorised company service providers go before they become authorised are significant, to make sure that we can have confidence in that.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q What would that entail?

Peter Swabey: That would entail detailed verification of who people were, of who the ownership was and how that was structured and, effectively, Companies House having a bar to doing that. Where I would take issue slightly with the premise of your question is when you talked about SMEs not needing or not having space for a company secretary; most of them have an accountant and all sorts of other things. It does not have to be a full-time role; someone can be doing it part time, but what is important is that someone who knows what they are doing is looking after those issues.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q Do you know how company service providers are regulated and supervised?

Peter Swabey: No, it is not something that our members—

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q They are supposedly regulated and supervised by HMRC. Previous witnesses talked about OPBAS, which in its most recent report said that 81% of those supervisory bodies did not have a proper risk-based approach to ensure that those people were lawyers, accountants, bankers or whatever, that they were legitimate people not colluding in or facilitating economic crime. What do you have to say about all that? Basically, supervision is in a mess. HMRC does nothing to supervise company service providers. What is your view on that?

Peter Swabey: I cannot help you much with that, because we are not a supervisory body in that sense.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q You give advice on what makes good supervision.

Peter Swabey: We give advice on what is good governance for organisations, not on the supervisory role.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Q I want to pursue that point for a moment. In the interests of good governance, would it not make sense to strengthen some of the obligations on directors to include, for example, a duty to take steps to prevent corruption in their organisations? We have similar measures on corruption; we do not have similar measures on economic crime and fraud.

Peter Swabey: You have the directors’ duties under section 171 of the Companies Act and so on. Those are there, but it is difficult to identify exactly how those directors’ duties can be pursued against any defaulting director. For me, that is one of the challenges. Were you to introduce something extra on that, that would be a solution, but again you would need to look at how that could actually be enforced.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q It is nice to see you, Mr Swabey. May I ask specifically about the governance aspect, which is your area? Accountability is fundamental to governance. You cannot hold people to account for things that they are not responsible for, or likewise the reverse. Will you touch a little on how you see that improving—not just the accountability in financial transparency, and all the anti-money laundering and various other aspects we have spoken about, but the ability to hold companies to account for other governance areas, whether those are corporate social responsibility, clean-up, environmental or many others?

Peter Swabey: The Bill deals with some very specific issues, which are not necessarily those. I think that the Bill would need to be broadened significantly were it going to get into things like sustainability, corporate social responsibility and so on.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q You do not think that cleaning up Companies House, making people accountable, and understanding who they are and who knows what are important for governance?

Peter Swabey: No, I think that is very important for governance. What I was saying was that you were then talking about some of the other issues, such as corporate social responsibility, which are probably outwith the scope of the Bill as it stands.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q I do not agree; let me push back on that. One of the things we have a problem with in the community that I am lucky enough to represent is dumping waste—fly-tipping—and it so happens that occasionally, it is done by companies that then disappear. I think the Bill helps to address that. Do you not?

Peter Swabey: Absolutely, yes.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q So it does have some environmental effect.

Peter Swabey: Yes, you are right. I had not thought of that aspect of it—I was thinking in terms of the reporting that companies do—but yes, in terms of tracking down defaulting companies, I think it will help you.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q Would you agree, then, that it may also support other areas of governance: the ability to oversee, for example, different areas of employment, human trafficking or whatever it might be, and to go through companies that set up and disappear far too quickly?

Peter Swabey: Yes, absolutely. Removing the ability for companies to go bust one day and reappear the next with a very similar name and very similar directors, but without all those tedious debts that they used to have, is one of the really important issues.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Exactly—phoenixing.

Peter Swabey: I think that is really important.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q I am very glad you are supportive of that. I think this makes a huge difference; as you rightly say, it is one step on the journey, but it is still a huge difference from where we are.

I also wondered if you could talk a little bit about whether you think it is going to help with economic crime. Clearly, although I am not a BEIS Minister, one of my responsibilities is fraud. The presence and disappearance of corporate entities is, I am afraid, something that has caused more than its fair share of fraud. How do you think the Bill might be able to help with that?

Peter Swabey: I think the Bill will help with that by making it possible to have greater confidence in the directors who are responsible for those companies actually being real people. We were talking a little while ago about the ease with which you can set up a company, and the limited verification of directors that goes on. We have a verification process in the Bill that will help to ensure that those people are actually the people you believe them to be, and that there is an address where you can get hold of them and, particularly, where the forces of law enforcement can get hold of them should they need to. That is a real strength.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

I am very grateful, not only for your evidence today, but for the work you do and the oversight you bring. It does make a huge difference, and I am very grateful indeed for it. Thank you.

None Portrait The Chair
- Hansard -

Thank you very much. If there are no further questions from Members, we will thank the witness for his evidence and move on to the next panel. Peter, thank you very much for your time; we greatly appreciate it.

I am going to suspend the sitting, because we have a little bit of time before the next evidence session, and the witness is not in the waiting room yet because she is giving evidence via Zoom.

14:38
Sitting suspended.
Examination of Witness
Catherine Belton gave evidence.
14:41
None Portrait The Chair
- Hansard -

I restart the sitting with our sixth panel . We will now hear oral evidence from Catherine Belton, journalist and author. Catherine is appearing via Zoom. We have until 3.10 pm. Catherine, could you please introduce yourself for the record?

Catherine Belton: Hi, I am Catherine Belton, author of “Putin’s People”. I am a reporter with The Washington Post.

Seema Malhotra Portrait Seema Malhotra
- Hansard - - - Excerpts

Q Thank you very much, Ms Belton, for joining us to give evidence today, and thank you for all you do as well. In terms of the scale of economic crime and how much needs to happen nationally and internationally, what gaps do you see in the legislation as it currently stands that stop the UK from being able to tackle economic crime on the scale that we need to?

Catherine Belton: There is a very simple answer to this, though I should basically preface all my answers by saying that I am not an expert on the Bill like some of my colleagues, such as Oliver Bullough. I have not studied it deeply, but what I can speak to is the urgency of these reforms, because of the threat posed to our national security. There is also a dire need to push through the anti-SLAPP legislation.

All these deep-pocketed oligarchs are essentially taking advantage of our system and are able to outspend not just journalists but financial watchdogs acting in the public interest. They are outspent and intimidated out of pursuing any real investigation into financial misconduct. They know from the outset that they may lose.

You only have to look at the example of the Serious Fraud Office and its battle against ENRC, which was once listed on the London stock exchange, then delisted and owned by a trio of Kazakh fraudsters essentially. The amount they spent annually on legal cases in the UK was £89 million, which is over the annual budget of the Serious Fraud Office. Though the Bill is of dire importance, without greater spending and funding for our public watchdogs—the National Crime Agency, Serious Fraud Office and other entities—we are going to be stymied from the get-go.

Alison Thewliss Portrait Alison Thewliss
- Hansard - - - Excerpts

Q Thank you very much, Catherine. Could you tell us a bit more about why the UK has become the destination of choice for people wishing to use corporate structures for money laundering and other purposes? Could you tell us about the impact that has internationally?

Catherine Belton: The UK, like many other countries, has welcomed capital from places such as Russia with open arms for the past 20 years. It is certainly a place that Russian oligarchs have flocked to, not only because they want to be part of the UK establishment but because they have clearly taken advantage of our lax legislation and regulation compared with the US, for instance. If you are listing a company in the US you face the Sarbanes-Oxley regulations, and you have committed a crime if you are found to have lied on your financial disclosures. Here, there seem to be so many loopholes; people can get away with everything.

We only have to look at our Companies House institution to see that there is very little scrutiny of filings that people are making. We have all heard the obvious examples of people not disclosing anything. I think you are a great expert in the use of limited liability partnerships by Russian money launderers. UK LLPs have seen tens of billions of dollars’ worth of illicit Russian cash move through them over the last decade or so.

Most of those money laundering schemes have been overseen by the Federal Security Service of the Russian Federation. It has a money laundering department called Department K, which has overseen all those schemes and has had an involvement in each and every one of them. I am told by security officials in Moldova—where one scheme used LLPs to move tens of billions of dollars of cash into the UK—that essentially the schemes are used not just by Russians seeking to move money to evade customs and tax, but by the Russian Federal Security Service itself, because it sees the greater flows of cash as cover for it to move its strategic cash into our jurisdiction.

I must again point to the need for SLAPP legislation and ask whether that could, or should, be attached to the economic crime Bill as it stands. If we do not enable journalists and financial watchdogs to look at those entities without fear of getting crushed by enormous lawsuits that will cost more than anyone’s budget allows, then we are going to be open to this type of abuse of our system forever. It was only July when Dominic Raab, the Justice Secretary, finally and wonderfully—it seemed like a miracle at the time—forwarded that anti-SLAPP legislation. It was going to allow for an early dismissal mechanism for cases that were clearly an abuse of the law, and aimed at intimidating journalists and financial watchdogs out of reporting matters of public interest—whether financial misconduct or something else. There has been a great deal of turmoil in Government since then, but we are seeing that SLAPP cases have very much not gone away.

The esteemed Chatham House think-tank recently had to remove the mere mention of a Tory donor, who had previously been convicted of money laundering, from a report on the abuses of the UK system by kleptocrats. The past of our Tory donors is something that we should know about, yet Chatham House had to erase its mention of that donor from its report. Staff looked into how much it was going to cost to defend, even though it was clearly public interest reporting. There was not really much to dispute about it, but they found it was going to cost them £500,000 before the case even got to trial, which means there is something so deeply wrong with our system, and we cannot even begin to combat any of these issues without having these anti-SLAPP measures in place. That is not just for journalists but for the Serious Fraud Office and for other public interest watchdogs.

Alison Thewliss Portrait Alison Thewliss
- Hansard - - - Excerpts

Q Thank you; that is very helpful. I just wanted to ask about something else. Bill Browder had suggested a sort of “adverse costs” amendment, to prevent law enforcement companies from not being able to afford to take a case against these people. Would you support that?

Catherine Belton: Yes, for sure. Obviously, the companies pursuing these abusive cases should face having to carry the full cost of the case. I have a colleague at the Foreign Policy Centre, Susan Coughtrie, and she and Charlie Holt of English PEN have been working on a new Bill for this SLAPP reform, and I very much recommend that you speak to them as well. That Bill would provide even tougher requirements for cases to really show a likelihood of success.

What the Ministry of Justice proposed was like a three-step set of criteria for judges deciding whether a SLAPP case is a SLAPP case, and whether it should be dismissed before the costs racked up too highly. One of those criteria was whether the case being pursued had a realistic chance of success and it is very clear that this type of criterion needs to be toughened up. I certainly recommend that you speak to Susan Coughtrie at the Foreign Policy Centre about ways in which to do that.

However, I guess that my question to you would be: “Do you think there is a significant possibility that the anti-SLAPP Bill could be attached to the Economic Crime Bill? Is that something that will this speed up?” It is so vitally needed—more than ever. I mean, it is completely—

None Portrait The Chair
- Hansard -

Catherine, I am really sorry to interrupt you—

Alison Thewliss Portrait Alison Thewliss
- Hansard - - - Excerpts

I think my colleagues and I are interested in hearing this.

None Portrait The Chair
- Hansard -

It is a very important question, but unfortunately we have to stick to Members asking witnesses questions. However, I am sure that you can put those questions to our esteemed Members in other forums.

I will move on to James Daly now, because there are a couple of other Members who are keen to ask questions.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q Catherine, thank you very much for giving evidence; what you have said is very helpful. You have investigated these matters and looked into them. You have talked about Companies House, which is a central part of this legislation, and we have talked with other witnesses about what needs to be done there.

However, I just wanted to ask about money laundering. To make a very straightforward point, you obviously need a bank. If you have got a fake financial institution, or a legal entity set up for criminal purposes, you need a means of transferring money, either out of that body or into it. Could you talk about any thoughts or experience that you have, including regarding anything that you have investigated, that touches on that point and on what we can perhaps do to address it?

Catherine Belton: I think it goes back to this issue of LLPs and how these limited liability partnerships have really become, over the last two decades, the vehicle of choice for Russian money laundering schemes in particular—at least the ones that I have studied.

There was the “Moldovan laundromat”, which used LLPs based in the UK, including in Scotland, to move $14 billion out of Russia in illicit cash in the space of four years. That was part of a much bigger process through Danske Bank; I think the total volume of illicit Russian cash coming through Danske Bank was in the realm of $200 billion in just over a decade. That is obviously enormous amounts of cash.

However, it just goes down to the weakness of LLPs and the system that we have created, in which you can have companies established that do not even need to have any real business in the UK; they do not pay taxes here and therefore they did not have to file any accounts. They were not really having to file any beneficial ownership, either. That really means that there has been a huge gap in our legislation. Obviously, the Companies House reform will hopefully provide for more disclosure of beneficial ownership, but there are still so many ways for people to get around it, because Companies House really does not have proper funding to check whether beneficial ownership is being reported properly.

Obviously, the banking system is now under much greater pressure to investigate the source of funds, but while the banking system has become a much more complicated place for people to move illicit money through, the same demands are not placed on hedge funds or private equity funds. There are much less stringent requirements on those types of entities to disclose who their clients are and where the money is coming from. We only have to look at who the major backers of Brexit were. Hedge funds and private equity funds were major donors during the Brexit referendum, and we really had no clue where they were getting the money from.

None Portrait The Chair
- Hansard -

Catherine, we really want to hear from you and make sure that all our other members get to ask questions. We have two other members after James who want to ask questions, so please keep your responses as brief as possible, with all the information that is possible to get across.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q On top of all the very important points that you have made, I think one of the things that I am left with from your evidence, Catherine, is that we have to ensure that the information-sharing links between Companies House and financial institutions are strengthened. Companies House was described as being a passive organisation at the moment, but what you are saying is that that has to change and there has to be a close link with financial institutions, so that these relationships are attacked throughout the criminal justice system. Am I right?

Catherine Belton: Yes, that is exactly right.

None Portrait The Chair
- Hansard -

Thank you very much.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Q Catherine, I think I speak for all of us in saluting you for the courage you have shown in revealing what you have revealed. How important was it to President Putin that people around him—his friends and allies—were able to move money so easily out of Russia through UK corporate structures?

Catherine Belton: I think this has become a key way in which the Putin regime is able to extend its soft power and influence and undermine our democracies. That is very clear, because you can have vast flows of pretty much untraceable money, especially in the case of LLPs. Once it goes through a UK LLP, no one has any clue where any of that cash has gone. Vladimir Putin believes that the weakness of the west lies in our incessant drive for profits and the belief that the more Russian cash there is in the UK, the more Russia will have to follow our corporate governance standards.

Unfortunately, there has been a great lack of corporate governance standards, which has allowed our system to be corrupted. It has really laid bare how powerless some of our oversight bodies and enforcement agencies are. You only have to look at the National Crime Agency’s investigation into the source of the donation that Arron Banks gave to the Brexit campaign to see just how feeble our institutions are, at a time when we really need to be empowering them. When the NCA had to look for the source of the £8 million, it could not go any further than the Isle of Man company co-owned by Arron Banks. We do not know where the money came from.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Q Let me just crystallise this. Are you saying that allies of President Putin used UK corporate structures to move money out of Russia?

Catherine Belton: Yes, I am, of course. Obviously, that has an agenda, especially when the UK Parliament’s own Intelligence and Security Committee has pointed out the very close links between Russian business, the Russian state and Russian intelligence. Basically, Russian businesses very often have to act as arms of the Kremlin or follow Kremlin orders. Russian businessmen have to follow Kremlin orders in order to hold on to their wealth. It is not just money that is coming into our system and making everyone rich; it is money with an agenda, and that agenda can be to undermine our democracy.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Q I do not know whether you can see it, but the Bill is called the Economic Crime and Corporate Transparency Bill. How credible do you think corporate transparency in this country will be if we do not amend the Bill to include the protection of journalists like you, who have worked so hard and bravely to reveal the truth only to face legal action in English courts that sought to silence you?

Catherine Belton: I think it will be half-baked if it does not include that amendment. Obviously, it is great to have better laws, but when financial watchdogs, public oversight bodies and journalists are still unable to cast a light on some of the financial transactions of the super-rich, from fear of these crushing lawsuits, it means that you have a system that is only half working. Law enforcement relies, and has relied in the past, to a great degree on journalistic investigations, including for instance by the OCCRP; its reporting has led to some very important cases.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q I will ask one question, Catherine, because many have been asked. I join with others who have met you, or read your book, and are full of admiration for your courage. For those who have not, and do not know your story, will you quickly tell us what happened to you in relation to the SLAPPs, and why it is important that we try to tackle those in the Bill? You can do it very briefly; I am conscious of time.

Catherine Belton: I wrote a book called “Putin’s People”, which was about Putin’s rise to power, the continued role of the KGB and how Russia was using oligarchs—Russian businessmen—to further Russian influence in the world. I was writing precisely about how many of the oligarchs, such as Roman Abramovich, were essentially forced to act as arms of the Kremlin, because otherwise their wealth could be jeopardised. Putin’s hold on power was such that anybody who did not obey his orders could face jail or the seizure of their companies.

Abramovich was very upset when I suggested in the book, quoting three former associates, that he had acquired Chelsea football club on Putin’s orders, in order to acquire soft power and influence in the UK. That, I believe, was public interest reporting. The allegation had been put to his spokesperson, and the response was in the book. He announced that he was suing me personally and HarperCollins—a statement that was swiftly followed by lawsuits from three other Russian billionaires, and then one from the Kremlin oil company Rosneft. The cases were very difficult to grapple with, because there were so many of them all at the same time.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q How many were there altogether?

Catherine Belton: Five cases. It cost my publisher £1.5 million to deal with the cases, and they got only to the preliminary hearing stage before they were either settled or withdrawn. Rosneft’s case had to be withdrawn completely because there was no basis for any of its claims. The judge found that one of Abramovich’s claims was completely exaggerated, which allowed us to make minor amendments and avoid the enormous cost of having to continue to fight. Even though we believed that we had a very strong public interest case, our lawyers told us that it would have cost, at a minimum, £2.5 million to continue to defend the great deal of reporting that had gone into my book. It would have taken over a year. Abramovich had twice filed the exact same claim simultaneously in Australia as well, even though he had no business there, and therefore no reputation to protect.

Nineteen media rights organisations said that the cases against “Putin’s People” and my publisher, HarperCollins, bore all the hallmarks of a SLAPP case—that is, they were designed to intimidate the publisher, and they were abuse of process, particularly in the case of Abramovich.

Yes, the judge found that one of his claims was exaggerated, which, according to the Ministry of Justice’s proposal for the anti-SLAPP law, is one of the criteria under which SLAPP cases should be thrown out of court at an early stage. It introduced three criteria. One was that meanings were being inflated or exaggerated by a claimant; that was clearly the case for most of the oligarchs pursuing me. In Rosneft’s case, the judge found that what I had written about Rosneft, the Kremlin oil company, was not defamatory at all, yet my publisher had to spend hundreds of thousands of pounds just to get to the stage of a preliminary hearing, to get it thrown out of court. The proceedings demonstrated how many other UK media organisations had been censoring themselves because they did not want to deal with those enormously costly lawsuits—

None Portrait The Chair
- Hansard -

Catherine, I am really sorry, but I have two more people waiting to ask questions and there is only five minutes. I am so sorry to curtail you.

Seema Malhotra Portrait Seema Malhotra
- Hansard - - - Excerpts

Q I want to come back on how we can take practical steps to tackle this. I think you mentioned the Foreign Policy Centre. Are there more specific measures we could take in the Bill?

Catherine Belton: In July, the MOJ forwarded anti-SLAPP legislation. Unfortunately, because of the chaos of the last couple of months, that has not really gone anywhere. That legislation could be attached, as is, to the Economic Crime and Corporate Transparency Bill. The Bill as drafted slightly toughens the criteria for claimants; they have to prove that there is a significant likelihood that they have a real claim. You should speak to the FPC to weigh whether it is worth pursuing their draft laws as a better model, or whether it is enough to use the one already drafted by the MOJ. They had extensive consultations on that, but now it looks like all the momentum has gone. It is astonishing to me that this is not being pursued as a priority, given the situation we are in. It is absolutely vital that we shine light on individuals who may be operating on behalf of Putin to undermine western support for Ukraine, and to undermine our resolve this winter as we face enormous cost of living hikes. It is really important.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q Catherine, thank you very much for giving evidence to what must be your 20th or 30th Committee in the last 12 months. I am very grateful for the work you do. Could you tell us how you think the reforms to Companies House will improve oversight of listed finance? As you say, it is a building block.

Catherine Belton: You say that this is my 20th or 30th time giving evidence, but unfortunately, it is not. I have only spoken on SLAPPs before. I will leave the realm of Companies House reforms to people who are more expert on it than me.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Okay, thank you.

None Portrait The Chair
- Hansard -

If there are no further questions from Members, thank you very much, Catherine, for taking the time to speak to us.

Examination of Witness

Professor Jason Sharman gave evidence.

15:09
None Portrait The Chair
- Hansard -

Last but not least, we will hear oral evidence from Professor Jason Sharman, professor of politics at the University of Cambridge. We have until 3.30 pm. Professor Sharman, could you introduce yourself and give us your background for the record?

Professor Jason Sharman: My name is Jason Sharman and I am a professor of international relations at Cambridge University. I study international money laundering and corruption, often by impersonating would-be corrupt officials, money launderers and terrorist financiers.

Seema Malhotra Portrait Seema Malhotra
- Hansard - - - Excerpts

Q Thank you for coming to give evidence. Does the Bill go far enough in reducing the attractiveness of the UK as a destination for economic crime? You obviously have an international perspective, and I am keen to know whether you are seeing new behaviours that it would be useful for us to understand. Are the measures sufficient for tackling the challenge we face?

Professor Jason Sharman: I would not want to make the perfect the enemy of the good. The legislation is a positive step, but I watched the earlier testimony, and I agree with people who say that the proof of the pudding is in the enforcement. I study politics and international relations; I am less interested in the rules on the books and more interested in what difference they make, if any. If you are a criminal—a money launderer—you do not have to be very original. You do not have to try new things. Things that worked 10, 20 or 30 years ago still work today, so there is no need to change too much.

Seema Malhotra Portrait Seema Malhotra
- Hansard - - - Excerpts

Q On the attractiveness of the UK, you have mentioned enforcement, but from your research in this area, what would you highlight as being the weakest points in enforcement?

Professor Jason Sharman: The UK has a combination of a good reputation and lax enforcement. From the point of view of a launderer, that is a bonus: you get double. You get the appearance of probity—other people have mentioned the use of UK companies to open foreign bank accounts—with not much scrutiny and even less enforcement. Transparency is all good and well, but more information by itself does not lead to stronger action against money launderers or corrupt officials.

Alison Thewliss Portrait Alison Thewliss
- Hansard - - - Excerpts

Q There has been a lot of discussion about anti-money laundering supervision, and the effectiveness of the agencies that the Government expect to carry out those duties. Are they the weakest link in the chain, and could more be done to tighten up that anti-money laundering supervision, to shut the door, and to stop these companies from beginning their business here?

Professor Jason Sharman: There is certainly more that could be done. Some of it has been mentioned by other people; more money is the obvious one, but that may be necessary but not sufficient. In some ways, the career structure and career incentives for people who work in these agencies needs reviewing: if they start an investigation and it goes well, they get a small bonus to their career. If they start an investigation and it goes badly, they get a very big, indelible black mark, so in terms of career progression, it is safer for them not to investigate things.

One of the main sources of support has not been fully used: there are a lot of people outside the formal enforcement agencies who are very keen to help in this cause, including journalists and those in non-governmental organisations, as well as in the for-profit sector. That potential has not been tapped, so there are certainly things that the Government and the state could and should do, particularly in terms of regulatory agencies; but the area where I think it is possible to make most progress is probably beyond that.

Alison Thewliss Portrait Alison Thewliss
- Hansard - - - Excerpts

Q That makes sense. Certainly, there have been lots of times when I have been in rooms with a group of people who have solutions to tackle this, and Government should be doing more to make sure that they are listened to. Could I ask about the abuse of limited partnerships, secrecy jurisdictions and things like that? Could more be done to tighten up those rules? It feels as though there is an awful lot of abuse of those corporate structures, and very little scrutiny.

Professor Jason Sharman: It depends what you mean by “secrecy jurisdiction”. A person who has studied this for a long time said this: “People are not surprised when I tell them that the most important tax haven in the world is an island. People are surprised when they hear that the name of that island is Manhattan. People are not surprised to hear that the second largest tax haven is a city on an island. The city is London, and the island is Great Britain.”

We recently formed a shell company with co-authors Michael Findley and Dan Nielson in the United States. It took 137 seconds to incorporate that company. Here, it would probably take you a little longer—it might take you as long as 10 minutes—but you do not really have to show ID in any case, so the barriers are pretty low. If you do not want to use anything as fancy as a limited liability partnership, you can just use a plain old company, and that works pretty well for holding a bank account overseas.

Alison Thewliss Portrait Alison Thewliss
- Hansard - - - Excerpts

Q The Government have talked up the benefits of being able to incorporate companies fast. Do you think there needs to be a bit more grit in the system to allow for scrutiny, rather than speed?

Professor Jason Sharman: I think so. For me, it is telling that in jurisdictions for which incorporations are their lifeblood, such as the British Virgin Islands, it is much slower to incorporate. It takes close to two weeks to incorporate in the British Virgin Islands, and it takes about $1,000. The British Virgin Islands get half of their Government revenue from incorporation fees. They have a real interest in making sure their company registry works well. No one likes red tape and filling out forms, but the idea that you might have to spend a couple of hours instead of 15 minutes, or £50 instead of £12 is, to me, not unreasonable.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q Thank you for that, Jason. You have given an example already, but I was wondering about the international context. We have Companies House. Can you give me an example of the equivalent in European countries or America and the difference you perceive between our Companies House and theirs?

Professor Jason Sharman: I feel sorry for British Companies House, because it has been given a lot of work without the resources to carry it out. The mismatch between what is expected of an institution and the resources it has to achieve those ends is greater. Company registries are passive, archival organisations.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q That was my point, really. We have accepted the point about resources, but Companies House was described by one of the directors we heard from as a passive organisation in respect of these issues. I just wondered whether in other jurisdictions, say France or Germany—and I don’t know the answer to this question—they have that view of their equivalents, or do they view theirs as a proactive organisation that has to investigate the things we are talking about?

Professor Jason Sharman: No. The UK is typical.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q Forgive my naivety, but it usually takes a company or a legal entity about 15 minutes to register with Companies House. The intention behind that is for money laundering purposes. I am assuming—forgive me if I am wrong—that when Fred Bloggs and Co. was set up, the people who did so had to then open a bank account in the name of Fred Bloggs and Co. in order to transfer the money to this jurisdiction. Is that correct?

Professor Jason Sharman: Yes and no. Generally, yes, but if you want to own property, you never have to touch the banking system. If you want to own a yacht, you can set up the shell company and earn, just like that. You can break sanctions and own property with a shell company, even without a bank account.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q Just in general, using the banks as an example, should we be looking to put in the Bill requirements for them to play their part in the partnership to tackle money laundering?

Professor Jason Sharman: Again, banks have had these requirements to establish the beneficial owners for a while. I think this is good, but it is the enforcement that is key there.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q Following on from that, I completely take the point about enforcement, but would a failure to prevent power make any difference, assuming it was enforced?

Professor Jason Sharman: I probably differ from many of the other people who have spoken in that I am not a fan of failure to prevent. I think that the goal of these laws is to make life hard for bad people without making life hard for good people at the same time. To the extent that you have really onerous regulation or weaken the presumption of innocence, that is something of an own goal or collateral damage. Before you put people in jail, you should be pretty serious about it. There should be a mental intention there—a mens rea.

I am not really comfortable with the strict liability. There is strict liability in anti-bribery, which means I have to do pointless anti-bribery training every year for the University of Cambridge. It does not do me any good and it does not stop corruption, but it is one of the things that Cambridge feels it has to do because of the strict liability. Again, it is a cost to society that is not included in legislation or in regulatory impact assessments.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q Because time is limited, I will not engage with that, but it is a really interesting view. I want to quote something to you that I think you said—apologies if I have got it wrong. You said:

“These host states now have a duty to block, trace, freeze, and seize these illicit funds and hand them back to the countries from which they were stolen.”

I do not know who you were referring to there, but, in our case, with the illicit Russian assets frozen in the UK, how do you suggest we seize those funds and how can we repurpose them?

Professor Jason Sharman: It depends. With the Russian assets that are criminal assets, eventually you need to go to a court of law to do that—

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q That is very hard—you know that.

Professor Jason Sharman: Indeed. That is hopefully something that the Bill will do something to correct. It may be different if you are talking about sanctions and the money that is currently frozen. It would depend. If we are talking about criminal money, there is an anti-money laundering process of confiscation—civil and criminal.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q Sanctions.

Professor Jason Sharman: Sanctions. I think you cannot. There is proper process. As I understand it, unless there is a formal state of war that obtains between two states, on what basis are you going to take away—

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q That is the point. Did I quote you incorrectly, then?

Professor Jason Sharman: No, you quoted me correctly, but that is money that was stolen in one place and moved to another place, and you have to prove that it was stolen. That is different from saying, “You are a Russian oligarch and we are going to freeze your funds.” It is very different.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q I accept it is different from a Russian oligarch, but according to Bill Browder we have something like £30 billion of Russian state assets sitting frozen at the moment. Of course, it needs to change. I totally accept that we are not at war with Russia, so those powers do not exist. Do you think it is appropriate to introduce any new powers that would enable us to seize as well as freeze those assets and then repurpose them for the reconstruction in Ukraine? There is certainly a desire across the political divide here in the UK to try to achieve something along those lines. Do you think that is possible?

Professor Jason Sharman: I would not shed a tear if Russian oligarchs lost their assets.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q This is the state I am talking about.

Professor Jason Sharman: Okay, for the Russian state. In that case, I think that would be wonderful. I know Browder mentioned earlier central bank assets. But, again, there is a precedent here. To what extent would foreign Governments put money overseas? There is a lot of concentration on Russia as a corrupt regime, which I think it is, but it has plenty of company, many of which have assets in the UK.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q The Italians appear to have conquered this—I do not know if you know about that—through the stuff they have done on the mafia. The Canadians appear to have introduced a new power that might take them there. The Americans are trying to think about it. The Europeans are. There is quite a lot of thinking. I am just picking your brain. Is there anything you have done in this field that could add value as we try to think about it?

Professor Jason Sharman: I think not, and I think that the British Government, at least when it comes to sanctioning oligarch assets, which I realise are different from state assets, are in a bind. I think they will have to return those assets to the oligarchs and that they may have to pay damages to the oligarchs. That would be a terrible injustice, but I really worry about what the end game for sanctions is.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Q Jason, you are a political scientist. Why are we in this position where we have such weakness? Why has our political system failed to address these weaknesses for so long?

Professor Jason Sharman: This is probably a typical social science answer, but there are quite a few reasons that make it difficult, because no one corrective, in and of itself, is going to fix the situation. There have been solutions, such as the persons of significant control registry, the unexplained wealth orders and so on, where it has been like, “This is the thing that will unlock the problem”. But instead it is a combination. First off, it is appropriately difficult to take away people’s property. Secondly, the bureaucratic incentives do not favour it. You have this very risk-averse culture within law enforcement agencies. Thirdly, as I said, there is a failure to harness the incredible investigative resources that lie outside the state, in the not-for-profit sector but also in the for-profit sector.

None Portrait The Chair
- Hansard -

Before the right hon. Member for Birmingham, Hodge Hill asks his next question, I remind him that our line of questioning has to relate to the legislation in front of us. With his extensive parliamentary experience, I know that he will be able to do that.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Q I am grateful for those guard rails, Ms Bardell. At the moment, the Bill has a lacuna, which is any protections around safeguarding politicians from dirty money. We are not covered by suspicious activity reporting, for example. Some would argue that the £1.2 billion that has flown into British politics over the past 10 years from people with all kinds of motivations and ambitions may be one of the reasons that our political system has not acted hitherto to stop this corruption, and that should be something we fix in the Bill. What do you think about that?

Professor Jason Sharman: I think that, as Catherine Belton said earlier, certainly volumes of money into politics have something to do with it, but even if you could come up with a perfect solution to that problem, it may not actually make too much difference in terms of interdicting money laundering and corruption funds into this country. That is not to say it is not worth while doing, but there is this constant phase of saying, “If only we do x, we’ll really be able to fix the problem.” I think it is something where modest progress, incremental progress, is what we should expect, and we have to do lots of different things right in order to achieve that progress.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Q So it could be part of the solution.

Professor Jason Sharman: Yes.

None Portrait The Chair
- Hansard -

Thank you. I move finally to Tom Tugendhat.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q Professor, thank you very much indeed. I am grateful to you for reminding us that Magna Carta guarantees private property in various ways. Various legal jurisdictions, including the United States, Italy, the European convention on human rights, European property law and, indeed, many other jurisdictions around the world have all maintained and guaranteed it, which makes this so difficult. That said, do you agree that it is important to try to find out who owns what, so that we can at least take action where we have a legal ability to do so, and does this Bill help with that?

Professor Jason Sharman: Yes and yes. I think this is a modest positive step, but, given the track record of legislation, I would say that it has to be implemented. That is where the problem has been heretofore, and I can possibly anticipate that it may be the problem here, too. If you say, “You have to identify yourself as the owner of a company,” and you have entries in Companies House saying, “My name is XXX XXX,” and that does not get challenged, then more information is not necessarily better if that information is junk.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q No, that is true, and that is why the work being done between Companies House and the agencies is so important—to ensure that Companies House goes from being a pinboard to being a regulator and a check. That is a very important move. It is not the same as the FCA or a regulator of that kind, but at least it is beginning to verify in terms of ID and so on. How much of a difference do you think the overseas territories and Crown dependencies verifications have already made?

Professor Jason Sharman: I mentioned briefly that some of my research, together with Mike Findley and Dan Nielson, has been to impersonate would-be money launderers and look to set up companies in various jurisdictions. It is much harder to set up companies, and the standards are much more rigorous, in the Cayman Islands, the British Virgin Islands and the Crown dependencies than in the UK. Of the UK jurisdictions, the UK is the easiest place to set one up, so I think the UK could learn a lot from its overseas territories and Crown dependencies. I noticed with interest that a couple of the other witnesses here said the same.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q It is clear that there is a huge number of changes. You will know about the work that we have done in the past on the Foreign Affairs Committee and now in Government on trying to clean this up. This is something that, sadly, has lasted for the best part of 100 years, with no Government really making any effort to do anything about it until now. It is interesting that we are here again with a number of registrations, many of which were warned about in the 1970s, ’80s, ’90s, noughties and, now, the ’10s and ’20s. I am glad that we are doing something about it. Do you think that Companies House is going to be able to do that if it has the proper resources, or is it going to require other agencies as well?

Professor Jason Sharman: No, I do not think Companies House will be able to do it. Its main function is passive and archival; it is a library mainly. I think it is just not in its DNA to be otherwise. I think most of the solution for this is in the private sector. I am talking about properly regulated, supervised and audited corporate service providers. I co-authored a report 10 years ago with the World Bank called “The Puppet Masters”, and that was overwhelmingly the conclusion that we came to.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q Would you say that the extra powers given to organisations such as the Solicitors Regulation Authority and its equivalent in Scotland are important to ensure that such regulators actually do have teeth? At the moment, as you will know, the fines form both of them are very low. This would, one hopes, connect to the work that we did in 2017 or 2018—I cannot remember exactly when—for the report “Moscow’s Gold”, where the Foreign Affairs Committee highlighted the role of enablers, not just regulators.

Professor Jason Sharman: I completely agree. I think, even more, that HMRC, as the regulator for corporate service providers, those enablers, has been completely missing in action. If there were one bit of the public sector that I would change, repurpose or fund, it would be to get HMRC to take its duty to regulate and penalise corporate service providers seriously. It has just been completely missing in action so far.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Thank you very much.

None Portrait The Chair
- Hansard -

If there are no further questions from Members, I want to thank the witness for his evidence. Professor Sharman, thank you very much for taking the time to come and speak to us.

Ordered, That further consideration be now adjourned. —(Nigel Huddleston.)

15:29
Adjourned till Tuesday 1 November at twenty-five past Nine o’clock.

Financial Services and Markets Bill (Sixth sitting)

The Committee consisted of the following Members:
Chairs: Mr Virendra Sharma, † Dame Maria Miller
† Bacon, Gareth (Orpington) (Con)
Bailey, Shaun (West Bromwich West) (Con)
† Davies, Gareth (Grantham and Stamford) (Con)
† Davies, Dr James (Vale of Clwyd) (Con)
Docherty-Hughes, Martin (West Dunbartonshire) (SNP)
† Eagle, Dame Angela (Wallasey) (Lab)
Grant, Peter (Glenrothes) (SNP)
† Griffith, Andrew (Arundel and South Downs) (Con)
† Hammond, Stephen (Wimbledon) (Con)
† Hardy, Emma (Kingston upon Hull West and Hessle) (Lab)
† Hart, Sally-Ann (Hastings and Rye) (Con)
† McDonagh, Siobhain (Mitcham and Morden) (Lab)
† Mak, Alan (Havant) (Con)
† Morrissey, Joy (Beaconsfield) (Con)
† Siddiq, Tulip (Hampstead and Kilburn) (Lab)
† Tracey, Craig (North Warwickshire) (Con)
† Twist, Liz (Blaydon) (Lab)
Bradley Albrow, Simon Armitage, Committee Clerks
† attended the Committee
Public Bill Committee
Thursday 27 October 2022
(Afternoon)
[Dame Maria Miller in the Chair]
Financial Services and Markets Bill
Clause 28
Treasury power in relation to rules
14:00
Stephen Hammond Portrait Stephen Hammond (Wimbledon) (Con)
- Hansard - - - Excerpts

I beg to move amendment 48, in clause 28, page 40, line 39, at end insert—

“3RF Requirement to publish specified information

(1) The Treasury may at any time, by notice in writing, direct a regulator to measure its performance against specified metrics and to publish such information if—

(a) the regulator does not already publish such information, or

(b) the Treasury consider the information published is insufficient for the purposes of holding the regulator to account.

(2) A direction under subsection (1) may—

(a) specify the element of the regulator’s performance to be measured;

(b) specify the appropriate metrics to be used;

(c) specify the period for which performance must be measured; and

(d) specify the date by which the performance information must be published.

(3) As soon as practicable after giving the direction under subsection (1) the Treasury must—

(a) lay before Parliament a copy of the direction, and

(b) publish the direction in such manner as the Treasury considers appropriate.

(4) A direction under subsection (1) may be varied or revoked by the giving of a further direction.”

I again guide the Committee to my entry in the Register of Members’ Financial Interests. Clause 28 amends the Financial Services and Markets Act 2000. It gives the Treasury the power to make or to direct rules. A key element of our discussions has been transparency and accountability, and the amendment is designed to make things a little clearer by ensuring that regulators report regularly and transparently on key metrics. The regulators are already mandated to report to His Majesty’s Treasury in their annual reports, which have to contain some performance metrics; the issue is that those metrics are selected by the regulator themselves. At the moment, an oversight body has the power to send for “persons, papers and records”, but it does not have the power to mandate regulators to report on specific performance metrics over time. I think that that leaves a hole in terms of both accountability to Parliament and transparency of regulators.

I accept the evidence that Martin Taylor gave the Committee that Parliament and the Government have a huge amount of influence. Equally, though, the chief executive of the Prudential Regulation Authority, when asked elsewhere for his thoughts on the competitiveness objective, described a lot of it as a “red herring”. When asked how he would report on the competitiveness objective, he said that he had “no convincing answer”. It is important that there is a convincing answer, and that is, in effect, what my proposed new section 3RF of the 2000 Act would provide.

As I have stated quite clearly, I do not believe that this is about a race to the bottom. We need a well-regulated, tough regulated, transparently regulated jurisdiction. Regular accountability on performance is in no way an infringement of a regulator’s independence; I think that it would enhance the regulator’s reputation. The amendment therefore sets out a number of metrics on which a regulator might be asked to report. That could work relatively easily. For instance, the Treasury could use its powers to set out more clearly the elements on which the regulator should measure and report its performance. It could also set out definitions that are relevant to the measures themselves. I think that the direction potentially should be able to be scrutinised by the public, and particularly by Parliament and the Treasury Committee, and that the information should be published, and published more frequently.

My amendment is designed to ensure that the regulator not only has the objective, but has to report on it on a very clear set of metrics, which would then allow us in Parliament and the public to ensure that it is meeting the objective.

Tulip Siddiq Portrait Tulip Siddiq (Hampstead and Kilburn) (Lab)
- Hansard - - - Excerpts

I thank the hon. Member for tabling the amendment. In principle, Opposition Members are supportive of providing regulators with clearly defined metrics to assess their performance. We would need further information about how it would work in practice before we could lend our support to the amendment, but in principle we are in agreement with the views that the hon. Member has outlined.

Andrew Griffith Portrait The Financial Secretary to the Treasury (Andrew Griffith)
- Hansard - - - Excerpts

I am grateful to my hon. Friend the Member for Wimbledon for raising this important issue, and I note the potential, in-principle support of the hon. Member for Hampstead and Kilburn, speaking for the Opposition.

The Government agree that it is vital to have appropriate public metrics for holding regulators to account on their performance. FSMA already requires regulators to report annually on how they have discharged their functions, advanced their objectives and complied with their other duties. In addition, schedules 1ZA and 1ZB to FSMA provide that the Treasury may direct a regulator to include such other matters as it deems appropriate in the regulator’s annual report.

As part of their annual reports, both the Financial Conduct Authority and the PRA publish data on operational performance. The FCA annually publishes operating service metrics relating to authorisations, timeliness of responses to stakeholders, and regulatory permission requests, among other things. In April 2022, the FCA also published a comprehensive set of outcomes and metrics that it will use to measure and publicly report on its performance. The PRA annually publishes data on its performance of authorisation processes.

Amendment 48 seeks to allow the Treasury, in addition, to determine what metrics the FCA and the PRA should use to measure their performance and over what period, and other technical aspects of the measurement and publication of metrics. Let me reassure my hon. Friend of the importance that I attach to the matter he has raised. I have discussed it with the CEOs of the PRA and the FCA since taking up my role, and I will continue to do so. I am open to discussing the matter with my hon. Friend outside the Committee to see what further reassurance the Government could give, or what further measures we could take. I therefore ask him to withdraw his amendment.

Stephen Hammond Portrait Stephen Hammond
- Hansard - - - Excerpts

I thank the Minister for his response, and I thank the hon. Member for Hampstead and Kilburn for hers. Clearly, there is a willingness across the House to look at this matter again, so I am going to take the Minister at his word—as I always do—and accept his kind reassurance. Perhaps he might ask the hon. Lady to join us in that discussion, because it would be beneficial. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

Clause 28 enhances FSMA by enabling the Treasury to place an obligation on the FCA or the PRA to make rules in a certain area of regulation. Equivalent provision for the Bank of England and the Payment Systems Regulator is made in clause 44 and in paragraph 7 of schedule 7.

FSMA requires that regulators advance their objectives when they make rules, set technical standards and issue guidance. The regulators must also take into account eight regulatory principles when discharging their functions. It is generally up to the regulators to determine what rules are necessary, but as set out in the future regulatory framework review consultation in November last year, that approach may not always be sufficient. There must be a means for the Government and Parliament to require the regulators to make rules covering certain matters, in order to ensure that important wider public policy concerns are addressed. That approach has already been established in legislation through the Financial Services Act 2021, which required the FCA to make rules that applied to FCA-regulated investment firms.

Clause 28 enables the Treasury to make similar regulations and place an obligation on the regulators to make rules in a certain area. The clause aims to strike a balance between the responsibilities of the regulator, the Treasury and Parliament now that we are outside the EU. It does not enable the Government to tell a regulator what its rules should be; it simply enables the Government, with the agreement of Parliament, to say that there must be rules relating to a particular area. The FCA and the PRA must continue to act to advance their objectives and take into account their regulatory principles when complying with the requirements set under this power. The Treasury cannot require the regulators to make rules that they would not otherwise have the ability to make.

I assure the Committee that this power will always be subject to the affirmative procedure. That is the most appropriate procedure, as it means that Parliament will be able to consider and debate any requirements set in this way. It also ensures that the Government are able to act to ensure that these requirements stay up to date with changing markets, rather than setting them out in primary legislation, where they could quickly become out of date. The clause enhances the FSMA model, enabling the Treasury to ensure that key areas of financial services continue to be regulated following the repeal of retained EU law and in the future. I commend the clause to the Committee.

Question put and agreed to.

Clause 28 accordingly ordered to stand part of the Bill.

Clause 29

Matters to consider when making rules

Emma Hardy Portrait Emma Hardy (Kingston upon Hull West and Hessle) (Lab)
- Hansard - - - Excerpts

I beg to move amendment 1, in clause 29, page 41, line 7, at end insert

‘, and also to financial inclusion.

(2A) For the purposes of this section, “financial inclusion” means the impact on those who might be prevented from accessing financial services as a result of the new rules made by either regulator, or from accessing them on the same terms as existed before the making of the new rules.’

None Portrait The Chair
- Hansard -

With this it will be convenient to discuss the following:

New clause 2—FCA: Regard to financial inclusion in consumer protection objective

‘(1) FSMA 2000 is amended as follows.

(2) In section 1C (The consumer protection objective), after subsection (2)(c) insert—

“(ca) financial inclusion;”.’

New clause 3—FCA duty to report on financial inclusion

‘(1) The FCA must lay before Parliament a report, as soon as practicable after the end of—

(a) the period of 12 months beginning with the day on which this Act is passed, and

(b) every subsequent 12-month period,

on financial inclusion in the UK.

(2) A report under this section must include—

(a) an assessment of the state of financial inclusion in the UK;

(b) details of any measures the FCA has taken, or is planning to take, to improve financial inclusion in the UK;

(c) developments which the FCA considers could significantly impact on financial inclusion in the UK; and

(d) any recommendations to the Treasury which the FCA considers may promote financial inclusion in the UK.’

Emma Hardy Portrait Emma Hardy
- Hansard - - - Excerpts

My amendments relate to the issue of financial inclusion, which those who serve on the Treasury Committee have heard me talk about many times before. I will start with an explanation, which is much better than the one I tend to give, that I found in the written evidence from the Financial Inclusion Commission of what financial inclusion actually is. It speaks about its vision for

“a financially inclusive UK where financial services are accessible, easy to use and meet people’s needs over their lifetime, and where everyone has the skills and motivation to use them.”

I would think that that aim and ambition would be supported by everyone. I will add that the Financial Inclusion Commission is a cross-party, cross-organisation group that recommends financial inclusion.

The commission also said in its evidence that

“over a million people in the UK do not have a bank account, one in four households lack insurance protection and one in five adults would not be able to cover more than one month of living expenses if they lost their source of income.”

Financial inclusion is a hugely important and relevant issue. Some 22% of UK adults have less than £100 in savings. The commission says that it believes the Financial Conduct Authority

“does not have the powers to adequately reflect vulnerable consumers’ interests when considering potential regulatory changes.”

That was its argument for my amendment, which is about “have regards”.

I also came across written evidence from the Phoenix Group. I was a little surprised by it, but in a happy way. The Phoenix Group is a FTSE 100 company, and it also argues for the FCA to have regard to financial inclusion. It says in its evidence:

“Financial exclusion is one of the biggest drivers of poor consumer outcomes in the UK – it is a clear oversight that there is no specific statutory requirement for the FCA to address, or even consider, financial inclusion issues across its work.”

It goes on to talk about this in relation to pensions, in particular. It said one of the problems it encounters in the

“long-term savings and pensions space”

is what it calls the “guidance gap” when it comes to making decisions about pensions. It believes that requiring the FCA to have regard to financial inclusion could start to address some of these issues. I have to say that before I read all of the evidence, I had not heard a FTSE 100 company arguing for that.

In oral evidence, the FCA pushed back on the need for a “have regard” for financial inclusion. We might have expected that; people tend to push back on having things added to their workload, even when the evidence says something else. The push-back tends to suggest that the FCA has a consumer duty and therefore does not need a “have regard” for financial inclusion. However, there is a big difference between the consumer duty and the “have regard” that I am talking about.

The consumer duty deals with people who are able to access products, but I am talking about the people who cannot access products at all because they are excluded from the financial market. The clients I am referring to are the ones the market does not want. That is happening more and more as we face the cost of living crisis. In real life, the people we are talking about end up being disadvantaged by paying more for credit, more for insurance and more for services, as we heard in evidence from Martin Coppack of Fair By Design.

The financial inclusion forum, chaired by HMT and the Department for Work and Pensions, addresses some issues, but it has been criticised as a closed talking shop. There are no selection criteria for who is invited and very little is published on what it does, what it discusses, or its actions and outcomes. Many of the organisations that back the “have regard” requirement for the FCA sit on that group already, and they recognise that what we have done is not enough, which is why they are calling for the requirement. In addition, we cannot get the toughest issues talked about at the financial inclusion forum—many allies have asked for the poverty premium to be on the agenda, but with no luck—and it does not seem to have many positive outcomes.

14:15
The “have regard” for financial inclusion is also supported by the Finance Innovation Lab and the Finance for our Future coalition, which think the Bill is a real opportunity to deliver financial inclusion.
I will stop here because of time, but I refer back to the evidence from the Financial Inclusion Commission, which put it so much better than I could:
“Such a principle would allow the UK economy to grow and compete on the international stage in an inclusive manner, for the benefit of all members of society.”
That is surely something we would all support, so I will press the amendment to a vote.
Angela Eagle Portrait Dame Angela Eagle (Wallasey) (Lab)
- Hansard - - - Excerpts

It is a pleasure to follow my hon. Friend the Member for Kingston upon Hull West and Hessle, whose comments I wholeheartedly support. I suspect there will be widespread support among Committee members for the objectives of her amendment. Perhaps the Minister will argue that a “have regard” to financial inclusion is the wrong way to go about it, but I would argue that not having these things in mind when an industry is being regulated can make a situation worse.

We know the level of financial exclusion because my hon. Friend mentioned the figures. I do not intend to go over all that, but essentially what we have—this has developed because of the way the market works—is a retail financial services sector that is very focused on a set of quite complex products. It is also very focused on its distribution networks and not so much on the customer. Retail financial products have often focused on the relationship between those who introduce products and those who sell them on to the ultimate customer, often with quite rewarding levels of sales commission. The bad end of that kind of financial services model is that we get a structure that is not focused enough on consumers, and a range of ever-increasing complexity that costs more and excludes more people who might be on basic incomes.

Over time, the dynamic of that structure means that the financial services sector gets more and more complex, more and more focused on the distribution networks, and less and less focused on the end customer. One understands that when the industry starts complaining about the lack of financial education. There is some truth in that, but there is also truth in the fact that the opacity of the price mechanisms and the complexity of the products that the industry comes up with make it confusing, and of course that increases the cost base, which excludes more low-paid people.

A previous Administration that I might have been a member of tried to address the issue with stakeholder products that were meant to be much simpler with very up-front but capped pricing that everybody would understand. Those were throttled out of existence because the industry did not really want them to succeed, and what has happened since—not by anyone’s design but by the dynamics of the way the market works—means that there is less and less available for those who have small amounts of income because the products are simply not profitable in the current structure of our retail financial services.

This is a systemic issue that needs to be solved, because we need a financial services retail sector that serves everybody. We do not have one, and we are getting to a stage where market dynamics make it less and less likely that we will have one; they are actually excluding more people. I think that a “have regard” that prompts thought about structures and, perhaps, about the regulation of some simpler products that could be made available is a really important part of addressing that market failure.

Like my hon. Friend the Member for Kingston upon Hull West and Hessle, I am worried that the Minister will say that we have consumer protections in place. This is not about those who are currently consuming the products; it is about those who cannot even afford to have basic bank accounts, those who have to go to money lenders because they are in such precarious circumstances, and those who pay the poverty premium because accessing financial services costs so much more as a percentage of their overall income than it costs someone on a higher income. I can tell the Minister—I am sure he has come across this in his own constituency—that many people who exist on very tight incomes, and who really have to budget, shy away from having basic accounts because they cannot afford to go into deficit and be charged a fee. That would destroy all their very careful balancing.

This issue is particularly important for people who are on benefits and have them paid into a bank account at a set time, but who have bill payments coming out at a different time. I would really appreciate it if the Minister would think profoundly about how the problem can be solved, so that our financial services sector can get to a stage where it can make profit—a modest profit perhaps, but some profit—out of dealing with people on much more modest incomes. After all, there are millions of them, and the dynamic of the market structures we have at the moment is moving provision away from people on lower incomes.

Emma Hardy Portrait Emma Hardy
- Hansard - - - Excerpts

On my hon. Friend’s point about consumer duty, the evidence suggests that one of the unintended consequences is that it can make some currently marginally profitable products unprofitable, thereby excluding more people from them, so one of the things that the consumer duty is trying to address is actually making it more difficult for some people in society to have anything.

Angela Eagle Portrait Dame Angela Eagle
- Hansard - - - Excerpts

I agree with my hon. Friend.

I will wrap up. Given that this is a systemic issue, a “have regard” is the best way of dealing with it. I hope that the Minister will think carefully about that and about how it might help us arrest the dynamic that is taking financial services away from people on modest incomes, and making it less and less profitable for the industry to serve them, leaving them much diminished in their attempts to engage appropriately in our society in ways that many people take for granted, such as by having a credit card and bank account, or being able to conduct electronic cash transfers and so forth.

Siobhain McDonagh Portrait Siobhain McDonagh (Mitcham and Morden) (Lab)
- Hansard - - - Excerpts

I rise to support my hon. Friend the Member for Kingston upon Hull West and Hessle. Like her, I am on the Treasury Committee, and I have to say to this Committee: please pass the amendment, so she can stop talking about it in our meetings! [Laughter.] To be fair to her, it is something that she repeats and that bears repeating, because I fear that if the FCA is not responsible for having regard to financial inclusion, the responsibility continues to sit with us as MPs. Who became aware that closing bank branches in town centres was getting to be a problem? Who was concerned about access to ATMs, especially free ATMs? It was MPs, through their constituents raising the issue with us. This is a cross-party effort. It is not the sole responsibility or the sole campaign issue of one side of the House.

More and more of our hard-working, respectable constituents are being excluded from financial products. They desperately want to insure their cars, but if they pay their car insurance monthly, they pay more. They desperately want to contribute to their pensions and life insurance policies to give comfort to their families. They want to do all those things, but an increasing proportion of them are being excluded from those products. If the FCA had regard to how the issue affects an ever growing part of our society, we would at least have a different way of looking at it.

An issue that I know is close to your heart, Dame Maria, is women’s exclusion from many financial products, given the nature of their work, including part-time work and periods off work for raising children. In the end, the taxpayer picks up the bill if those products are not available. It is in the interests of all of us—our constituents and our parties—to support the amendment in the name of my hon. Friend the Member for Kingston upon Hull West and Hessle.

Tulip Siddiq Portrait Tulip Siddiq
- Hansard - - - Excerpts

When I was first elected, I was told by another MP here that I should pick an issue, stick to it and talk about it constantly. I pay tribute to my hon. Friend the Member for Kingston upon Hull West and Hessle for following that advice to a tee. I follow in the steps of my hon. Friends the Members for Kingston upon Hull West and Hessle, for Wallasey and for Mitcham and Morden, who spoke about financial inclusion and how it affects us all. Later, we will debate essential face-to-face banking services. For now, I want to focus on the poverty premium, which my hon. Friend the Member for Mitcham and Morden mentioned: the extra costs that poorer people have to pay for essential services such as insurance, loans or credit cards.

We believe that everyone should have access to financial services—whether it is savings schemes or insurance—when they need them, regardless of their income and circumstances. If the Government are serious about building a strong future for our financial services outside the EU, they should recognise that the Bill is an opportunity to rethink how financial resilience, inclusion and wellbeing are tackled in the UK.

We support amendment 1 and new clauses 2 and 3, which would give the FCA a new cross-cutting “must have regard” to financial inclusion measure as part of its regulatory framework. As the Minister knows, that would mean that the FCA would have to consider financial inclusion across all its activities and report on its progress.

In our evidence session, Fair by Design talked about the higher costs that poorer people have to pay for insurance products. Research from the Social Market Foundation, with which the Minister will be familiar, has shown that those who are unable to pay for their car insurance in annual instalments face an average extra cost of £160. Surely the Minister agrees that that is unjust, and that regulation must play a role in tackling the poverty premium. If he accepts that principle, what is the argument against introducing a new “have regard” provision to empower the FCA to monitor how well financial services are meeting the needs of low-income consumers? For example, a “must have regard” for financial inclusion could allow the regulator to review practices such as insurers charging more to customers who pay for their insurance in monthly instalments.

Does the Minister recognise that exclusion from financial services is a growing problem in the UK? If he rejects the arguments for a “have regard”, what solution does he propose instead? It is something we all see in our casework as constituency MPs.

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

I thank hon. Members for their contributions. I appreciate the work of the hon. Member for Kingston upon Hull West and Hessle. I have been to Hull, but I think that everyone has constituents who face precisely the problem of which she speaks, so I will depart from my text.

The Government oppose the new clauses and the amendment. However, we have heard from the FCA its opposition to this measure and its contention that it is not required. It would say that—I understand that point. I would be happy to consider how the Government respond. That is the most worthy response I can make; I am not inclined to dismiss any of the hon. Lady’s arguments.

14:30
Indeed, we are not neutral actors, because as we raise the level of the regulatory burden, one of the unintended consequences, which the hon. Member for Wallasey precisely spoke about, is that we often raise the cost of accessing products, or exclude parts of society, because that increased regulatory burden means that providers sometimes withdraw from the sector.
Craig Tracey Portrait Craig Tracey (North Warwickshire) (Con)
- Hansard - - - Excerpts

Will my hon. Friend give way?

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

I will give way; I do not propose to speak for very long on this point, anyway.

Craig Tracey Portrait Craig Tracey
- Hansard - - - Excerpts

I am very much in favour of financial inclusion, but we have to be careful about how we achieve it. I was an insurance broker before coming here. The reason I left was that the cost of regulation on our business meant that we disappeared from the high street. That meant that vulnerable people had less access to insurance. We see more and more access points moving out, and having to go online, so people are losing out. Does the Minister agree that, although we must ensure that we are looking after the most vulnerable people, more regulatory burdens will put up the cost and affect the availability of products?

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

I thank my hon. Friend for that intervention. He put it far better than I did, bringing to bear his personal experience, but that was precisely the point that I was making.

Siobhain McDonagh Portrait Siobhain McDonagh
- Hansard - - - Excerpts

Does the Minister agree, though, that unless we know what is happening and somebody keeps the figures, there can be unintended consequences? Martin Coppack from Fair by Design made the point that he has been trying to get this thing done for years and what he has found is that when he goes to the internal Treasury committee that considers financial exclusion, it says, “It’s not our job to keep the numbers. Go to the FCA.” The FCA says, “It’s not our job to keep the numbers. Let’s go back to the Treasury.” Surely it needs to be somebody’s responsibility, so that we understand and know the direction of travel.

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

Once again, the Government will not oppose those points for the sake of opposing them. I would like to take this matter away. Powerful arguments have been made and the FCA has made its contention. I think it is entirely appropriate that the Government consider the matter further.

Emma Hardy Portrait Emma Hardy
- Hansard - - - Excerpts

I will take Members back to the evidence given by the Phoenix Group as to why the FCA should “have regard”. I think there is broad consensus that financial inclusion is important. The difference of opinion is regarding what we do to achieve it. This point relates to that made by my hon. Friend the Member for Mitcham and Morden. Phoenix said that the “have regard” responsibility should lie with the FCA because it is

“the single UK body with the clearest ability and access to information”.

That is the main point. We heard evidence from a Minister from the Department for Work and Pensions and a Minister from the Treasury, because there is a question around where financial inclusion fits into social policy and financial policy; there is a bit of a mush over who is responsible. Sometimes when we find that lots of people are responsible for something, in reality no one is responsible, because everyone can always say that it is the other person who is responsible and not them. That evidence from Phoenix Group was powerful.

The organisation also said:

“With many of the most pressing issues falling in between the remits of government and regulators, this makes addressing financial inclusion problems more difficult.”

We need the FCA to “have regard” for this matter, to act as that single body to gather the information and look at the issue more seriously, otherwise, we will be failing, as we have done for years, to achieve any real outcomes. I will therefore be pushing the amendment to a vote.

Question put, That the amendment be made.

Division 4

Ayes: 5


Labour: 5

Noes: 9


Conservative: 9

Question proposed, That the clause stand part of the Bill.
None Portrait The Chair
- Hansard -

With this it will be convenient to discuss clauses 30 to 32 stand part.

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

Under the FSMA model, the detailed rules that apply to firms are generally set by the regulators, acting within a framework set by Government and Parliament.

FSMA requires the regulators to act in a way that advances their statutory objectives when discharging their general functions, including those of making rules, setting technical standards and, in the case of the FCA, issuing guidance. It is generally up to the regulators to determine which rules are necessary, and, when they make rules, to do so in a way that advances, and is compatible with, their objectives. They must also have regard to their regulatory principles. Clauses 29 to 32 ensure that relevant regulator actions, including rule making, are proportionate and reflect important matters of public policy as appropriate.

The objectives and regulatory principles in FSMA are cross-cutting and apply to everything the regulators do. They have not been designed to suit particular policy areas. That is why Parliament, through the Financial Services Act 2021, introduced a limited number of factors that the PRA and FCA must consider when making rules in certain areas—for example, when implementing the latest Basel standards.

Clause 29 therefore provides the Treasury with the ability to specify, by way of regulations, matters that the FCA and PRA must “have regard” to when making rules in a particular area. The regulators will be required to outline how they have considered these “have regards” in their public consultations, just as they do already for objectives and regulatory principles. The power for the Treasury to specify matters in regulations will always be subject to the affirmative procedure. That means that Parliament will be able to consider and debate any “have regards” introduced using the new power.

Clause 30 contains a mechanism to manage the interaction between the regulators’ rule-making and supervisory responsibilities and the Treasury’s deference decisions, including equivalence decisions. Deference is a process endorsed by the G20, in which jurisdictions and regulators defer to each other on relevant matters when it is justified by the quality of their respective regulatory, supervisory and enforcement regimes.

It is the responsibility of the Government to determine whether overseas regulatory and supervisory standards are equivalent to our own, and therefore whether to defer to an overseas jurisdiction. The rules that the regulators make will have a direct bearing on the criteria against which the Treasury assesses overseas jurisdictions for that purpose.

To manage that interaction, clause 30 creates a requirement for the FCA and PRA, when proposing changes to rules or supervisory practices, to consider the impact on deference afforded by the Treasury to overseas jurisdictions, and to consult the Treasury should they determine that the proposed action may lead the Government to review their deference decisions. That consultation process will allow the Treasury to provide regulators with its views on how their actions will impact existing deference decisions, and ensures that the regulators holistically consider deference when considering a change to their rules or supervisory practices.

Clause 31 has a similar purpose. It contains a mechanism to manage the interaction between the regulators’ rule-making and supervisory responsibilities, and the Treasury’s responsibilities in upholding the UK’s international trade obligations. The Government are responsible for ensuring that the UK complies with commitments arising from international trade agreements that the UK has agreed.

The clause supports the existing FSMA model by creating a statutory requirement for the regulators when making changes to rules or supervisory practices to consider whether there is a material risk that these changes are incompatible with an international trade obligation. They must give written notice to the Treasury before proceeding if such a risk arises. Clauses 30 and 31 are necessary and proportionate measures to manage the respective responsibilities of the Treasury and the regulators in these areas.

Clause 32 inserts new section 138BA into FSMA to enable the Treasury to allow the FCA and the PRA to waive or modify their rules where appropriate. Setting the same rules for everyone can sometimes come with unintended consequences. Recognising this, existing section 138A of FSMA already gives the regulators some discretion; however, the existing provisions require the relevant regulator to have determined that a rule is “unduly burdensome”, or would not achieve the purpose for which the rules were made, before modifying or disapplying rules.

We want our regulators to be more proportionate and more agile. The new power in clause 32 will therefore give the Treasury the ability to enable the FCA and the PRA to waive or modify their rules in a wider range of circumstances, which will make it easier for regulator rules to reflect different business models and practices where appropriate. Importantly, it will also ensure that some existing waiver regimes in retained EU law can be maintained. I therefore commend clauses 29 to 32 to the Committee.

Question put and agreed to.

Clause 29 accordingly ordered to stand part of the Bill.

Clauses 30 to 32 ordered to stand part of the Bill.

Clause 33

Responses to recommendations of the Treasury

Question proposed, That the clause stand part of the Bill.

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

Under section 1JA of FSMA 2000 and section 30B of the Bank of England Act 1998, the Treasury must make recommendations to the FCA and the Prudential Regulation Committee at least once in each Parliament on aspects of the economic policy of His Majesty’s Government. The FCA and the PRC, as the governing committee of the PRA, should have regard to these matters when carrying out their functions.

Currently, there is no statutory requirement for the FCA and the PRC to respond to the Treasury’s recommendations and explain how they have had regard to them. Clause 33 therefore amends section 1JA of FSMA 2000 and section 30B of the Bank of England Act 1998 to create a requirement for the FCA and the PRC to respond annually. The response must outline the action the regulator has taken or intends to take, or the reasons it has not taken and does not intend to take action, on the basis of the recommendations. The response will be laid before Parliament by the Treasury.

The clause is therefore intended to increase transparency of how the FCA and the PRA have taken into account these recommendations. As a result, this clause aligns the FCA and the PRC with the statutory requirement for the Bank of England’s Financial Policy Committee, which is already required to respond to the recommendation letters sent to it by the Treasury. Finally, this measure formalises an emerging practice, as the FCA and PRC have previously responded to recommendation letters from the Treasury. I therefore commend the clause to the Committee.

Tulip Siddiq Portrait Tulip Siddiq
- Hansard - - - Excerpts

I have one quick question for the Minister. Are the Government required to consult or give advance notice before sending a policy letter to regulators? If not, is there a risk that the new “have regards” for different policy areas could be dropped on the regulators from nowhere, and could distract the FCA and PRA from their primary and secondary objectives?

14:45
Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

That is, of course, possible, but it would be unusual. There is regular discourse between His Majesty’s Treasury and regulators, and I consider the risk that the hon. Lady raises relatively small. The regulatory bodies would consult on that change if required.

Question put and agreed to.

Clause 33 accordingly ordered to stand part of the Bill.

Clause 34

Public consultation requirements

Stephen Hammond Portrait Stephen Hammond
- Hansard - - - Excerpts

I beg to move amendment 49, in clause 34, page 47, line 38, at end insert—

“(2B) The FCA must publish a list of all of the consultees.”

Again, I guide the Committee to my entry in the Register of Members’ Financial Interests. The amendment is very simple. I welcome clause 34. It sets out public consultation requirements and, after proposed new section 1RA of FSMA 2000, inserts proposed new section 1RB, concerning requirements in connection with public consultation. The key word here is “public”. Proposed new section 1RB(2) states:

“The FCA must include information in the consultation about any engagement by the FCA with…statutory panels”.

That is a public consultation, or it should be. Therefore it seems only appropriate that the FCA and the PRA list all the consultees to the public consultation. That is what amendment 49, for the FCA, and consequential amendment 55, for the PRA, provide. That is a very simple request. If the Government cannot agree to it today, I hope that they will take it away about think about it very carefully.

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

Amendment 49 seeks to require the FCA to publish a list of all respondents to any public consultation. I recognise that my hon. Friend the Member for Wimbledon intended for the requirement in amendment 49 also to apply to the PRA, where the same issues would arise.

The Government believe that policy making is at its most effective when it draws on the views, experience and expertise of those who may be impacted by regulation. Meaningful stakeholder engagement makes it more likely that final proposals will be effective, understood and accepted as fair and reasonable. The Government also recognise the importance of transparency in supporting the effective scrutiny of the regulators, and are bringing forward a number of measures in the Bill to support that.

I remind my hon. Friend that FSMA already requires the FCA to publish information regarding responses to their public consultations. In particular, section 138I of FSMA requires the FCA to publish an account, in general terms—I accept that that is different from what my hon. Friend proposes—of representations made in response to consultation, and of the regulator’s response to them.

Although I therefore support the ambition behind the amendment, there is a risk that the additional requirement on the FCA to publish a list of all consultees to every consultation could deter stakeholders that want to respond confidentially from engaging fully with the regulators’ consultations.

The Government sympathise with my hon. Friend’s point, but I ask him to withdraw his amendment. I am happy to meet with him, with officials, to see whether there is a different way in which he can obtain the comfort he desires, or in which we can take the matter forward.

Stephen Hammond Portrait Stephen Hammond
- Hansard - - - Excerpts

I am very pleased to hear what the Minister said, because he has broadly accepted the thrust of what I said. I think he is offering me the chance to explore with him the circumstances in which a body does not wish for its name to be published in respect of a consultation. I am prepared to have that conversation with him so that I understand why he thinks that that might constrain the FCA and PRA. With that reassurance from the Minister, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

None Portrait The Chair
- Hansard -

With this it will be convenient to discuss clause 35 stand part.

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

FSMA 2000 requires the PRA and FCA to set up and maintain a number of stakeholder panels, also known as statutory panels. Those panels are intended to provide valuable insight, advice and challenge to the regulators’ rule making, drawing on the experience and expertise of their respective memberships. The regulators have regular meetings and discussions with their panels. In those, most major policy and regulatory proposals are presented for comment at an early stage.

The FCA’s statutory panels are the financial services consumer panel, the practitioner panel, the smaller business practitioner panel, and the markets practitioner panel. The Bill also puts the listing authority advisory panel on a statutory footing. The PRA’s statutory panel is the practitioner panel, and the Bill also puts its insurance sub-committee on a statutory footing as the insurance practitioner panel. The Payment Systems Regulator has one statutory panel, which covers the full range of the PSR’s responsibilities.

The additional responsibilities that the regulators take on following the repeal of retained EU law will result in the regulators making more rules across a broader range of topics. The UK’s departure from the EU will therefore increase the opportunities and the need for the regulators to consult their statutory panels from the outset of policy and regulatory development; that was not possible to the same extent while the UK was a member of the EU. It will strengthen the panels’ important ability to provide stakeholder input into the development of policy and regulation.

Clause 34 therefore requires the FCA and PRA to include information in their public consultations about any engagement that they have had with statutory panels. Clause 35 requires the regulators to provide information in their annual reports on their engagement with the statutory panels of the FCA, PRA and PSR over the reporting period. The FCA and PRA already voluntarily provide some information on panel engagement as part of their annual reports. This clause will formalise the existing practice, ensuring clear and consistent communication by the regulators.

The regulators, working with the panels as appropriate, will be responsible for determining how to meet these requirements. Importantly, the regulators will not be required to publish information that they deem to be against the public interest. That will ensure that the FCA and PRA can find the appropriate balance between transparency and the confidentiality crucial to ensuring an open exchange of views between panel and regulator. I therefore recommend that these clauses stand part of the Bill.

Tulip Siddiq Portrait Tulip Siddiq
- Hansard - - - Excerpts

I will speak to clauses 34 and 35 together. Statutory panels make an invaluable contribution, based on panel members’ experience and expertise, to the FCA’s and PRA’s policy-making functions. However, we feel that transparency is vital in ensuring that the public feel that financial services regulation is working in their interests. That is why we support these clauses, which we recognise will increase transparency by guaranteeing consistent communication by regulators about their engagement with panels. Does the Minister agree that representation of the voices of consumers and the public on the FCA’s statutory panels also plays an important role in upholding the transparency of the regulatory process? Ultimately, it is the public, both as consumers and as taxpayers, who are most impacted when regulations go wrong and when regulators fail to adequately uphold consumer protections or financial stability.

I draw the Minister’s attention to the written evidence to the Public Bill Committee from the Finance Innovation Lab. It recommended that

“the government mandate public interest representation of at least 50% on all groups and committees providing advice and making decisions about financial services policy and regulation.”

I want to know whether the Minister has considered the Finance Innovation Lab’s argument about the transparency of statutory panels, and whether that could be strengthened by

“ensuring that the voices of consumers and citizens are given at least equal weight to the voice of industry.”

If he is not familiar with the written evidence, he is welcome to write to me later.

Angela Eagle Portrait Dame Angela Eagle
- Hansard - - - Excerpts

I support the position of my hon. Friend the Member for Hampstead and Kilburn. Given the transfer of powers from Brussels to the UK and the fact that a lot of the current structure is up for discussion and potential change—although we hope it will not all change at once—there is bound to be much more interest in the regulators’ decisions for lobbying purposes than there would be normally in any given year. That level of interest will last until the system settles down into whatever its future tracks will be.

In those circumstances, the regulators must be able to demonstrate robustly that there has been no kind of industry or regulatory capture via some of these panels, and that consumer interest has been properly represented. When I talk to consumer stakeholders and groups, there is certainly a view that the balance is not right at the moment, which is why I am so supportive of what my hon. Friend has said from the Front Bench.

We have to be able to demonstrate, in a transparent way, that meetings that may be confidential for very good reasons are not something else. Will the Minister give us some ideas about how consumer representation in these technical panels can be properly shown to be robust and how transparency can be improved, given the fluid context for a lot of these decisions and future structures?

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

I thank the hon. Members for Hampstead and Kilburn and for Wallasey for their points. We must be alive to the risk of producer capture, and these clauses are a real step forward in bringing the required transparency to the composition of these panels and their recommendations. The Government recognise the importance of the consumer voice; panels that have diverse backgrounds and different expertise avoid group-think, which is an important aspect.

Through this Bill, the Government will introduce a requirement for regulators to maintain statements of policy in relation to their process for recruiting members to panels. That in itself is a step forward. However, it would not be right to move forward with a specific numerical threshold. The panels are there to challenge the policymaking process, in order to give a voice to practitioners, as well as consumers,. They are not of themselves representative. The representative function is one that we discharge here in Parliament, and I think that is the appropriate balance.

Question put and agreed to.

Clause 34 accordingly ordered to stand part of the Bill.

Clause 35 ordered to stand part of the Bill.

15:00
None Portrait The Chair
- Hansard -

We have a lot to cover this afternoon, so I urge Members to take note of the groupings of amendments so we can move through this at the appropriate pace.

Clause 36

Engagement with Parliamentary Committees

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

I beg to move amendment 3, in clause 36, page 49, line 31, leave out

“and the regulatory principles in section 3B,”

and insert—

“(ba) demonstrate that the FCA has had regard to the regulatory principles in section 3B when preparing the proposals,”.

This amendment ensures that the notification provisions align with the duty in section 1B(5)(a) of the Financial Services and Markets Act 2000, for the FCA to have regard to the regulatory principles set out in section 3B of that Act.

None Portrait The Chair
- Hansard -

With this it will be convenient to discuss the following:

Government amendment 4

Clause 36 stand part.

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

I will speak first to clause 36 and then turn to Government amendments 3 and 4. Parliament, through primary legislation, sets the overall approach and institutional architecture for financial services regulation. This includes the regulators’ objectives and requirements to ensure appropriate accountability. Parliament therefore has a unique and special role in relation to the scrutiny and oversight of the FCA and the PRA. Given the regulators’ wide-ranging powers, which they exercise independently of Government, it is vital that Parliament can continue to effectively scrutinise and hold the regulators to account. This is particularly important given that the regulators will have additional rule-making responsibilities following the repeal of retained EU law.

Parliament has a number of existing mechanisms to scrutinise the regulators, including the targeted scrutiny provided by Select Committees. The Government’s view is that those are appropriate and flexible and should continue to be the principal ways in which Parliament holds the regulators to account. Clause 36 adds to these existing tools to support more effective accountability of the regulators to Parliament. The clause also addresses concerns raised in debates during the passage of the Financial Services Act 2021.

Members of both Houses highlighted the importance of the regulators having sufficient regard to the conclusions of parliamentary scrutiny, and the importance of parliamentarians receiving sufficient information from the regulators to facilitate their scrutiny and ensure that it is effective. The clause inserts new provisions in FSMA to require the FCA and the PRA to notify the Treasury Committee when they publish consultations on proposed rules, setting out how they exercise any of their general functions, or on proposals under a statutory duty.

The new provisions also require the regulators to draw the Treasury Committee’s attention to certain key aspects of a consultation, including how proposals advance their objectives and have had regard to the regulatory principles. The clause also requires the FCA and PRA to respond in writing to formal responses to any of their public consultations from any parliamentary Committee. While it is expected that the regulators would always respond, this will give Parliament reassurance by placing this on a statutory footing. The Government consider that placing those requirements on the regulators on a statutory basis is appropriate due to the unique circumstances of the financial services regulators’ wide remits, and their position as independent public bodies that are accountable to Parliament.

I now turn to amendments 3 and 4, which make a technical change to the new requirements for the FCA and PRA to notify the Treasury Committee when they publish a consultation. Clause 36 contains a minor drafting error, by requiring the regulators to set out how the proposed rules are “compatible” with the regulatory principles. The Government have tabled these amendments to correct that and remove any ambiguity, and to align the requirement in clause 36 with the broader requirements in FSMA.

Tulip Siddiq Portrait Tulip Siddiq
- Hansard - - - Excerpts

The Minister has already said that he is open to discussion about this, but I specifically want to turn to the role of the Treasury Committee. The Opposition are pleased to see a strengthened role for the Treasury Committee in scrutinising financial services regulation. However, TheCityUK, in its written submission to the Committee, set out that, while the Treasury Committee has the power to send for persons, papers and records, it does not have the power to mandate the regulators to report on specific performance metrics over time.

TheCityUK argues that the efficiency and effectiveness of regulators, and the impact of their operational performance on UK competitiveness, would be improved by greater accuracy, transparency and accountability in operational performance metrics. It has proposed an amendment to give the Treasury powers to require regulators to report specified operational performance metrics, with the Treasury Select Committee consulted on the metrics to be reported. Those could include the regulator’s performance against its secondary objective or its “have regard” for net zero targets, for example. I wanted to hear what the Minister thinks about those proposals.

Angela Eagle Portrait Dame Angela Eagle
- Hansard - - - Excerpts

As a member of the Treasury Select Committee and—for an all too brief time—acting Chair, I am also very interested to hear what the Minister has to say about this.

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

I am struggling to add incrementally to what the Government have said earlier today regarding our receptivity to the idea of greater transparency, and an ability to design or influence the metrics that are being reported. I observe that the Treasury Select Committee appears fairly formidable in its ability to compel witnesses and information, and I would be interested to hear more about any deficiencies or impediments that that Committee, under its acting Chair or its permanent Chair, feels exist. This would certainly be an opportunity to rectify those, but I suggest that either I meet with the hon. Member for Wallasey, or she writes to me in a little more detail about what would help the working of that important Committee.

Amendment 3 agreed to.

Amendment made: 4, in clause 36, page 50, line 41, leave out paragraph (b) and insert—

“(b) demonstrate that the PRA has had regard to the regulatory principles in section 3B when preparing the proposals,”—(Andrew Griffith.)

This amendment ensures that the notification provisions align with the duty in section 2H(2) of the Financial Services and Markets Act 2000 for the PRA to have regard to the regulatory principles set out in section 3B of that Act.

Clause 36, as amended, ordered to stand part of the Bill.

Clause 37

Duty to co-operate and consult in exercising functions

Question proposed, That the clause stand part of the Bill.

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

The clause will insert proposed new section 415C into FSMA. The new section introduces a statutory duty for the Financial Conduct Authority, the Financial Ombudsman Service and the Financial Services Compensation Scheme to co-operate on issues that have significant implications for each other, or the wider financial services market.

The FCA is the conduct regulator for the financial services sector; the FOS is an alternative dispute resolution service for financial services complainants, such as consumers and smaller businesses; and the FSCS provides financial protection for eligible customers of financial services firms authorised by the FCA. While each has a distinct role within the UK’s regulatory architecture, the work of each organisation will often be relevant to, or have implications for, the others. When issues with wider implications emerge, it is crucial for the functioning of the UK’s regulatory system and achieving the best outcomes for consumers that those organisations co-operate to determine the most appropriate approach to managing them. The organisations already co-operate voluntarily through the wider implications framework. That voluntary framework was launched in January 2022 to promote effective co-operation on wider implication issues.

Clause 37 will enhance that co-operation and ensure that these arrangements endure over time. It will also ensure that the FCA, the FOS and the FSCS put appropriate arrangements in place for stakeholders to provide representations on their compliance with the new duty to co-operate on matters with wider implications.

I will now set out some of the detail of how the clause will function in practice. Proposed new section 415C(3) requires that each regulator maintains a statement of policy explaining how it will comply with this duty. Proposed new subsection (1)(b) requires that those organisations consult other organisations as appropriate, including other regulatory bodies, on wider implication matters. Proposed new subsection (6)(a) requires that they publish an annual report on their compliance with the duty, and proposed new subsection (7) requires that they outline representations received from stakeholders on their compliance with the duty to co-operate on wider implication issues.

Ultimately, this clause will support better outcomes for financial services firms and consumers by maximising collaboration among the FCA, the FOS and the FSCS on issues with wider implications. I have summarised the effects of the clause, and I therefore recommend that it stand part of the Bill.

Question put and agreed to.

Clause 37 accordingly ordered to stand part of the Bill.

Clause 38

Listing Authority Advisory Panel

Question proposed, That the clause stand part of the Bill.

None Portrait The Chair
- Hansard -

With this it will be convenient to discuss the following:

Clause 39 stand part.

Amendment 51, in clause 40, page 54, line 26, after “persons” insert “, at least two of which must be external to the FCA, the Treasury, or the Bank of England,”.

Amendment 52, in clause 40, page 54, line 31, at end insert—

‘(9A) The FCA must consider representations that are made to it by non-governmental bodies and recognised industry or trade association bodies.”

Amendment 53, in clause 40, page 54, line 32, leave out “from time to time” and insert “annually”.

Amendment 54, in clause 40, page 55, line 22, leave out “from time to time” and insert “annually”.

Clauses 40 to 42 stand part.

There is quite a lot in this group. If you refer to the selection list, you will see what is to be taken together.

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

I will first speak to clauses 38, 39, 40, 41 and 42, and I will then turn to amendments 51, 52, 53 and 54.

Clauses 38 and 39 concern the FCA’s and the PRA’s statutory powers. As we have already discussed, FSMA 2000 requires the PRA and FCA to set up and maintain stakeholder panels, also known as statutory panels. These panels provide valuable insight, advice and challenge to the regulators’ rule making, drawing on the experience and expertise of their respective memberships. The regulators have regular meetings and discussions with those panels, in which most major early policy and regulatory proposals are presented for comment. The confidentiality of the panel’s contributions allows the regulators to engage the panels when policy is in the early stages of development ahead of public consultation, and enables the panels to act as a critical friend. The panels represent a diverse range of stakeholders, including consumers, small businesses and market practitioners.

In addition, the FCA also voluntarily operates the listing authority advisory panel, which operates in a similar manner to its statutory panels, and represents the interests of issuers of securities and advises on the FCA listing function. In addition to its statutory practitioner panel, the PRA voluntarily operates an insurance sub-committee for that panel, which represents the interests of insurance practitioners.

Clauses 38 and 39 amend FSMA, to place the FCA’s listing authority advisory panel and the PRA practitioner panel’s insurance sub-committee on a statutory footing. These clauses also set requirements for the FCA and the PRA in relation to these panels, in line with the existing requirements for other statutory panels. That includes appointing a chair to be approved by the Treasury.

Clause 40 requires the FCA and the PRA each to establish and maintain a new statutory panel dedicated to supporting the development of their cost-benefit analysis. CBA is an important part of the regulators’ policymaking process. It helps the regulators to understand the likely impacts of a policy and to determine whether a proposed intervention is proportionate.

Under FSMA 2000, the FCA and the PRA are already required to undertake and publish a CBA when consulting on draft rules, unless certain exemptions are met. Respondents to the October 2020 future regulatory framework review consultation expressed significant concerns about the rigour and scope of the regulators’ CBAs and supported enhanced external challenge as a way to improve the quality of the regulators’ CBAs.

15:15
Clause 40 addresses these concerns and requires the FCA and the PRA to consult their CBA panel on the preparation of a CBA. The Government recognise that requiring the CBA panel to provide detailed comments on all of the regulators’ CBA before publication could cause delays to the policymaking process. To avoid these delays, or an overly burdensome process for minor rule changes, the clause enables the regulators to agree thresholds with the CBA panel for when the panel does not need to review an individual CBA before publication. These thresholds will be set out in the regulator’s statement of policy on CBA, which is provided for in clause 41. The Government consider that the CBA panels can play an important role in improving the production of CBAs by the regulators.
Clause 41 responds to feedback from respondents to the FRF review consultation, who expressed concerns that it is not clear when and how regulators decide to conduct CBA and what the process involves. The clause creates a new statutory requirement for the regulators to each publish a statement of policy on their approach to cost-benefit analyses and sets out requirements regarding the information the regulators must include. This includes the regulators’ methodology for preparing CBA. The clause also requires the regulators to set out in the statement how they ensure that they appropriately consider any comments on CBA in response to the consultations, and provides transparency of the regulators’ CBA processes.
Clause 42 amends FSMA 2000 to require the PRA and the FCA to
“prepare and publish a statement of policy”
in relation to how they appoint members to their statutory panels. Ensuring the right membership of the panels is crucial to each panel’s success in providing challenge, a range of expertise and differing perspectives, and to fulfilling their role as a critical friend to the relevant regulator. Respondents to the November 2021 FRF review consultation raised concerns regarding the lack of representation of some groups in the current panel membership: for example, vulnerable consumers. The clause therefore requires the regulators to make sure there is a clear and transparent process for appointing members to ensure that the membership of panels represents the full diversity of stakeholders.
Amendments 51 to 54 seek to introduce specific requirements for the FCA in relation to its approach to CBA and the creation of its CBA panel. Amendment 51 seeks to add a requirement for the FCA, when appointing persons to its CBA panel, to appoint at least two members who are
“external to the FCA, the Treasury, or the Bank of England”.
I agree with my hon. Friend the Member for Wimbledon that the composition of regulators’ panels is crucial. The Committee should be aware that the FCA’s existing panels are already made up of external stakeholders. Given the important role of the panels to act as a critical friend to the regulator, it is implicit that their members are made up of those outside of the financial services, regulators and the Government.
Amendment 52 would require the FCA to consider representations made to it by non-governmental bodies and recognised industry or trade association bodies in relation to its development of a CBA. Section 138I of FSMA requires the FCA to undertake and publish a CBA when consulting on draft rules, unless certain exemptions are met. Therefore, the FCA is already required to consider any stakeholder representations relating to CBA.
Amendments 53 and 54 would require the FCA and PRA to publish annual responses to the representations made to them by their CBA panels. If taken with amendment 52, the FCA would also be required to publish annual responses to representations made to it by non-governmental bodies and recognised industry or trade association bodies. Amendments 53 and 54 would restrict the flexibility for the FCA and the PRA to choose how frequently to publish responses to representations from their CBA panels, which may indeed be the point that is being made.
The Government do expect the FCA and the PRA to publish responses to representations at appropriate intervals. That may generally be annually, but it could be more frequent if appropriate. It may not always be appropriate for the Government to direct the regulators on operational matters such as this in statute.
Although I am, again, sympathetic to the intention behind these amendments and I regret somewhat that we are even in this position—that, as the regulator perhaps does not have the industry’s confidence in its existing CBA process, the Bill Committee would need to discuss this matter—I ask my hon. Friend the Member for Wimbledon to withdraw amendments 51 to 54. I commend clauses 38 to 42 to the Committee.
Stephen Hammond Portrait Stephen Hammond
- Hansard - - - Excerpts

Again, I direct the Committee to my entry on the Register of Members’ Financial Interests. I warmly welcome the creation of cost-benefit panels. In my view, the greater the understanding of the cost and benefit of a regulation, the greater the understanding of the impact, and therefore the effectiveness, of the regulation, and the greater the transparency of that process.

I am pleased that the Bill includes this clause because it sets out the agenda, membership, metrics and outputs that each of these panels should make. I guess the real answer I am trying to get from the Minister—I have listened carefully and I think we have had most of the response, but I want to test him a little more—is that, if we are to get all the desirable outcomes from setting up these panels, we must know how much they are a creature of the regulator and how much they are independent of the regulator.

The Minister clearly said that there is an implicit assumption that the regulator would follow an independent line for these panels. If the purpose of the panels is purely to provide evidence and they are controlled by the regulator, those recommendations will be accepted, but it is key that there is an independent panel.

I agree that regulators are not in ivory towers, as Martin Taylor said in his evidence to us. I do not think there is substantial implicit control, nor do I think there is not an implicit desire to see independence, nor do I think that there is not implicit influence by His Majesty’s Treasury. However, if we want to build the world’s leading regulatory regime, it must be seen to be tough and proportionate, and that is why these panels are very helpful. I therefore support the aim of clause 40.

My amendments seek to address the concern that the panel has marked its own homework—the excuse that “the dog ate my homework”—and the point about independence. I understand that members of the panel could already be external, but I want to make it clear that “could” is not enough; there should and must be external members. I hope that the Minister will be able to give me that further reassurance that that is very much the intention of the Bill.

I take on board exactly what the Minister said about my amendment 52, in that the FCA already has to consider the representations and place them on record. However, I am quite concerned by the wording. I think the Minister got my point, which is about the wording “from time to time”. Those of us who have had the honour to stand at the Dispatch Box will have been asked questions such as, “When is that happening, Minister?”, to which the response is often, “Soon,” or, indeed, as we heard the Minister say this morning, “In due course.”

The regulator might say to us that it is going to publish the responses “from time to time”. I take the point that the Minister does not want to fetter the regulator, but I am concerned that, if there is not something either in implicit guidance to the regulator or potentially set out, “from time to time” could be whenever the regulator chooses and potentially not annually. Therefore, if it were to say “annually or more frequently” I would be a lot happier. I listened to the Minister’s comments and I think he probably has sympathy with what I am saying, but I will listen to his response to my remarks.

None Portrait The Chair
- Hansard -

Before I bring in the next speaker, I apologise to the hon. Member for Wimbledon, who I probably should have brought in first. I apologise for that; it is a bit awkward.

Angela Eagle Portrait Dame Angela Eagle
- Hansard - - - Excerpts

It is odd hearing the Minister’s response before we have spoken to the amendments. I just want to make a few comments about cost-benefit analysis, which is not an easy science. I am an avid observer of the Government’s attempts to do a cost-benefit analysis. Let us put it this way: it often leaves plenty to be desired when we start looking at how the Government have decided to cost the effect of their legislative suggestions, and we go into the detail of it and see how back-of-an-envelope and dubious some of it is. I do not want to sound too sarcastic, but perhaps if the CBA panels get to be good, they could teach the Government a thing or two about how to do their own analyses.

It is often a difficult but desirable thing to try to estimate the cost of particular suggestions, especially when regulators impose them in other areas. It is important that regulators think about proportionality for the industry itself. Also, in an industry where all the costs are likely to be passed on to the consumer, it is extremely important that it can be done sensibly, properly and in a way that stands up to scrutiny, and I hope that the scrutiny would be there for others to look at.

One often comes up against quite blank walls when trying to interrogate Government cost-benefit analyses, and one ends up going down dead ends and not really understanding how the judgments about the costs have been made, so the better we can get at the science in whatever context, the better for everybody.

It is important that clause 42 exists to try to provide balance and transparency about who will be on the panels, because we would not want them to be captured by particular parts of the structure. We need to have some objectivity if their work is to have credibility and deserves to be taken into account in regulators’ decision making.

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

Apologies if I spoke out of order.

None Portrait The Chair
- Hansard -

It was my error.

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

I will be brief. The hon. Member for Wallasey has great experience of these matters. I suspect we are all familiar with the analogy of Government regulatory impact assessments, which, as the hon. Lady says, are probably vulnerable to the criticism of being opaque, with the science and data not fully laid out. Indeed, I am aware of past suggestions by bodies such as the Institute for Government that there be specialist committees and support given precisely for that purpose. That is analogous, although it concerns not the working of Government legislation, but regulators exercising their rule-making powers. All those observations are pertinent to this point.

My hon. Friend the Member for Wimbledon came back to me on the point about the reasonableness of the phrasing “annually or more frequently”. He makes a good point. As we know, there are many cases in statute where it is specified that something should be annual. Every Government Department is required to lay its own annual reports before Parliament, and we impose that annual burden on many private and third sector enterprises, whether via the Charity Commission or the Companies Act 2006.

15:29
Stephen Hammond Portrait Stephen Hammond
- Hansard - - - Excerpts

Indeed. We ask the FCA to produce an annual report as well, so this is not out of line with other expectations.

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

My hon. Friend has finished my point for me. This is not uncommon in statute, so while the Government do not accept the amendment and will vote against it, I have committed—and I do so again—to meet my hon. Friend and consider these matters further before Report.

Stephen Hammond Portrait Stephen Hammond
- Hansard - - - Excerpts

Having listened to the Minister, I think amendment 51 might already be included in the Bill, amendment 52 appears to be fettering, and 53 and 54 —it looks like I am going to enjoy substantial tea and biscuits at the Treasury next week. As such, I do not intend to press my amendments to a Division.

Question put and agreed to.

Clause 38 accordingly ordered to stand part of the Bill.

Clauses 39 to 42 ordered to stand part of the Bill.

Clause 43

Exercise of FMI regulatory powers

Question proposed, That the clause stand part of the Bill.

None Portrait The Chair
- Hansard -

With this it will be convenient to discuss clause 45 stand part.

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

The Committee has previously discussed the repeal of retained EU law so that it can be replaced with an approach to regulation designed for the UK. As part of that, the Bank of England will take on additional responsibility in relation to the regulation of central counterparties and central securities depositories. Clause 43 sets statutory objectives for the Bank of England to advance, and regulatory principles for it to consider, when fulfilling those responsibilities.

Currently, the Bank has an objective to protect and enhance UK financial stability. Clause 43 confirms that that will continue to be the Bank’s primary objective when regulating CCPs and CSDs, reflecting the vital role played by those financial market infrastructures. The clause also sets out further considerations to which the Bank must have regard when pursuing that objective. First, the Bank must have regard to the effect that its regulation may have on the financial stability of other countries where FMIs provide services. It must also have regard to the desirability of regulating CCPs and CSDs in a way that is not determined by the location of users of their services.

The UK is home to clearing and settlement markets used by market participants around the world. UK CCPs and CSDs are therefore pieces of important infrastructure used by firms in many jurisdictions. As such, it is right that the UK authorities, in regulating these firms, should consider their impact on the financial stability not just of the UK but of other countries.

The clause also introduces a new secondary objective for the Bank in relation to its regulation of CCPs and CSDs. This requires it to facilitate innovation in the provision of services as far as is reasonably possible, subject to pursuing its primary objective. The Bank will pursue this new objective with a view to improving the quality, efficiency and economy of these services. The Bank must also have regard to a set of general regulatory principles, which largely mirror those in place for other regulators.

However, there is also a new principle on the desirability of facilitating fair and reasonable access to services provided by CCPs and CSDs. This recognises that individual firms can often serve the majority of the market in their specialist areas and aims to ensure that their customers can continue to access these services on fair terms.

To further reflect the Bank’s increased responsibility in this space, the clause also sets up a new statutory financial market infrastructure committee in the Bank of England and makes provision about its make-up. The committee will be responsible for the Bank’s functions in relation to these matters but the Bank may also expand the committee’s remit to cover other functions, if it deems that to be appropriate.

Clause 45 updates FSMA to reflect the Bank of England’s increased responsibilities for the regulation of CCPs and CSDs, and ensures that the Bank has the appropriate powers to supplement its new general rule-making power. The clause also applies a range of accountability mechanisms to the Bank’s regulation of CCPs and CSDs, which the Bill also introduces for other regulators. These measures have previously been discussed by this Committee and include, for example, the power for the Treasury to set out matters that the Bank must consider when making rules in specific areas of regulation.

Together, clauses 43 and 45 are vital in ensuring that the Bank is accountable for its use of the new powers and follows the appropriate public policy objectives when exercising its powers. I therefore recommend that these clauses stand part of the Bill.

Question put and agreed to.

Clause 43 accordingly ordered to stand part of the Bill.

Clause 44

Bank of England: rule-making powers

Question proposed, That the clause stand part of the Bill.

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

Clause 44 closely relates to clauses 27 and 28, which the Committee has already considered. As we have discussed, clause 27 covers requirements for regulators to review their rules so that they remain fit for purpose, while clause 28 enables the Government to place an obligation on the regulators to make rules in certain areas. Clause 44 applies these same mechanisms to the Bank of England, in respect of its regulation of central counterparties and central securities depositories.

The clause introduces a new section of FSMA, which places a requirement on the Bank to ensure that the rules are reviewed regularly after implementation, to confirm that they remain appropriate and continue to have the desired effect. New section 300J of FSMA, which the clause will introduce, requires the Bank to publish a statement of policy for how it conducts rule reviews.

As the Bank takes on increased responsibility, there may be occasions when the Treasury considers that it is in the public interest for the Bank to review its rules, in the same way that we discussed earlier in relation to the PRA and FCA. Therefore, the clause introduces new section 300K of FSMA, which provides a mechanism for the Treasury to direct the Bank to review its rules. New section 300L of FSMA requires the Bank to report the outcome of the review and requires the Treasury to lay this report in Parliament. As with the corresponding measures for the PRA and the FCA, the Government consider that this offers a new avenue for challenge of the Bank’s rule making where required, while maintaining its operational independence. The clause 44 also places conditions on the Treasury’s exercise of the power, so that it will direct the Bank to review its rules only where it considers it to be in the public interest.

As discussed when the Committee considered clause 28, it is right that, in the context of increased responsibilities, the Treasury should have the ability to require the making of rules in certain areas of financial services regulation. This is equally true of the Bank in regard to its regulation of CCPs and CSDs. The clause therefore introduces new section 300M of FSMA, which enables the Treasury to place an obligation on the Bank to make rules in a certain area. The use of this power will be subject to the affirmative procedure in Parliament. The power does not enable the Government to tell the Bank what its rules should be; it simply enables the Government to say that there should be rules, with the agreement of Parliament.

The clause ensures that the same enhancements to the FSMA model that we have discussed will apply to the Bank as it regulates CCPs and CSDs. These are important tools to ensure that the Bank’s rules are relevant and appropriate. I therefore commend the clause to the Committee.

Tulip Siddiq Portrait Tulip Siddiq
- Hansard - - - Excerpts

We support the clause, which will empower the Treasury to require the Bank of England to carry out a review of a specific rule, but let me ask the Minister again: does he not agree that such a mechanism is sufficient to highlight to the Bank of England where the Treasury believes a rule may not be working in the public interest and therefore requires a rethink? Surely the provisions under clause 44, and elsewhere in the Bill, provide the Treasury with sufficient powers to hold the Bank of England, the PRA and the FCA to account. Why is an intervention power necessary?

Numerous City stakeholders have written to us to warn of the dangers of such a measure. For example, Barclays stated in its written evidence that

“historically the UK has benefited from a global reputation for having a strong, stable and predictable regulatory framework, developed by effective institutions with clear roles and responsibilities. It is critical to ensure any new intervention powers do not risk or undermine this reputation.”

The Minister was there when Martin Taylor told us that the proposed intervention power had a “bad smell”. The Bank of England has warned that it could diminish the independence of our regulators in the eyes of the global markets. If the financial services sector is sceptical of an intervention power, and experts at the Bank of England have given powerful warnings of the risks of introducing such a power, why is the Minister even contemplating such a provision?

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

I do not wish to detain the Committee further with a repetition of these points. The hon. Lady makes her points in a lucid fashion, but the Government simply disagree. It is appropriate for us to have laid out in statute the relevant responsibilities, both for the Treasury and for regulators. We are giving the regulators, including the Bank of England in this respect, vast areas of additional responsibility. There were previously intervention powers, which sat at the Brussels level. We are now repatriating those to create a rulebook that is appropriate for the United Kingdom.

The hon. Lady cites selectively, if I may say so, from the evidence that the Committee heard. If she engages widely with industry—as I know she does—she will hear other voices that talk about the need for us to have an agile and flexible system. As part of that, it is sometimes appropriate for us to direct.

Tulip Siddiq Portrait Tulip Siddiq
- Hansard - - - Excerpts

I will not detain the Committee too long. The Minister keeps referring to the industry, which he seems to suggest is supportive of the intervention power, but no one has seen it. Has he consulted the industry? Everyone I have spoken to has said that they have not seen the details of the intervention power, so how does he know they support it?

Andrew Griffith Portrait Andrew Griffith
- Hansard - - - Excerpts

The hon. Lady makes a very good point, but how does she know that she opposes it? I suggest we come back to this debate another day, when I hope to fulfil my commitment to bring the intervention power in front of the Committee.

Question put and agreed to.

Clause 44 accordingly ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned.(Joy Morrissey.)

15:45
Adjourned till Tuesday 1 November at twenty-five minutes past Nine oclock.
Written evidence reported to the House
FSMB43 UK Finance
FSMB44 Financial Services Consumer Panel

Economic Crime and Corporate Transparency Bill (Fourth sitting)

The Committee consisted of the following Members:
Chairs: Mr Laurence Robertson, † Hannah Bardell, Julie Elliott, Sir Christopher Chope
† Anderson, Lee (Ashfield) (Con)
† Ansell, Caroline (Eastbourne) (Con)
† Byrne, Liam (Birmingham, Hodge Hill) (Lab)
† Crosbie, Virginia (Ynys Môn) (Con)
† Daly, James (Bury North) (Con)
Doyle-Price, Jackie (Thurrock) (Con)
† Hodge, Dame Margaret (Barking) (Lab)
† Huddleston, Nigel (Lord Commissioner of His Majesty's Treasury)
† Hughes, Eddie (Walsall North) (Con)
† Hunt, Jane (Loughborough) (Con)
Kinnock, Stephen (Aberavon) (Lab)
† Malhotra, Seema (Feltham and Heston) (Lab/Co-op)
† Morden, Jessica (Newport East) (Lab)
Newlands, Gavin (Paisley and Renfrewshire North) (SNP)
Stevenson, Jane (Wolverhampton North East) (Con)
† Thewliss, Alison (Glasgow Central) (SNP)
† Tugendhat, Tom (Minister for Security)
Kevin Maddison, Anne-Marie Griffiths, Committee Clerks
† attended the Committee
Witnesses
Angela Foyle, Chair of ICAEW’s Anti Money-Laundering Committee, Institute for Chartered Accountants England and Wales (ICAEW)
Mike Miller, Economic Crime Manager, Institute for Chartered Accountants England and Wales (ICAEW)
Peter Swabey, Director, Policy & Research, Chartered Governance Institute UK & Ireland
Catherine Belton, Journalist and author
Professor Jason Sharman, Professor of Politics, University of Cambridge
Public Bill Committee
Thursday 27 October 2022
(Afternoon)
[Hannah Bardell in the Chair]
Economic Crime and Corporate Transparency Bill
Examination of Witnesses
Angela Foyle and Mike Miller gave evidence.
14:00
None Portrait The Chair
- Hansard -

We will now hear oral evidence from Angela Foyle and Mike Miller from the Institute of Chartered Accountants in England and Wales. We have until 2.20 pm. Could the witnesses please introduce themselves for the record?

Angela Foyle: I am Angela Foyle. I am the head of risk management and economic crime at BDO Global, but I chair the economic crime sub-committee of the Institute of Chartered Accountants in England and Wales.

Mike Miller: My name is Mike Miller. I am the economic crime manager working within the Institute for Chartered Accountants in England and Wales.

None Portrait The Chair
- Hansard -

Thank you very much. I will first call Liam Byrne.

Liam Byrne Portrait Liam Byrne (Birmingham, Hodge Hill) (Lab)
- Hansard - - - Excerpts

Q 213 Thank you, Ms Bardell. Starting with you, Angela—thank you so much for coming to give evidence. First, what are the perceptions around the world of London, in particular, as a centre for money laundering? How serious a problem do people abroad think that we have here?

Angela Foyle: Publicly, it is stated that London is one of the key capitals of money, but that is partly because it is the largest financial centre in the world, so you will inevitably have dirty money flowing through. There is that view. It is something that the US, in particular, has made comment on at times. On the other hand, when talking to Europeans, we are also recognised as being at the forefront of introducing legislation in relation to money laundering regulations and enforcing them, to some extent, compared with other jurisdictions. It is a bit of a mixed bag, depending on who you are talking to and in what context.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Q You used the word inevitable in your answer. Is it inevitable that there will be lots of dirty money on the scale we have flying through London today?

Angela Foyle: I think what I meant by that is that it is inevitable that you will have some illicit finance where there are significant movements of finance. I am not saying it is good—I think it is wrong. I think we should stop it to the greatest extent that we can, but where do you hide a tree? It would be in a wood. So, where are you going to hide dirty money? It is going to be somewhere where an awful lot of money is flowing through.

It is not that I think it is a positive thing at all; I think it is very negative. I actually spend most of my working life trying to see how we can prevent accountants and others—I have forgotten the word I mean—unknowingly getting involved with it. It is a problem for London that we have to be acutely conscious of, and therefore we have a greater responsibility, in many ways.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Thank you—that is well put. Mike, what is your view on that?

Mike Miller: I agree with Angela. London is such a large financial centre and there is such a volume of money moving through it that there inevitably will be, as Angela said, some money that is not well sourced and not well processed. That being said, we work very hard, particularly at ICAEW, to try to clamp down on it. Illicit finance and illicit transfer of funds affect the profession particularly badly. They put people in a very difficult position, both reputationally and legally. You will find the vast majority of chartered accountants and other professionals do not want to engage in unprofessional and malicious practice when it comes to that finance. We work very proactively with Committees, Parliament and across Government to make our representations about how this can be more effectively countered.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Q Angela, we heard evidence on Tuesday from UK Finance that it was concerned that the verification regime proposed in the Bill is much weaker than the regime used across the AML regulated sector. What is your view on that? Are you worried that a two-tier verification regime is emerging here?

Angela Foyle: It is interesting, because we would probably put it the other way around. The standard—sorry, I beg your pardon, I was thinking about the earlier Bill. Yes, this Bill has two forms of verification, by either Companies House or authorised corporate service providers. It does not appear to have the wording that would be in the money laundering regulations, which requires there to be reasonable verification measures using a risk-based approach. I think those kinds of words always assist, so that you actually have to assess and understand the risk surrounding the people you are trying to verify first, and therefore, if necessary, enhance your level of verification.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Q Do you think that is a weakness in the Bill that we should think about strengthening?

Angela Foyle: Around verification, yes. There is a spectrum, however. Requiring that someone has to verify, that is, prove, that that is true goes beyond what is possible for an accountant. I can look at documents. I can take careful measures to ensure that those documents are, or appear to be, valid, but I cannot actually ever say with 100% certainty that x is x; I can simply say that I have done the following work and, based on that, these are reasonable measures on the risk basis. I certainly think that is an area that could be, at the very least, clarified as to the standards expected to ensure that they are consistent.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Q That is very useful. Finally, the folks from Lloyds bank, and others, described how easy it is to move money through a network of banks and then consolidate it into a final bank, from which bad people may take their money out. We were worried about the way in which proxies in particular could be used by bad people to help with this kind of mechanism. In the Bill, we have a definition of “person with significant control”, which is someone with about 25%. Is that too high?

Angela Foyle: It is based on the Financial Action Task Force standards on beneficial ownership, which looks to people who own 25% or more, in some cases, or more than 25% in others. It is one of those challenging issues because, in relation to things such as proxies, often it is not the about the levels that a person owns, it is the fact that x purports to be the person who holds it, when actually they actually do so on behalf on y, which can be very difficult to track through.

Many people look below 25% in any event just to make sure. Particularly with sanctions, they will have a look there. But 25% is a global norm and changing it might cause other challenges. This is the question: are you satisfied that you understand who the people that you are dealing with are, and who is behind them, at all times? It is not necessarily a question of whether it should be 20%, 5% or 25%. It is a hard one for me to answer because I work with 25%, but I will generally have a good look around to see what else there is.

Alison Thewliss Portrait Alison Thewliss (Glasgow Central) (SNP)
- Hansard - - - Excerpts

Q In your evidence to the Committee, you said that you wanted Ministers to amend the legislation to ensure that accountancy firms are in the scope for indirect information-sharing provisions. Will you tell us a bit more about why that is important?

Mike Miller: Indirect information provision essentially relates to a third-party database which would allow the easier sharing of information between financial firms. The ones that are already mentioned include banks, crypto exchanges and various different entities that could be privy to malicious financial movements, essentially. The accountancy sector has not been included in that, so for the purposes of a lot of the work that we are doing about the open sharing of information with law enforcement, between bodies, between other firms, it would be helpful for the streamlined moving of information. It would certainly help accountancy firms to identify more quickly, and thus reduce the likelihood of, any bad transactions taking place. An accountancy firm could avoid getting embroiled in things it does not wish to get embroiled in if it had pre-emptive access to any intelligence—that may have been discovered by a bank, for example, looking in more detail at specific financial transactions than accountancy firms tend to—that indicated that it should not be doing business with particular entities.

Alison Thewliss Portrait Alison Thewliss
- Hansard - - - Excerpts

Q Thank you, that is useful. As one of the organisations under the OPBAS umbrella, how do you feel that is going with anti-money laundering supervision because there has been some criticism of that regime and its efficacy? Looking at the 2019-20 figures, I understand that you cancelled 10 memberships and issued 39 fines totalling £117,000 to members. What does that stand at now, and is it an effective deterrent?

Mike Miller: I do not have the up-to-date figure with me today, but I can come back to the Committee with that in writing. Generally, in OPBAS, we are obviously very supportive on the need to have professional bodies for oversight of regulation for anti-money laundering. There is obviously a Treasury consultation going on into the potential restructuring of OPBAS. We have been working closely with it to ensure that our members are represented, but also so that it will be the most effective oversight that it can be.

ICAEW is the largest supervisory body in that space. We are very proactive in taking a risk-based approach. We cover a lot of firms, and it is necessary that a lot of those inspections are carried out based on where we assume there is a higher level of risk of illicit financial transactions. Whether that should be changed is obviously something that we will come back to in the consultation.

We have been speaking regularly to Treasury and other groups. They are collecting intelligence to try to determine, I think, some concrete proposals before they put it out to consultation, but we are very supportive of OPBAS. We continue to work closely with it and have a strong supervisory body in place for the PBSs.

James Daly Portrait James Daly (Bury North) (Con)
- Hansard - - - Excerpts

Q Under the Bill exemptions from the main money-laundering offences would apply in two sets of circumstances. One is when a regulated business ends a business relationship with a client or customer and hands over property worth less than £1,000 for that purpose. The second is where a regulated business is dealing with property for a client or customer and prevents access to property of equivalent worth. Do you have any view on those exemptions and how they would potentially affect your profession?

Angela Foyle: I am not so sure the first one will affect us, at £1,000. The second one may facilitate certain activities for our insolvency practitioners, particularly where they are appointed in circumstances where they know that there has been some form of fraud—be that tax fraud or what is often called “fresh air invoicing” or invoice discounting fraud, where there is a set amount of money that is known to be tainted—because, currently, all of the assets of the insolvent entity can often be tainted, and defence against money laundering applications have to be made for each and every transaction done. By having that, they will be able to ringfence certain amounts that they know to be tainted—they would obviously do investigations to ensure that they have got that amount correct—and then deal more quickly with creditors and others with the remainder of the funds. In that sense, we certainly welcome that amendment. It is one that we raised with the Home Office, alongside the banks and, I believe, the Prison Service may have wanted it as well.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q Time might mean that you will be not be able to answer this question as fully as you might wish. However, on where we are now, and where the Bill will take us, the general view that we have heard from witnesses is that it is good—maybe as a starting point to go forward from. In a few sentences, will you explain how you think the Bill will affect your profession, for good or for bad?

Angela Foyle: There are a number of areas in which it will affect us. We are very much in favour of the changes to Companies House, I must say, and of giving additional powers to it. We are incredibly supportive of that.

One example that we can give relates particularly to the misuse of registered offices. All the firms have found instances of people effectively putting their address as offices of accounting firms, presumably to give them credibility. In some cases, that is linked to using names similar to either regulated or existing lawful businesses. Again, that is clearly intended to facilitate fraud. Currently, it can take months to get people off that address, but with the additional powers, we are hoping that that can be done much quicker.

Similarly, with other misuses, such as the inability to contact businesses, there is also the identification of directors to ensure that you are dealing with the people that you think you are. Even if those perhaps could be strengthened in some ways, I think there is a lot that is positive in the Bill. It is a staging post, but it is a really important one.

Mike Miller: I agree with Angela, particularly on the point about Companies House. We are definitely behind the reasons for and the principles of the Bill; we are very supportive of all that it seeks to do. We have been saying for quite a while that some of these measures are overdue, particularly those on Companies House, as Angela mentioned. We have proposed some tweaks for a few areas, particularly around verification, as we have touched on before. There is going to be a two-tier verification in the sense that Companies House will be responsible in some way or another for the verification of those that are registered in the UK. For overseas entities, that is a bit more of a challenge, because they require legal verification and we currently think that the legislation is such that it does not really allow a reputable business to take on the level of risk of a new client unless they have a particularly established relationship.

We have made some recommendations to our members that they need to exercise extreme caution taking on new clients solely for the purpose of verification. That is so the system works; it is not so that they avoid it. It is so that it does not, first, stop people being able to do business in the UK when they rightly should be able to, and secondly, so that if the larger, more reputable firms do not offer that service, then it becomes something that is picked up by those that we may not necessarily want to offer that service.

We have also recommended a couple of areas where we think it could be strengthened, particularly around notifying Companies House of a change of auditors, so there is a two-pronged approach. That is so that companies themselves, for example Angela’s firm, knows that they have been assigned as an auditor, to make sure that is correct and they audit the company, and for Companies House to make sure that a company is audited as it should be. We think that would reduce the likelihood of discrepancies coming in, going forward. However, overall, we are generally supportive.

James Daly Portrait James Daly
- Hansard - - - Excerpts

That is very helpful. Thank you.

Baroness Hodge of Barking Portrait Dame Margaret Hodge (Barking) (Lab)
- Hansard - - - Excerpts

Q ICAEW represents what proportion of the accountancy profession, do you reckon?

Angela Foyle: I do not know the proportion, but there are about a hundred and something thousand members.

Mike Miller: Yes, about 110,000 members. I am not sure of the proportion.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q You do not know the proportion, but the truth is that there will be people who are financial advisers and accountants who are not members. You have a policing role, but if they are not your members, they are not policed.

Angela Foyle: Not by the ICAEW, but there are other institutes out there.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q Yes, but you are the big one.

Angela Foyle: We are the bigger one, but they may be by someone else. There are also people who are not regulated by any professional body who can call themselves accountants as well.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q Quite. We know that most accountants are brilliant people who make sure we do not make mistakes when we fill in our tax return and all that sort of stuff. However, we know from all the leaks that there are a lot of bad apples in the accountancy world.

There are two things I wanted to ask. One is about the current system of regulation. You as professionals play a role in the system. What changes would you make to ensure the current regulation encompasses all those who call themselves financial advisers or accountants? Secondly, how good are you at your policing role? You obviously have a lobbying role and looking at both your CVs, you are on the lobbying side to make sure regulation fits what your profession wants. I am much more concerned about the policing role. Can you tell me how many people in the last year have been suspended, or whatever it is you do to them, if they have been found guilty of engaging in, facilitating or colluding with economic crime or money laundering or anything like that?

Angela Foyle: I do not think we have the numbers for the people this year.

Mike Miller: We do not have the numbers up to date for this year.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q I had them, but unfortunately I have lost them. I think it is about 10 or 15.

None Portrait The Chair
- Hansard -

I am going to have to curb this and move on very briefly to Tom because we have to finish.

Tom Tugendhat Portrait The Minister for Security (Tom Tugendhat)
- Hansard - - - Excerpts

Q This is a very brief question. What difference will this make to the solicitors’ profession as well? You will have noticed that there is not only a control of accountancy but an increase in penalty to solicitors’ regulations.

Angela Foyle: Neither of us is part of the Law Society so we cannot speak for them, but clearly, that was something that was thought to be necessary as a deterrent. Although I expect most of them are likely to be regulated by the Solicitors Regulation Authority for money laundering, rather than the Law Society. However, it must have been a gap that was thought to be necessary to fill. I really do not know, otherwise; I am speculating.

None Portrait The Chair
- Hansard -

Thank you very much. That brings us to the end of the time allotted for the Committee to ask questions. I thank our witnesses on behalf of the Committee for their evidence.

James Daly Portrait James Daly
- Hansard - - - Excerpts

On a point of order, Ms Bardell. As a result of Mr Tugendhat’s question, I had better declare an interest: I am a practising solicitor.

None Portrait The Chair
- Hansard -

Thank you very much. That will be put on the record.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Can I ask something wicked? Can the witnesses provide written answers to my questions?

None Portrait The Chair
- Hansard -

They can indeed.

Mike Miller: I am very happy to.

Angela Foyle: Could we possibly have your question in writing, just to remind us?

None Portrait The Chair
- Hansard -

We will arrange for the questions to be delivered to you in a written format and additionally distributed.

Examination of Witness

Peter Swabey gave evidence.

14:21
None Portrait The Chair
- Hansard -

We will now hear oral evidence from Peter Swabey of the Chartered Governance Institute UK & Ireland. I hope I have pronounced your name correctly.

Peter Swabey: It is pronounced “sway-bee”, but that is fine. I am used to all sorts of things.

None Portrait The Chair
- Hansard -

Q Thank you very much. We have until 2.50 pm for Members to ask questions. Could the witness please introduce themselves for the record?

Peter Swabey: I am Peter Swabey, and I am the policy and research director at the Chartered Governance Institute UK & Ireland. The institute is the professional body for people who work in governance, which includes company secretaries and governance professionals in all sectors.

Seema Malhotra Portrait Seema Malhotra (Feltham and Heston) (Lab/Co-op)
- Hansard - - - Excerpts

Q Thank you very much, Mr Swabey, for coming to give evidence. Could you say a little about what you do in relation to issues around economic crime? What is the view of your members about what more needs to be done and whether there is enough going on in the Bill? Do you have two or three things that you think need to be improved?

Peter Swabey: The institute and its members look at governance. Effectively, they are the people who are responsible for filing documents at Companies House and for advising boards on good governance. In that sense, they are perhaps less directly involved in economic crime than some of the other bodies you are hearing from.

From our perspective, the Bill is a really good effort. While I was sitting at the back, somebody said that it was regarded as a starter for 10. I think the Bill is a really good start on a lot of things that a lot of people have been thinking that Companies House should have been doing all this time—indeed, many people thought Companies House was doing it all this time, but it has not had the powers to do so. From that perspective, giving Companies House some of those powers is a really big step forward. There are a few things that I would perhaps have done differently, but that is in the realm of detail.

Seema Malhotra Portrait Seema Malhotra
- Hansard - - - Excerpts

Q What about gaps?

Peter Swabey: The big gap, from my perspective, is around the role of the company secretary or governance professional in the Bill. We were just hearing a bit about the arrangements for who is allowed to deliver documents for the authorised corporate services professionals. In most companies, it would be the company secretary who takes responsibility and ownership for doing that. That is something that we would like to see more specifically included in the Bill. The Government’s intention may be to include that in the regulations that the Secretary of State has the power to make. That is fine—that is regulations—but I would much rather see it in the Bill and, ultimately, the Act.

Seema Malhotra Portrait Seema Malhotra
- Hansard - - - Excerpts

Q To be a bit more specific, what more do you suggest should be in the Bill?

Peter Swabey: For me, it should reference the role of the company secretary. I have a slightly wider issue than that. The Companies Act 2006 got rid of the requirement for a company secretary in all companies. That was deregulatory—that was fine—but we now rely much more on the reporting that companies do and the filings that companies make, so I believe there should be a requirement for a company secretary, not just in public companies, as there is now, but in larger private companies that also have to meet some of these requirements.

Alison Thewliss Portrait Alison Thewliss
- Hansard - - - Excerpts

Q We heard earlier about some of the deficiencies in the way that documents are delivered and uploaded to the Companies House website, and how they can be used thereafter. Are there practical improvements that could be made to improve that situation, both at your end of the process, in the filing, and for the use of those documents at the other end of the process?

Peter Swabey: Yes, I think there are. We have regular engagement with Companies House and that is one of the things that it is seeking to tackle already, but will also seek to tackle through the powers and resources that it will hopefully get as a result of the Bill. It would great if everything that has to be filed at Companies House can be filed electronically. There are still a number of things that cannot be. Again, that may be changed as a result of the changes that Companies House are making to their system but, as we stand at the moment, there are things that cannot be filed electronically.

In terms of use, there is a question that companies sometimes get feedback on from shareholders, which is on the availability of information, particularly about retail shareholders, and particularly for those companies that have large registers of members. Individuals on this Committee, or me, or whoever—their name and address might be at Companies House in respect of a holding of 100 shares in a company. If it is a big public company with millions and millions of shares, that is probably not that helpful. There are people who buy copies of the register for commercial purposes. It would be quite useful to tighten that up.

Alison Thewliss Portrait Alison Thewliss
- Hansard - - - Excerpts

Q We have heard an awful lot about deficiencies in the register in terms of the information that is on there and the practical difficulties that that causes for companies who wish to interrogate the information for their own due diligence. Is that an issue you have come across?

Peter Swabey: Yes, I think it is. It is an issue in a couple of ways. We just heard about the challenges in correcting deficient information. There are a number of plcs that have reported that their registered office address has been used for companies of whom they have never heard. If you are a plc with a large number of subsidiary companies, that could quite easily be overlooked by people. As somebody said in the last session, that is then used to give credibility to the potentially fraudulent company that is being set up. Being able to fix that more quickly is certainly an advantage.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q One of the things we have talked about with every witness—you will probably give a similar answer, Mr Swabey—is that we all want to see Companies House resourced to be able to carry out the requirements in the Bill. One witness this morning made reference to the sheer volume of companies and legal entities that are registered at Companies House on a daily basis. If one of the consequences of the Bill is that registration at Companies House takes longer because people have to go through the regulations and comply with other duties, is there any consequence to that?

Peter Swabey: I think it makes it a little more difficult for some people. I am a company secretary, so I would argue that you simply have to plan it all a bit better, and perhaps think about some of that a little more in advance. It will mean that some corporate transactions that you can currently deal with very quickly by simply having a meeting in a room and agreeing that so-and-so and so-and-so are the new directors will now have to go through a process. We are all hoping that, as promised, Companies House will manage the verification process for new directors expeditiously so that that will not hold things up unduly, but it is an additional factor to bear in mind.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q In layman’s terms, and very briefly, if I want to register a legal entity and I employ you or somebody else to do that, what information is submitted to Companies House?

Peter Swabey: You have to name the directors. You have to give some sort of evidence that the directors are real people who you know, so some piece of personal information about them. That might be their eye colour or their national insurance number. Nobody actually checks that, by the way. You just have to fill the box in. You have to have a registered address for the company and a few other details, but it is a relatively simple process.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q So such a process—light-touch regulation at its finest—is certainly open to fraudulent activities.

Peter Swabey: I think it is fair to say that at the moment it is nothing like as secure as any of us would like it to be, and the Bill is a big step forward in tightening that up. I would still like to see it go further in some ways.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q It is the beneficial ownership that is revealed to Companies House, not necessarily even all the directors, as I understand it. The way you are talking, you obviously deal with big companies. The whole purpose, which I think we all share across the room, is that we want SMEs and the growth of new companies. The idea that every SME will have a company secretary is not really a viable alternative. That means it is really important that we can have faith in the company service providers, who are the people who check the data. Given the way the Bill is constructed, do you think you would have such faith, in particular given all we know from the Panama leaks onwards?

Peter Swabey: It is really important to make sure that the hoops through which those authorised company service providers go before they become authorised are significant, to make sure that we can have confidence in that.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q What would that entail?

Peter Swabey: That would entail detailed verification of who people were, of who the ownership was and how that was structured and, effectively, Companies House having a bar to doing that. Where I would take issue slightly with the premise of your question is when you talked about SMEs not needing or not having space for a company secretary; most of them have an accountant and all sorts of other things. It does not have to be a full-time role; someone can be doing it part time, but what is important is that someone who knows what they are doing is looking after those issues.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q Do you know how company service providers are regulated and supervised?

Peter Swabey: No, it is not something that our members—

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q They are supposedly regulated and supervised by HMRC. Previous witnesses talked about OPBAS, which in its most recent report said that 81% of those supervisory bodies did not have a proper risk-based approach to ensure that those people were lawyers, accountants, bankers or whatever, that they were legitimate people not colluding in or facilitating economic crime. What do you have to say about all that? Basically, supervision is in a mess. HMRC does nothing to supervise company service providers. What is your view on that?

Peter Swabey: I cannot help you much with that, because we are not a supervisory body in that sense.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q You give advice on what makes good supervision.

Peter Swabey: We give advice on what is good governance for organisations, not on the supervisory role.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Q I want to pursue that point for a moment. In the interests of good governance, would it not make sense to strengthen some of the obligations on directors to include, for example, a duty to take steps to prevent corruption in their organisations? We have similar measures on corruption; we do not have similar measures on economic crime and fraud.

Peter Swabey: You have the directors’ duties under section 171 of the Companies Act and so on. Those are there, but it is difficult to identify exactly how those directors’ duties can be pursued against any defaulting director. For me, that is one of the challenges. Were you to introduce something extra on that, that would be a solution, but again you would need to look at how that could actually be enforced.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q It is nice to see you, Mr Swabey. May I ask specifically about the governance aspect, which is your area? Accountability is fundamental to governance. You cannot hold people to account for things that they are not responsible for, or likewise the reverse. Will you touch a little on how you see that improving—not just the accountability in financial transparency, and all the anti-money laundering and various other aspects we have spoken about, but the ability to hold companies to account for other governance areas, whether those are corporate social responsibility, clean-up, environmental or many others?

Peter Swabey: The Bill deals with some very specific issues, which are not necessarily those. I think that the Bill would need to be broadened significantly were it going to get into things like sustainability, corporate social responsibility and so on.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q You do not think that cleaning up Companies House, making people accountable, and understanding who they are and who knows what are important for governance?

Peter Swabey: No, I think that is very important for governance. What I was saying was that you were then talking about some of the other issues, such as corporate social responsibility, which are probably outwith the scope of the Bill as it stands.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q I do not agree; let me push back on that. One of the things we have a problem with in the community that I am lucky enough to represent is dumping waste—fly-tipping—and it so happens that occasionally, it is done by companies that then disappear. I think the Bill helps to address that. Do you not?

Peter Swabey: Absolutely, yes.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q So it does have some environmental effect.

Peter Swabey: Yes, you are right. I had not thought of that aspect of it—I was thinking in terms of the reporting that companies do—but yes, in terms of tracking down defaulting companies, I think it will help you.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q Would you agree, then, that it may also support other areas of governance: the ability to oversee, for example, different areas of employment, human trafficking or whatever it might be, and to go through companies that set up and disappear far too quickly?

Peter Swabey: Yes, absolutely. Removing the ability for companies to go bust one day and reappear the next with a very similar name and very similar directors, but without all those tedious debts that they used to have, is one of the really important issues.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Exactly—phoenixing.

Peter Swabey: I think that is really important.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q I am very glad you are supportive of that. I think this makes a huge difference; as you rightly say, it is one step on the journey, but it is still a huge difference from where we are.

I also wondered if you could talk a little bit about whether you think it is going to help with economic crime. Clearly, although I am not a BEIS Minister, one of my responsibilities is fraud. The presence and disappearance of corporate entities is, I am afraid, something that has caused more than its fair share of fraud. How do you think the Bill might be able to help with that?

Peter Swabey: I think the Bill will help with that by making it possible to have greater confidence in the directors who are responsible for those companies actually being real people. We were talking a little while ago about the ease with which you can set up a company, and the limited verification of directors that goes on. We have a verification process in the Bill that will help to ensure that those people are actually the people you believe them to be, and that there is an address where you can get hold of them and, particularly, where the forces of law enforcement can get hold of them should they need to. That is a real strength.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

I am very grateful, not only for your evidence today, but for the work you do and the oversight you bring. It does make a huge difference, and I am very grateful indeed for it. Thank you.

None Portrait The Chair
- Hansard -

Thank you very much. If there are no further questions from Members, we will thank the witness for his evidence and move on to the next panel. Peter, thank you very much for your time; we greatly appreciate it.

I am going to suspend the sitting, because we have a little bit of time before the next evidence session, and the witness is not in the waiting room yet because she is giving evidence via Zoom.

14:38
Sitting suspended.
Examination of Witness
Catherine Belton gave evidence.
14:41
None Portrait The Chair
- Hansard -

I restart the sitting with our sixth panel . We will now hear oral evidence from Catherine Belton, journalist and author. Catherine is appearing via Zoom. We have until 3.10 pm. Catherine, could you please introduce yourself for the record?

Catherine Belton: Hi, I am Catherine Belton, author of “Putin’s People”. I am a reporter with The Washington Post.

Seema Malhotra Portrait Seema Malhotra
- Hansard - - - Excerpts

Q Thank you very much, Ms Belton, for joining us to give evidence today, and thank you for all you do as well. In terms of the scale of economic crime and how much needs to happen nationally and internationally, what gaps do you see in the legislation as it currently stands that stop the UK from being able to tackle economic crime on the scale that we need to?

Catherine Belton: There is a very simple answer to this, though I should basically preface all my answers by saying that I am not an expert on the Bill like some of my colleagues, such as Oliver Bullough. I have not studied it deeply, but what I can speak to is the urgency of these reforms, because of the threat posed to our national security. There is also a dire need to push through the anti-SLAPP legislation.

All these deep-pocketed oligarchs are essentially taking advantage of our system and are able to outspend not just journalists but financial watchdogs acting in the public interest. They are outspent and intimidated out of pursuing any real investigation into financial misconduct. They know from the outset that they may lose.

You only have to look at the example of the Serious Fraud Office and its battle against ENRC, which was once listed on the London stock exchange, then delisted and owned by a trio of Kazakh fraudsters essentially. The amount they spent annually on legal cases in the UK was £89 million, which is over the annual budget of the Serious Fraud Office. Though the Bill is of dire importance, without greater spending and funding for our public watchdogs—the National Crime Agency, Serious Fraud Office and other entities—we are going to be stymied from the get-go.

Alison Thewliss Portrait Alison Thewliss
- Hansard - - - Excerpts

Q Thank you very much, Catherine. Could you tell us a bit more about why the UK has become the destination of choice for people wishing to use corporate structures for money laundering and other purposes? Could you tell us about the impact that has internationally?

Catherine Belton: The UK, like many other countries, has welcomed capital from places such as Russia with open arms for the past 20 years. It is certainly a place that Russian oligarchs have flocked to, not only because they want to be part of the UK establishment but because they have clearly taken advantage of our lax legislation and regulation compared with the US, for instance. If you are listing a company in the US you face the Sarbanes-Oxley regulations, and you have committed a crime if you are found to have lied on your financial disclosures. Here, there seem to be so many loopholes; people can get away with everything.

We only have to look at our Companies House institution to see that there is very little scrutiny of filings that people are making. We have all heard the obvious examples of people not disclosing anything. I think you are a great expert in the use of limited liability partnerships by Russian money launderers. UK LLPs have seen tens of billions of dollars’ worth of illicit Russian cash move through them over the last decade or so.

Most of those money laundering schemes have been overseen by the Federal Security Service of the Russian Federation. It has a money laundering department called Department K, which has overseen all those schemes and has had an involvement in each and every one of them. I am told by security officials in Moldova—where one scheme used LLPs to move tens of billions of dollars of cash into the UK—that essentially the schemes are used not just by Russians seeking to move money to evade customs and tax, but by the Russian Federal Security Service itself, because it sees the greater flows of cash as cover for it to move its strategic cash into our jurisdiction.

I must again point to the need for SLAPP legislation and ask whether that could, or should, be attached to the economic crime Bill as it stands. If we do not enable journalists and financial watchdogs to look at those entities without fear of getting crushed by enormous lawsuits that will cost more than anyone’s budget allows, then we are going to be open to this type of abuse of our system forever. It was only July when Dominic Raab, the Justice Secretary, finally and wonderfully—it seemed like a miracle at the time—forwarded that anti-SLAPP legislation. It was going to allow for an early dismissal mechanism for cases that were clearly an abuse of the law, and aimed at intimidating journalists and financial watchdogs out of reporting matters of public interest—whether financial misconduct or something else. There has been a great deal of turmoil in Government since then, but we are seeing that SLAPP cases have very much not gone away.

The esteemed Chatham House think-tank recently had to remove the mere mention of a Tory donor, who had previously been convicted of money laundering, from a report on the abuses of the UK system by kleptocrats. The past of our Tory donors is something that we should know about, yet Chatham House had to erase its mention of that donor from its report. Staff looked into how much it was going to cost to defend, even though it was clearly public interest reporting. There was not really much to dispute about it, but they found it was going to cost them £500,000 before the case even got to trial, which means there is something so deeply wrong with our system, and we cannot even begin to combat any of these issues without having these anti-SLAPP measures in place. That is not just for journalists but for the Serious Fraud Office and for other public interest watchdogs.

Alison Thewliss Portrait Alison Thewliss
- Hansard - - - Excerpts

Q Thank you; that is very helpful. I just wanted to ask about something else. Bill Browder had suggested a sort of “adverse costs” amendment, to prevent law enforcement companies from not being able to afford to take a case against these people. Would you support that?

Catherine Belton: Yes, for sure. Obviously, the companies pursuing these abusive cases should face having to carry the full cost of the case. I have a colleague at the Foreign Policy Centre, Susan Coughtrie, and she and Charlie Holt of English PEN have been working on a new Bill for this SLAPP reform, and I very much recommend that you speak to them as well. That Bill would provide even tougher requirements for cases to really show a likelihood of success.

What the Ministry of Justice proposed was like a three-step set of criteria for judges deciding whether a SLAPP case is a SLAPP case, and whether it should be dismissed before the costs racked up too highly. One of those criteria was whether the case being pursued had a realistic chance of success and it is very clear that this type of criterion needs to be toughened up. I certainly recommend that you speak to Susan Coughtrie at the Foreign Policy Centre about ways in which to do that.

However, I guess that my question to you would be: “Do you think there is a significant possibility that the anti-SLAPP Bill could be attached to the Economic Crime Bill? Is that something that will this speed up?” It is so vitally needed—more than ever. I mean, it is completely—

None Portrait The Chair
- Hansard -

Catherine, I am really sorry to interrupt you—

Alison Thewliss Portrait Alison Thewliss
- Hansard - - - Excerpts

I think my colleagues and I are interested in hearing this.

None Portrait The Chair
- Hansard -

It is a very important question, but unfortunately we have to stick to Members asking witnesses questions. However, I am sure that you can put those questions to our esteemed Members in other forums.

I will move on to James Daly now, because there are a couple of other Members who are keen to ask questions.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q Catherine, thank you very much for giving evidence; what you have said is very helpful. You have investigated these matters and looked into them. You have talked about Companies House, which is a central part of this legislation, and we have talked with other witnesses about what needs to be done there.

However, I just wanted to ask about money laundering. To make a very straightforward point, you obviously need a bank. If you have got a fake financial institution, or a legal entity set up for criminal purposes, you need a means of transferring money, either out of that body or into it. Could you talk about any thoughts or experience that you have, including regarding anything that you have investigated, that touches on that point and on what we can perhaps do to address it?

Catherine Belton: I think it goes back to this issue of LLPs and how these limited liability partnerships have really become, over the last two decades, the vehicle of choice for Russian money laundering schemes in particular—at least the ones that I have studied.

There was the “Moldovan laundromat”, which used LLPs based in the UK, including in Scotland, to move $14 billion out of Russia in illicit cash in the space of four years. That was part of a much bigger process through Danske Bank; I think the total volume of illicit Russian cash coming through Danske Bank was in the realm of $200 billion in just over a decade. That is obviously enormous amounts of cash.

However, it just goes down to the weakness of LLPs and the system that we have created, in which you can have companies established that do not even need to have any real business in the UK; they do not pay taxes here and therefore they did not have to file any accounts. They were not really having to file any beneficial ownership, either. That really means that there has been a huge gap in our legislation. Obviously, the Companies House reform will hopefully provide for more disclosure of beneficial ownership, but there are still so many ways for people to get around it, because Companies House really does not have proper funding to check whether beneficial ownership is being reported properly.

Obviously, the banking system is now under much greater pressure to investigate the source of funds, but while the banking system has become a much more complicated place for people to move illicit money through, the same demands are not placed on hedge funds or private equity funds. There are much less stringent requirements on those types of entities to disclose who their clients are and where the money is coming from. We only have to look at who the major backers of Brexit were. Hedge funds and private equity funds were major donors during the Brexit referendum, and we really had no clue where they were getting the money from.

None Portrait The Chair
- Hansard -

Catherine, we really want to hear from you and make sure that all our other members get to ask questions. We have two other members after James who want to ask questions, so please keep your responses as brief as possible, with all the information that is possible to get across.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q On top of all the very important points that you have made, I think one of the things that I am left with from your evidence, Catherine, is that we have to ensure that the information-sharing links between Companies House and financial institutions are strengthened. Companies House was described as being a passive organisation at the moment, but what you are saying is that that has to change and there has to be a close link with financial institutions, so that these relationships are attacked throughout the criminal justice system. Am I right?

Catherine Belton: Yes, that is exactly right.

None Portrait The Chair
- Hansard -

Thank you very much.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Q Catherine, I think I speak for all of us in saluting you for the courage you have shown in revealing what you have revealed. How important was it to President Putin that people around him—his friends and allies—were able to move money so easily out of Russia through UK corporate structures?

Catherine Belton: I think this has become a key way in which the Putin regime is able to extend its soft power and influence and undermine our democracies. That is very clear, because you can have vast flows of pretty much untraceable money, especially in the case of LLPs. Once it goes through a UK LLP, no one has any clue where any of that cash has gone. Vladimir Putin believes that the weakness of the west lies in our incessant drive for profits and the belief that the more Russian cash there is in the UK, the more Russia will have to follow our corporate governance standards.

Unfortunately, there has been a great lack of corporate governance standards, which has allowed our system to be corrupted. It has really laid bare how powerless some of our oversight bodies and enforcement agencies are. You only have to look at the National Crime Agency’s investigation into the source of the donation that Arron Banks gave to the Brexit campaign to see just how feeble our institutions are, at a time when we really need to be empowering them. When the NCA had to look for the source of the £8 million, it could not go any further than the Isle of Man company co-owned by Arron Banks. We do not know where the money came from.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Q Let me just crystallise this. Are you saying that allies of President Putin used UK corporate structures to move money out of Russia?

Catherine Belton: Yes, I am, of course. Obviously, that has an agenda, especially when the UK Parliament’s own Intelligence and Security Committee has pointed out the very close links between Russian business, the Russian state and Russian intelligence. Basically, Russian businesses very often have to act as arms of the Kremlin or follow Kremlin orders. Russian businessmen have to follow Kremlin orders in order to hold on to their wealth. It is not just money that is coming into our system and making everyone rich; it is money with an agenda, and that agenda can be to undermine our democracy.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Q I do not know whether you can see it, but the Bill is called the Economic Crime and Corporate Transparency Bill. How credible do you think corporate transparency in this country will be if we do not amend the Bill to include the protection of journalists like you, who have worked so hard and bravely to reveal the truth only to face legal action in English courts that sought to silence you?

Catherine Belton: I think it will be half-baked if it does not include that amendment. Obviously, it is great to have better laws, but when financial watchdogs, public oversight bodies and journalists are still unable to cast a light on some of the financial transactions of the super-rich, from fear of these crushing lawsuits, it means that you have a system that is only half working. Law enforcement relies, and has relied in the past, to a great degree on journalistic investigations, including for instance by the OCCRP; its reporting has led to some very important cases.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q I will ask one question, Catherine, because many have been asked. I join with others who have met you, or read your book, and are full of admiration for your courage. For those who have not, and do not know your story, will you quickly tell us what happened to you in relation to the SLAPPs, and why it is important that we try to tackle those in the Bill? You can do it very briefly; I am conscious of time.

Catherine Belton: I wrote a book called “Putin’s People”, which was about Putin’s rise to power, the continued role of the KGB and how Russia was using oligarchs—Russian businessmen—to further Russian influence in the world. I was writing precisely about how many of the oligarchs, such as Roman Abramovich, were essentially forced to act as arms of the Kremlin, because otherwise their wealth could be jeopardised. Putin’s hold on power was such that anybody who did not obey his orders could face jail or the seizure of their companies.

Abramovich was very upset when I suggested in the book, quoting three former associates, that he had acquired Chelsea football club on Putin’s orders, in order to acquire soft power and influence in the UK. That, I believe, was public interest reporting. The allegation had been put to his spokesperson, and the response was in the book. He announced that he was suing me personally and HarperCollins—a statement that was swiftly followed by lawsuits from three other Russian billionaires, and then one from the Kremlin oil company Rosneft. The cases were very difficult to grapple with, because there were so many of them all at the same time.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q How many were there altogether?

Catherine Belton: Five cases. It cost my publisher £1.5 million to deal with the cases, and they got only to the preliminary hearing stage before they were either settled or withdrawn. Rosneft’s case had to be withdrawn completely because there was no basis for any of its claims. The judge found that one of Abramovich’s claims was completely exaggerated, which allowed us to make minor amendments and avoid the enormous cost of having to continue to fight. Even though we believed that we had a very strong public interest case, our lawyers told us that it would have cost, at a minimum, £2.5 million to continue to defend the great deal of reporting that had gone into my book. It would have taken over a year. Abramovich had twice filed the exact same claim simultaneously in Australia as well, even though he had no business there, and therefore no reputation to protect.

Nineteen media rights organisations said that the cases against “Putin’s People” and my publisher, HarperCollins, bore all the hallmarks of a SLAPP case—that is, they were designed to intimidate the publisher, and they were abuse of process, particularly in the case of Abramovich.

Yes, the judge found that one of his claims was exaggerated, which, according to the Ministry of Justice’s proposal for the anti-SLAPP law, is one of the criteria under which SLAPP cases should be thrown out of court at an early stage. It introduced three criteria. One was that meanings were being inflated or exaggerated by a claimant; that was clearly the case for most of the oligarchs pursuing me. In Rosneft’s case, the judge found that what I had written about Rosneft, the Kremlin oil company, was not defamatory at all, yet my publisher had to spend hundreds of thousands of pounds just to get to the stage of a preliminary hearing, to get it thrown out of court. The proceedings demonstrated how many other UK media organisations had been censoring themselves because they did not want to deal with those enormously costly lawsuits—

None Portrait The Chair
- Hansard -

Catherine, I am really sorry, but I have two more people waiting to ask questions and there is only five minutes. I am so sorry to curtail you.

Seema Malhotra Portrait Seema Malhotra
- Hansard - - - Excerpts

Q I want to come back on how we can take practical steps to tackle this. I think you mentioned the Foreign Policy Centre. Are there more specific measures we could take in the Bill?

Catherine Belton: In July, the MOJ forwarded anti-SLAPP legislation. Unfortunately, because of the chaos of the last couple of months, that has not really gone anywhere. That legislation could be attached, as is, to the Economic Crime and Corporate Transparency Bill. The Bill as drafted slightly toughens the criteria for claimants; they have to prove that there is a significant likelihood that they have a real claim. You should speak to the FPC to weigh whether it is worth pursuing their draft laws as a better model, or whether it is enough to use the one already drafted by the MOJ. They had extensive consultations on that, but now it looks like all the momentum has gone. It is astonishing to me that this is not being pursued as a priority, given the situation we are in. It is absolutely vital that we shine light on individuals who may be operating on behalf of Putin to undermine western support for Ukraine, and to undermine our resolve this winter as we face enormous cost of living hikes. It is really important.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Q Catherine, thank you very much for giving evidence to what must be your 20th or 30th Committee in the last 12 months. I am very grateful for the work you do. Could you tell us how you think the reforms to Companies House will improve oversight of listed finance? As you say, it is a building block.

Catherine Belton: You say that this is my 20th or 30th time giving evidence, but unfortunately, it is not. I have only spoken on SLAPPs before. I will leave the realm of Companies House reforms to people who are more expert on it than me.

Tom Tugendhat Portrait Tom Tugendhat
- Hansard - - - Excerpts

Okay, thank you.

None Portrait The Chair
- Hansard -

If there are no further questions from Members, thank you very much, Catherine, for taking the time to speak to us.

Examination of Witness

Professor Jason Sharman gave evidence.

15:09
None Portrait The Chair
- Hansard -

Last but not least, we will hear oral evidence from Professor Jason Sharman, professor of politics at the University of Cambridge. We have until 3.30 pm. Professor Sharman, could you introduce yourself and give us your background for the record?

Professor Jason Sharman: My name is Jason Sharman and I am a professor of international relations at Cambridge University. I study international money laundering and corruption, often by impersonating would-be corrupt officials, money launderers and terrorist financiers.

Seema Malhotra Portrait Seema Malhotra
- Hansard - - - Excerpts

Q Thank you for coming to give evidence. Does the Bill go far enough in reducing the attractiveness of the UK as a destination for economic crime? You obviously have an international perspective, and I am keen to know whether you are seeing new behaviours that it would be useful for us to understand. Are the measures sufficient for tackling the challenge we face?

Professor Jason Sharman: I would not want to make the perfect the enemy of the good. The legislation is a positive step, but I watched the earlier testimony, and I agree with people who say that the proof of the pudding is in the enforcement. I study politics and international relations; I am less interested in the rules on the books and more interested in what difference they make, if any. If you are a criminal—a money launderer—you do not have to be very original. You do not have to try new things. Things that worked 10, 20 or 30 years ago still work today, so there is no need to change too much.

Seema Malhotra Portrait Seema Malhotra
- Hansard - - - Excerpts

Q On the attractiveness of the UK, you have mentioned enforcement, but from your research in this area, what would you highlight as being the weakest points in enforcement?

Professor Jason Sharman: The UK has a combination of a good reputation and lax enforcement. From the point of view of a launderer, that is a bonus: you get double. You get the appearance of probity—other people have mentioned the use of UK companies to open foreign bank accounts—with not much scrutiny and even less enforcement. Transparency is all good and well, but more information by itself does not lead to stronger action against money launderers or corrupt officials.

Alison Thewliss Portrait Alison Thewliss
- Hansard - - - Excerpts

Q There has been a lot of discussion about anti-money laundering supervision, and the effectiveness of the agencies that the Government expect to carry out those duties. Are they the weakest link in the chain, and could more be done to tighten up that anti-money laundering supervision, to shut the door, and to stop these companies from beginning their business here?

Professor Jason Sharman: There is certainly more that could be done. Some of it has been mentioned by other people; more money is the obvious one, but that may be necessary but not sufficient. In some ways, the career structure and career incentives for people who work in these agencies needs reviewing: if they start an investigation and it goes well, they get a small bonus to their career. If they start an investigation and it goes badly, they get a very big, indelible black mark, so in terms of career progression, it is safer for them not to investigate things.

One of the main sources of support has not been fully used: there are a lot of people outside the formal enforcement agencies who are very keen to help in this cause, including journalists and those in non-governmental organisations, as well as in the for-profit sector. That potential has not been tapped, so there are certainly things that the Government and the state could and should do, particularly in terms of regulatory agencies; but the area where I think it is possible to make most progress is probably beyond that.

Alison Thewliss Portrait Alison Thewliss
- Hansard - - - Excerpts

Q That makes sense. Certainly, there have been lots of times when I have been in rooms with a group of people who have solutions to tackle this, and Government should be doing more to make sure that they are listened to. Could I ask about the abuse of limited partnerships, secrecy jurisdictions and things like that? Could more be done to tighten up those rules? It feels as though there is an awful lot of abuse of those corporate structures, and very little scrutiny.

Professor Jason Sharman: It depends what you mean by “secrecy jurisdiction”. A person who has studied this for a long time said this: “People are not surprised when I tell them that the most important tax haven in the world is an island. People are surprised when they hear that the name of that island is Manhattan. People are not surprised to hear that the second largest tax haven is a city on an island. The city is London, and the island is Great Britain.”

We recently formed a shell company with co-authors Michael Findley and Dan Nielson in the United States. It took 137 seconds to incorporate that company. Here, it would probably take you a little longer—it might take you as long as 10 minutes—but you do not really have to show ID in any case, so the barriers are pretty low. If you do not want to use anything as fancy as a limited liability partnership, you can just use a plain old company, and that works pretty well for holding a bank account overseas.

Alison Thewliss Portrait Alison Thewliss
- Hansard - - - Excerpts

Q The Government have talked up the benefits of being able to incorporate companies fast. Do you think there needs to be a bit more grit in the system to allow for scrutiny, rather than speed?

Professor Jason Sharman: I think so. For me, it is telling that in jurisdictions for which incorporations are their lifeblood, such as the British Virgin Islands, it is much slower to incorporate. It takes close to two weeks to incorporate in the British Virgin Islands, and it takes about $1,000. The British Virgin Islands get half of their Government revenue from incorporation fees. They have a real interest in making sure their company registry works well. No one likes red tape and filling out forms, but the idea that you might have to spend a couple of hours instead of 15 minutes, or £50 instead of £12 is, to me, not unreasonable.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q Thank you for that, Jason. You have given an example already, but I was wondering about the international context. We have Companies House. Can you give me an example of the equivalent in European countries or America and the difference you perceive between our Companies House and theirs?

Professor Jason Sharman: I feel sorry for British Companies House, because it has been given a lot of work without the resources to carry it out. The mismatch between what is expected of an institution and the resources it has to achieve those ends is greater. Company registries are passive, archival organisations.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q That was my point, really. We have accepted the point about resources, but Companies House was described by one of the directors we heard from as a passive organisation in respect of these issues. I just wondered whether in other jurisdictions, say France or Germany—and I don’t know the answer to this question—they have that view of their equivalents, or do they view theirs as a proactive organisation that has to investigate the things we are talking about?

Professor Jason Sharman: No. The UK is typical.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q Forgive my naivety, but it usually takes a company or a legal entity about 15 minutes to register with Companies House. The intention behind that is for money laundering purposes. I am assuming—forgive me if I am wrong—that when Fred Bloggs and Co. was set up, the people who did so had to then open a bank account in the name of Fred Bloggs and Co. in order to transfer the money to this jurisdiction. Is that correct?

Professor Jason Sharman: Yes and no. Generally, yes, but if you want to own property, you never have to touch the banking system. If you want to own a yacht, you can set up the shell company and earn, just like that. You can break sanctions and own property with a shell company, even without a bank account.

James Daly Portrait James Daly
- Hansard - - - Excerpts

Q Just in general, using the banks as an example, should we be looking to put in the Bill requirements for them to play their part in the partnership to tackle money laundering?

Professor Jason Sharman: Again, banks have had these requirements to establish the beneficial owners for a while. I think this is good, but it is the enforcement that is key there.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q Following on from that, I completely take the point about enforcement, but would a failure to prevent power make any difference, assuming it was enforced?

Professor Jason Sharman: I probably differ from many of the other people who have spoken in that I am not a fan of failure to prevent. I think that the goal of these laws is to make life hard for bad people without making life hard for good people at the same time. To the extent that you have really onerous regulation or weaken the presumption of innocence, that is something of an own goal or collateral damage. Before you put people in jail, you should be pretty serious about it. There should be a mental intention there—a mens rea.

I am not really comfortable with the strict liability. There is strict liability in anti-bribery, which means I have to do pointless anti-bribery training every year for the University of Cambridge. It does not do me any good and it does not stop corruption, but it is one of the things that Cambridge feels it has to do because of the strict liability. Again, it is a cost to society that is not included in legislation or in regulatory impact assessments.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q Because time is limited, I will not engage with that, but it is a really interesting view. I want to quote something to you that I think you said—apologies if I have got it wrong. You said:

“These host states now have a duty to block, trace, freeze, and seize these illicit funds and hand them back to the countries from which they were stolen.”

I do not know who you were referring to there, but, in our case, with the illicit Russian assets frozen in the UK, how do you suggest we seize those funds and how can we repurpose them?

Professor Jason Sharman: It depends. With the Russian assets that are criminal assets, eventually you need to go to a court of law to do that—

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q That is very hard—you know that.

Professor Jason Sharman: Indeed. That is hopefully something that the Bill will do something to correct. It may be different if you are talking about sanctions and the money that is currently frozen. It would depend. If we are talking about criminal money, there is an anti-money laundering process of confiscation—civil and criminal.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q Sanctions.

Professor Jason Sharman: Sanctions. I think you cannot. There is proper process. As I understand it, unless there is a formal state of war that obtains between two states, on what basis are you going to take away—

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q That is the point. Did I quote you incorrectly, then?

Professor Jason Sharman: No, you quoted me correctly, but that is money that was stolen in one place and moved to another place, and you have to prove that it was stolen. That is different from saying, “You are a Russian oligarch and we are going to freeze your funds.” It is very different.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q I accept it is different from a Russian oligarch, but according to Bill Browder we have something like £30 billion of Russian state assets sitting frozen at the moment. Of course, it needs to change. I totally accept that we are not at war with Russia, so those powers do not exist. Do you think it is appropriate to introduce any new powers that would enable us to seize as well as freeze those assets and then repurpose them for the reconstruction in Ukraine? There is certainly a desire across the political divide here in the UK to try to achieve something along those lines. Do you think that is possible?

Professor Jason Sharman: I would not shed a tear if Russian oligarchs lost their assets.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q This is the state I am talking about.

Professor Jason Sharman: Okay, for the Russian state. In that case, I think that would be wonderful. I know Browder mentioned earlier central bank assets. But, again, there is a precedent here. To what extent would foreign Governments put money overseas? There is a lot of concentration on Russia as a corrupt regime, which I think it is, but it has plenty of company, many of which have assets in the UK.

Baroness Hodge of Barking Portrait Dame Margaret Hodge
- Hansard - - - Excerpts

Q The Italians appear to have conquered this—I do not know if you know about that—through the stuff they have done on the mafia. The Canadians appear to have introduced a new power that might take them there. The Americans are trying to think about it. The Europeans are. There is quite a lot of thinking. I am just picking your brain. Is there anything you have done in this field that could add value as we try to think about it?

Professor Jason Sharman: I think not, and I think that the British Government, at least when it comes to sanctioning oligarch assets, which I realise are different from state assets, are in a bind. I think they will have to return those assets to the oligarchs and that they may have to pay damages to the oligarchs. That would be a terrible injustice, but I really worry about what the end game for sanctions is.

Liam Byrne Portrait Liam Byrne
- Hansard - - - Excerpts

Q Jason, you are a political scientist. Why are we in this position where we have such weakness? Why has our political system failed to address these weaknesses for so long?

Professor Jason Sharman: This is probably a typical social science answer, but there are quite a few reasons that make it difficult, because no one corrective, in and of itself, is going to fix the situation. There have been solutions, such as the persons of significant control registry, the unexplained wealth orders and so on, where it has been like, “This is the thing that will unlock the problem”. But instead it is a combination. First off, it is appropriately difficult to take away people’s property. Secondly, the bureaucratic incentives do not favour it. You have this very risk-averse culture within law enforcement agencies. Thirdly, as I said, there is a failure to harness the incredible investigative resources that lie outside the state, in the not-for-profit sector but also in the for-profit sector.

None Portrait The Chair
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Before the right hon. Member for Birmingham, Hodge Hill asks his next question, I remind him that our line of questioning has to relate to the legislation in front of us. With his extensive parliamentary experience, I know that he will be able to do that.

Liam Byrne Portrait Liam Byrne
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Q I am grateful for those guard rails, Ms Bardell. At the moment, the Bill has a lacuna, which is any protections around safeguarding politicians from dirty money. We are not covered by suspicious activity reporting, for example. Some would argue that the £1.2 billion that has flown into British politics over the past 10 years from people with all kinds of motivations and ambitions may be one of the reasons that our political system has not acted hitherto to stop this corruption, and that should be something we fix in the Bill. What do you think about that?

Professor Jason Sharman: I think that, as Catherine Belton said earlier, certainly volumes of money into politics have something to do with it, but even if you could come up with a perfect solution to that problem, it may not actually make too much difference in terms of interdicting money laundering and corruption funds into this country. That is not to say it is not worth while doing, but there is this constant phase of saying, “If only we do x, we’ll really be able to fix the problem.” I think it is something where modest progress, incremental progress, is what we should expect, and we have to do lots of different things right in order to achieve that progress.

Liam Byrne Portrait Liam Byrne
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Q So it could be part of the solution.

Professor Jason Sharman: Yes.

None Portrait The Chair
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Thank you. I move finally to Tom Tugendhat.

Tom Tugendhat Portrait Tom Tugendhat
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Q Professor, thank you very much indeed. I am grateful to you for reminding us that Magna Carta guarantees private property in various ways. Various legal jurisdictions, including the United States, Italy, the European convention on human rights, European property law and, indeed, many other jurisdictions around the world have all maintained and guaranteed it, which makes this so difficult. That said, do you agree that it is important to try to find out who owns what, so that we can at least take action where we have a legal ability to do so, and does this Bill help with that?

Professor Jason Sharman: Yes and yes. I think this is a modest positive step, but, given the track record of legislation, I would say that it has to be implemented. That is where the problem has been heretofore, and I can possibly anticipate that it may be the problem here, too. If you say, “You have to identify yourself as the owner of a company,” and you have entries in Companies House saying, “My name is XXX XXX,” and that does not get challenged, then more information is not necessarily better if that information is junk.

Tom Tugendhat Portrait Tom Tugendhat
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Q No, that is true, and that is why the work being done between Companies House and the agencies is so important—to ensure that Companies House goes from being a pinboard to being a regulator and a check. That is a very important move. It is not the same as the FCA or a regulator of that kind, but at least it is beginning to verify in terms of ID and so on. How much of a difference do you think the overseas territories and Crown dependencies verifications have already made?

Professor Jason Sharman: I mentioned briefly that some of my research, together with Mike Findley and Dan Nielson, has been to impersonate would-be money launderers and look to set up companies in various jurisdictions. It is much harder to set up companies, and the standards are much more rigorous, in the Cayman Islands, the British Virgin Islands and the Crown dependencies than in the UK. Of the UK jurisdictions, the UK is the easiest place to set one up, so I think the UK could learn a lot from its overseas territories and Crown dependencies. I noticed with interest that a couple of the other witnesses here said the same.

Tom Tugendhat Portrait Tom Tugendhat
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Q It is clear that there is a huge number of changes. You will know about the work that we have done in the past on the Foreign Affairs Committee and now in Government on trying to clean this up. This is something that, sadly, has lasted for the best part of 100 years, with no Government really making any effort to do anything about it until now. It is interesting that we are here again with a number of registrations, many of which were warned about in the 1970s, ’80s, ’90s, noughties and, now, the ’10s and ’20s. I am glad that we are doing something about it. Do you think that Companies House is going to be able to do that if it has the proper resources, or is it going to require other agencies as well?

Professor Jason Sharman: No, I do not think Companies House will be able to do it. Its main function is passive and archival; it is a library mainly. I think it is just not in its DNA to be otherwise. I think most of the solution for this is in the private sector. I am talking about properly regulated, supervised and audited corporate service providers. I co-authored a report 10 years ago with the World Bank called “The Puppet Masters”, and that was overwhelmingly the conclusion that we came to.

Tom Tugendhat Portrait Tom Tugendhat
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Q Would you say that the extra powers given to organisations such as the Solicitors Regulation Authority and its equivalent in Scotland are important to ensure that such regulators actually do have teeth? At the moment, as you will know, the fines form both of them are very low. This would, one hopes, connect to the work that we did in 2017 or 2018—I cannot remember exactly when—for the report “Moscow’s Gold”, where the Foreign Affairs Committee highlighted the role of enablers, not just regulators.

Professor Jason Sharman: I completely agree. I think, even more, that HMRC, as the regulator for corporate service providers, those enablers, has been completely missing in action. If there were one bit of the public sector that I would change, repurpose or fund, it would be to get HMRC to take its duty to regulate and penalise corporate service providers seriously. It has just been completely missing in action so far.

Tom Tugendhat Portrait Tom Tugendhat
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Thank you very much.

None Portrait The Chair
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If there are no further questions from Members, I want to thank the witness for his evidence. Professor Sharman, thank you very much for taking the time to come and speak to us.

Ordered, That further consideration be now adjourned. —(Nigel Huddleston.)

15:29
Adjourned till Tuesday 1 November at twenty-five past Nine o’clock.
Written evidence reported to the House
ECCTB04 Letter from Tom Tugendhat MP, Security Minister, Home Office, and Jackie Doyle-Price MP, Minister of State at the Department for Business, Energy and Industrial Strategy, dated 24 October 2022, re: Government Amendments
ECCTB05 British Property Federation (BPF)