Grand Committee
Financial Services and Markets Bill
Monday 13th March 2023
(1 year, 8 months ago)
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The Deputy Chairman of Committees (Baroness Bull) (CB)
My Lords, if there is a Division in the Chamber while we are sitting, the Committee will adjourn as soon as the Division Bells are rung and resume after 10 minutes.
Amendment 197
Lord Sharkey
“Duty of the FCA with regard to interest rates for mortgage prisoners
After section 137FD of FSMA 2000 insert—
“137FE FCA general rules: interest rate for mortgage prisoners
(1) The FCA must make general rules requiring authorised persons involved in regulated mortgage lending and regulated mortgage administration to introduce a cap on the standard variable rates charged to mortgage prisoners and to ensure that mortgage prisoners can access new fixed interest rate deals at an interest rate equal to or lower than an interest rate specified by the FCA.(2) In subsection (1)—“mortgage prisoner” means a consumer who cannot switch to a different lender because of their characteristics and has a regulated mortgage contract with one of the following types of firms—(a) inactive lenders, or firms authorised for mortgage lending that are no longer lending, and(b) unregulated entities, or firms not authorised for mortgage lending and which contract with a regulated firm to undertake the regulated activity of mortgage administration;“new fixed interest rate deals” means the ability for the consumer to fix the rate of interest payable on a regulated mortgage contract for periods of 2 years and 5 years;“standard variable rate” means the reversion rate which is a variable rate of interest charged under the regulated mortgage contract after the end of any initial introductory deal.(3) The general rules made under subsection (1) must set the level of the cap on the standard variable rate at a level no more than 2 percentage points above the Bank of England base rate.(4) The general rules made under subsection (1) must make new fixed interest rate deals available to mortgage prisoners who—(a) are up to date with payments or have aggregate arrears of no more than one monthly payment in the past 12 months,(b) have a remaining term of 2 years or more,(c) have an outstanding loan amount of at least £10,000, and(d) have not received consent to let the property. (5) When specifying the interest rates for new fixed interest rate deals required by subsection (1) the FCA must specify rates for a range of loan-to-valuation ratios taking into account the average 2-year and 5-year fixed rates available to existing customers of active lenders through product transfers.(6) The FCA must ensure any rules that it is required to make as a result of subsection (1) are made no later than six months after this Act is passed.””Member’s explanatory statement
This new Clause would require the FCA to introduce a cap on the Standard Variable Rates charged to mortgage prisoners and, under specified circumstances, ensure their access to fixed rate interest deals.
Lord Sharkey (LD)
My Lords, I declare an interest as co-chair of the APPG on Mortgage Prisoners. I thank the noble Viscount, Lord Trenchard, for adding his name to my Amendment 197, which is a probing amendment to allow debate on the issue of mortgage prisoners. There are getting on for 200,000 mortgage prisoners in the UK, who are trapped with their current lenders. For eight years or so they have paid very high standard variable rates, now of around 7%, 8% or even more.
Mortgage prisoners exist because the Government sold their mortgages to vulture funds, which have been increasing their standard variable interest rates and refusing to offer mortgage prisoners new deals or access to fixed rates. The harm being caused to these mortgage prisoners is the direct responsibility of the Government; when the time came for the mortgages of Northern Rock and Bradford & Bingley customers to be sold back to the private sector, the Government could have pursued an approach that ensured that these customers were protected. They could have sold them to active lenders or secured a cast-iron commitment from purchasers to offer these customers new deals.
The risk to these customers was clearly identified. In January 2016, the noble Lord, Lord McFall, wrote to the Treasury, UK Asset Resolution and the FCA to highlight that many of those affected by the sales were mortgage prisoners who would be unable to switch lender. He warned:
“Given the prospect of rising interest rates it is important that all mortgage customers are given the opportunity to achieve certainty over their payments by accessing a fixed rate. I am concerned that some customers affected by these mortgage sales … will not be offered reasonable fixed mortgage rates.”
UKAR responded that, in returning these mortgages to the private sector,
“the option to be offered new deals, extra lending and fixed rates should become available”.
However, this requirement was not written into the contract when mortgages were sold to the vulture fund Cerberus, with the BBC reporting that UKAR is now claiming to have been misled by it.
Consumer champion Martin Lewis, about whose work I will have more to say in a moment, lays the responsibility for the treatment of mortgage prisoners with the Government. He said that they have
“sold these loans to professional debt buyers that don’t offer mortgages, and left these people with these types of mortgages that have been too expensive and crippled their finances and destroyed their wellbeing.”
The Government are directly responsible; they chose to sell the mortgages to vulture funds.
In 2021, the House of Lords passed an amendment that would have capped standard variable rates for mortgage prisoners. This would have provided immediate, practical help for the 200,000 mortgage prisoners and their families. When the Government rejected this amendment in the Commons in April 2021, the Minister claimed that
“the Government and FCA have undertaken significant work in this area to create additional options that make switching into the active market easier for some borrowers.”—[Official Report, Commons, 26/4/21; col. 85.]
The FCA published an update in November 2021; this review confirmed that its interventions have, so far, had only a tiny impact. Only 2,200 of the almost 200,000 mortgage prisoners have been able to switch, just over 1% of the total. It turned out that lenders had only a limited appetite to offer options to switch using the modified affordability test devised by the FCA.
The FCA and the Government show little understanding of how vulnerable many mortgage prisoners really are or what stress and financial hardship they have endured and continue to endure. They certainly have not done anything practical to help. All this misery and harm could have been prevented, but even now the Government still refuse to acknowledge their responsibility or provide any help. At the moment, they and the FCA propose no further action.
This is deeply unfair and more than slightly ironic. A recent LSE report found evidence that the Treasury has not only made back the cost of managing the sales of these mortgages but has made a £2.4 billion surplus. However, there has been one significant development. Last Wednesday, my co-chair of the APPG on Mortgage Prisoners, Seema Malhotra MP, and Martin Lewis, chaired a meeting in Parliament to examine and explain new research conducted by the LSE, generously funded by Martin Lewis. The Treasury and the FCA were in attendance. This research contains concrete and costed proposals for a solution to this long-standing and continuing injustice.
Martin Lewis told the meeting:
“This report lays out starkly that the state sold these borrowers into poverty, knowing it could cause them harm, and made billions doing it. The result has destroyed lives. People have been left in financial, physical and mental misery, exacerbated by the pandemic and cost of living crisis ripping through their already dire situations. When we put solutions to the Treasury in the past, it said it wanted to look at them, but couldn’t as they weren’t costed. Now, having fought tooth and nail to get some of the data needed from official institutions, it is costed.”
Therefore, there should be no more excuses. He went on:
“The Government has a moral and financial responsibility to mitigate some of the damage done. Mortgage prisoners are the forgotten victims of the financial crash. The banks were bailed out at the expense of these borrowers. I hope the Treasury lives up to its past promise to investigate at speed and uses this report as a springboard to find any and all solutions to free mortgage prisoners.”
The APPG has sent copies of the LSE report to the Treasury, the FCA and other interested parties.
Will the Minister and her Treasury colleagues meet the APPG and its supporters to discuss the solutions proposed in the LSE report? Can she arrange this meeting urgently—certainly well before Report? Thanks to the support, generosity and persistence of Martin Lewis, and the work of the LSE and the APPG, we now have a clear and costed plan finally to bring relief to the nearly 200,000 mortgage prisoners. There can be no excuse for further delay. If we cannot set a course to free these prisoners, we will want to return to the issue on Report. I beg to move.
Viscount Trenchard (Con)
My Lords, I am delighted to support Amendment 197, moved by the noble Lord, Lord Sharkey, and to which I have added my name. I served on the former Services Sub-Committee of the former European Union Committee with the noble Lord and have been impressed by his accurate understanding of, and thoughtful approach to, this and other financial issues.
The noble Lord explained the reasons for his amendment with his customary clear logic. I will not take up the Committee’s time by repeating them. I particularly endorse the introduction of a cap of 2% over the standard variable rate for mortgage prisoners. UK Finance has identified 195,000 borrowers from inactive lenders, of whom 47,000 have been identified as mortgage prisoners.
I welcome the FCA’s recent review of this problem and its review of the effectiveness of its regulatory interventions to remove barriers to switching. Recently, only a small number of borrowers have been able to switch from an inactive lender to a new deal with an active lender. I share the FCA’s hope that more mortgage prisoners will be able to switch their mortgage and I hope that the Minister will support this amendment.
Baroness Bennett of Manor Castle (GP)
My Lords, I rise briefly to offer Green support for this amendment and to agree entirely with everything that has been said thus far. I feel a sense of déjà vu all over again. I was just looking back at the comments I made in 2021, when, it is worth noting for the record, this issue of mortgage prisoners went to ping-pong: the House of Lords passed an amendment, and it went back and forth between the two Houses. Back then, we were talking about people suffering under high rates of 4% or 5%, and some were suffering with the vulture funds of 9%. As we have heard set out clearly, the situation has not improved but has got much worse, and we also have a cost of living crisis.
The noble Lord, Lord Sharkey, noted that Martin Lewis is now involved in this, with his crucial supporting research. What a state our country is in when everyone can feel a great sense of relief and hope because someone who is, after all, only a private individual has stepped in where Parliament has failed. Surely this is the stage where Parliament—or the Government—can step up and rescue people trapped in often terrible situations through no fault of their own.
Baroness Noakes (Con)
My Lords, like the noble Baroness, Lady Bennett of Manor Castle, I recall our debates on this subject in 2021. Indeed, I think the amendment that the noble Lord, Lord Sharkey, has tabled is word for word the amendment he tabled on Report during the passage of what became the Financial Services Act 2021. It will not surprise the noble Lord that familiarity with it has not made me any warmer to the amendment.
As the noble Lord, Lord Sharkey, reminded us, mortgage prisoners derive from lending practices before the financial crisis. These mortgage borrowers were much more likely to have got a mortgage without proof of income or with an impaired credit history. They still have relatively high loan-to-value ratios, and they often have unsecured debt as well. Many of them have interest-only mortgages, with no repayment plan. Put simply, they typically have higher-risk characteristics than borrowers with active lenders.
The noble Lord, Lord Sharkey, has correctly excluded 50,000 or so of the population of mortgage prisoners from his amendment, because they are in arrears or within the last 12 months of their mortgage term, but I think he intends the remaining 143,000 to benefit from the largesse provided by this amendment. This is notwithstanding that the FCA estimates that 66,000 of them could, in fact, switch to active lenders because the active lenders in the market have changed their risk appetite, with the encouragement of the FCA, and they would now be able to remortgage. I do not believe that it is right to legislate to give preferential financial terms to those who choose not to take advantage of the opportunities available to them in the market.
The FCA’s last review found that around 30,000 of the remaining 47,000 would be unlikely to benefit from switching, because if they did find a deal it would cost them more than the interest rates that they are currently paying. High-risk borrowers do not get the best rates in the market, however much they might wish to. Amendment 197 would give these borrowers a rate that did not reflect the market for them, and I do not believe that it is fair to give them a special advantage by legislating for them.
The FCA has proposed some practical steps to assist the remaining population, but it does not propose anything like that which is contained in Amendment 197. That is not surprising because the LSE in its earlier, independent study—I have yet to see the study that the noble Lord, Lord Sharkey, referred to—concluded that market interventions were not justified and could cause markets harms.
We all have sympathy for those stuck with debt that they struggle to afford, but the problem is not confined to mortgage prisoners, and it is just not fair to single out this group of problem borrowers for special treatment. It is also an extraordinary departure from regulatory norms. The FCA does not tell lenders to whom they must lend money; that is not how regulation works. Under this amendment, the FCA would be telling lenders what their risk appetite should be, which raises big issues of moral hazard and fails to deal with the prudential consequences in terms of capital, on which the PRA is the arbiter.
Furthermore, the FCA is required to set interest rate caps, but only by reference to LTVs. This ignores the other key driver of interest rates—namely, the credit risk of the borrower. Whatever rate the FCA comes up with, it will be the wrong answer for some borrowers, and it would be plainly unfair if the FCA set the rate assuming high credit quality, because that is very likely to be at odds with the facts. In addition, requiring the standard variable rates to be no more than two percentage points above base rate ignores any evidence about the correct uplift for the particular type of loan and borrower characteristics, which can produce outcomes that do not reflect objective market realities. I hope that the noble Lord, Lord Sharkey, does not pursue this amendment, as he did in the 2021 Bill; it really does not make sense.
Lord Naseby (Con)
My Lords, I take issue with my noble friend, as I have spent most of my political life involved in housing. We have a situation in the country, which is relevant to this amendment, of huge pressure on local authorities to help families who are homeless. The numbers are going up every month at the moment, and this amendment would at least ensure provision for a small section of society—possibly younger people or single-parent families—who find themselves in a situation that is nothing to do with their own original arrangement with the mortgage lender. It is entirely appropriate for our society to say that there is a means of helping them in a transitory manner to get them settled.
The most worrying aspect is in proposed new paragraph (b), which the noble Lord highlighted. This is not a new problem but a growing one, with unregulated entities on the fringe of the mortgage market. Any of us who has done any work in this area knows that it is quite a difficult area to control, but the FCA has not got a handle on it yet and it needs to.
I am not going to say any more, but I very much hope that my noble friend on the Front Bench will take this issue away, think about it and recognise that, if we do not take action, the local authorities where these people live will have even more pressure on them to find a home for the relevant family.
Baroness Bowles of Berkhamsted (LD)
My Lords, I rise to say a word in support of my noble friend Lord Sharkey. There are some more generalised and wider issues around this problem. We have the situation quite often—in fact, it is perhaps the norm nowadays—that whoever extends credit, whether for a mortgage or another thing, is not necessarily the same organisation that ends up holding it later on. It may be securitised, sliced, diced and sold on, or it may be sold on to a vulture fund because they are in trouble. The same sort of thing has happened with student loans, which have essentially been sold to vulture companies.
This raises the issue of what the Government’s terms are when they are doing the selling. I fully understand that they say they have to get the best value for the taxpayer, or whatever it is, but you cannot have value for the taxpayer at the cost of usury on a minority, and that is the situation that has arisen. It could impact on some with student loans, if the pressure to pay is different from how it was when the loans were elsewhere.
I have two questions. First, what are the Government going to do along the lines outlined by my noble friend to assist mortgage prisoners? More generally, what are they going to do when looking at mortgage terms that allow it to be sold on to anybody without any safeguards and other types of selling on, whether in distress or otherwise, that likewise essentially dispense with any kind of consumer credit or similar kinds of protections?
I am sure the Minister will recall that when we were talking about bounce-back loans and we had to dispense with some consumer credit protections, I warned that we might get bad behaviour as a consequence. This is part of the same picture and why we have such protections there in the first place, yet nowadays they are being seriously circumvented.
Lord Tunnicliffe (Lab)
My Lords, I do not come to this debate with a predetermined position but to listen and take a view after we have looked at the circumstances and listened to the Minister’s response. I would value a copy of the report that the noble Lord, Lord Sharkey, spoke about. I have a lot of sympathy for these individuals and note that their problems are undoubtedly exacerbated by—I do not know how to describe it—the Truss impact on loan rates in the UK, which must fall particularly heavily on those individuals. I await the Minister’s response.
Lord Harlech (Con)
My Lords, I thank the noble Lord, Lord Sharkey, for tabling this amendment, and all noble Lords for their contributions.
The Government have a great deal of sympathy for borrowers who are unable to switch their mortgage, and the Treasury has already worked extensively with regulators and industry to act where possible to support borrowers. For example, we have worked with the FCA to implement changes to its mortgage lending rules, removing the regulatory barrier that prevented some customers, who otherwise may have been able to switch, accessing new products.
However, we do not believe there are further practical and proportionate universal options than those already taken to reduce the rates paid by these consumers. Extensive work has been done to look into this issue, partly as a result of prior interest from this House, which has emphasised the complex and varied circumstances that consumers are in. Specifically, following commitments made during the passage of the Financial Services Act 2021, the Government worked with the FCA to conduct a report into mortgage prisoners, which was completed and laid before Parliament in November 2021. This report found that the vast majority of those with the 195,000 mortgages held by inactive firms are not mortgage prisoners, as they are already paying competitive rates for their circumstances or they would be able to switch if they took action to do so—if, of course, they met the risk appetite of active lenders, a point raised by my noble friend Lady Noakes. Others had different factors that might prevent them being able to switch, such as being close to the end of their mortgage term or having an account in arrears. The report found that only 47,000 were truly mortgage prisoners—that is, customers who are up to date with their mortgage payments and unable to switch to a new mortgage deal, but who could potentially benefit from lower rates if they were able to switch.
While I understand the difficulty that many of these customers are facing, capping the standard variable rates charged on mortgages with inactive lenders to help this limited group of customers would have significant implications for the wider mortgage market which cannot be ignored. Any action we take must also be fair to other borrowers in the active market, particularly those with similar characteristics and paying similar rates, who may be unable to access fixed-rate deals.
A cap for mortgage prisoners would therefore create an arbitrary division between one set of consumers and another. Capping rates would also restrict lenders’ ability to vary rates in line with market conditions—a key part of responsible lending. This is a material risk, which, as Ministers set out during the passage of the Financial Services Act 2021, could have financial stability implications. Those concerns were also raised by the London School of Economics in its November 2020 report on mortgage prisoners, which argued against the introduction of a standard variable rate cap. In view of these risks and the proportionate steps that the Government and the FCA have already taken to support mortgage prisoners, it is clear that an SVR cap is not an appropriate solution.
However, borrowers who have switched have seen significant savings. The FCA’s review found that take-up was affected by consumer inertia and limited lender risk appetite. Some 140,000 letters were sent to borrowers about the rule change, which resulted in only 700 calls to brokers.
The noble Lord, Lord Sharkey, raised the new report from the London School of Economics and Martin Lewis. The Government will of course carefully consider the proposals put forward in this report. I note that it recommends free, comprehensive financial advice for all, but I would like to provide reassurance that the Government are committed to helping people in financial difficulty. We recognise the important role that debt advice providers play in assisting people, including mortgage prisoners, who are in problem debt, especially with the increasing cost of living pressures that were raised by the noble Baroness, Lady Bennett.
This is why the Government have continued to maintain record levels of debt advice funding for the Money and Pensions Service, bringing its budget for free-to-client debt advice in England to more than £90 million this financial year. Furthermore, the Government have made a number of interventions, as a result of the financial crisis, to protect the economy and ordinary savers and businesses from the negative impacts of economic and financial instability. These include the interventions in Northern Rock and Bradford & Bingley, with their loan and mortgage assets ultimately held in the government-owned company UK Asset Resolution. It is right that the Government seek to achieve value for money for taxpayers as we exit the interventions made as a result of the financial crisis. The proceeds from these sales are not hypothecated and go towards supporting wider public finances.
The noble Baroness, Lady Bowles, sought to draw out the wider case of the Government selling on. I can say only that UK Asset Resolution sales met or exceeded best practice for customer protections. Firms had to agree to robust protections before their bids were considered. Inactive firms have and use a range of forbearance options for borrowers in payment difficulty, and many borrowers with inactive firms pay competitive rates.
However, the Government are consistently committed to looking for practical and proportionate options where they will deliver genuine benefits for affected mortgage borrowers, and where interventions are fair to borrowers in the active market and to taxpayers. In light of the request, we will be happy to facilitate a meeting with Treasury officials before Report. We will co-ordinate with Members’ offices to agree a time and place suitable for everyone.
While it is important that we do not create false hope, the Government will carefully consider the proposals from the LSE/Martin Lewis report. In light of this, I ask the noble Lord to withdraw this amendment.
Lord Sharkey (LD)
I thank all noble Lords who spoke in this brief debate. There was a sense of déjà vu in all this. I recognise the arguments of the noble Baroness, Lady Noakes, because it is not so long since we heard them last time. It would be indelicate of me to remind the Committee that, having heard all those arguments last time around, and mine, we voted fairly massively in favour of the amendment in front of us again today.
As I said in my opening remarks, at the moment this is not about the amendment as it is down on the page. This is a probing amendment to make sure that the initiative of Martin Lewis, the LSE and the APPG is taken seriously by the Government. I am grateful for the Minister’s promise—if that is what it was—to arrange a meeting with the APPG and other interested parties. It would be wrong if, after all this work and effort, we were simply to get a note from the Treasury passed under the door saying, “No, it doesn’t work”. We want an interactive process to discuss the proposals that Martin Lewis and the APPG are putting forward. I do not think the Minister talked about timing, but we need to do that urgently and before Report.
Baroness Noakes
“Financial Ombudsman Service
(1) FSMA 2000 is amended as follows.(2) After section 229 insert—“229A Power of FCA to require Financial Ombudsman Service to refrain from specified action (1) Where the first, second and third conditions are met, the FCA may give a direction under this section to the Financial Ombudsman Service.(2) The first condition is that the Financial Ombudsman Service is proposing to exercise any of its powers in relation to the determination of a complaint.(3) The second condition is that the FCA is of the opinion that the exercise of the power in the manner proposed may have implications beyond the specifics of the complaint in question.(4) The third condition is that the FCA is of the opinion that the giving of the direction is necessary in order to avoid the possible consequence described in subsection (3).(5) A direction under this section is a direction requiring the Financial Ombudsman Service not to exercise the power or not to exercise it in a specified manner.(6) The FCA must consult the Financial Ombudsman Service before giving a direction under this section.”(3) In paragraph 15(1) of Schedule 17 (fees) after “respondent” insert “or relevant party”.”Member’s explanatory statement
This amendment gives power to the FCA to overrule a decision of the FOS where this would have implications which would affect the FCA’s ability to regulate effectively and to allow the FOS to make persons other than the complainant make a payment towards the costs of a case.
Baroness Noakes (Con)
My Lords, this amendment concerns the Financial Ombudsman Service. It is in fact two amendments in one; I should have separated them. The amendments were suggested by UK Finance and I will speak to each leg separately.
The first two subsections of proposed new Section 229A of FSMA, which my amendment would insert, would establish that, in certain circumstances, the FCA can direct the FOS in a particular complaint determination. I should say that I welcome Clause 38, which will set up a new duty of co-operation and consultation between the FCA, the FOS and the Financial Services Compensation Scheme. It was curious that FSMA provided for co-operation and consultation for the FCA and the PRA but the FOS was left out. In practice, I understand that Clause 38 would do little more than formalise what has already been happening in practice as part of the FOS’s wider implications framework, although that is entirely voluntary and Clause 38 would make it mandatory.
In the past, there have been problems with regulated firms having acted in a way that they believed was wholly in accordance with the FCA rulebook, including the principles that should guide how firms act. Firms believed that their actions were in accordance with the FCA’s expectations as well, although those are notoriously hard to pin down. Then, following a complaint, the FOS took a different view. As we know, the FOS is required to determine each complaint individually and makes its determinations using the FSMA formula of what is fair and reasonable in the circumstances of the individual complaint. That can and does result in outcomes that are, at best, frustrating for the firms involved when they believe that they have been doing exactly what was expected of them. A particular source of concern has been fraud cases, where the FOS has often gone beyond the requirements of the banking protocol, which was supposed to set out agreed expectations of what banks need to do in relation to suspicious transactions.
In addition, the FCA handbook requires firms to apply the outcome of FOS determinations to future complaints, so individual FOS decisions in effect become precedents, even though they were determined on the facts of individual cases. Another frustration can be that FOS decisions are not always internally coherent, so a confusing pattern of precedents can be created. In effect, a parallel rulebook grows up, but one created out of specific cases without underlying principles—certainly without any underlying principles that have been consulted on.
I think it fair to say that, although the financial services sector values the fact that the FOS represents a low-cost dispute-resolution service, it has for some time had concerns about how it operates and how its decisions become quasi-law. These concerns are now amplified, with the advent of the new consumer duty, which rests on the principle of delivering good outcomes for consumers. This adds a layer of complexity and uncertainty into an already challenging environment. There are concerns about precisely what firms are expected to do in the case of closed products and whether new vectors are being opened up for claims management companies. There will be an ongoing tension between the consumer principle, which is not intended to operate at the level of individual consumers, and the FOS, which is unambiguously focused on individual cases.
My amendment does not give the FCA an unconstrained ability to override the FOS; it is drafted to apply only where there are implications beyond the specifics of the particular complaint. The PRA has long had the power to overrule the FCA where it thinks it will have an adverse impact, as specified in Section 31 of FSMA. Similarly, the banking reform Act of 2013 gave powers to the Bank of England, the PRA and the FCA to intervene against the payment services regulator. It is genuinely puzzling that a similar power in relation to the FOS was not granted to the FCA when it was set up, or to the FSA under FSMA. This is a modest provision designed to ensure that the activities covered by both the FOS and the FCA are dealt with in a coherent way.
The second leg of my amendment is on a slightly different subject: it is a minor amendment to paragraph 15 of Schedule 17 to FSMA. Under this paragraph, the financial services firms complained about pay fees to the FOS—there is no problem with that. My amendment adds “or relevant party” to this, so that firms or individuals other than the firm complained about could be required to pay fees. This is obviously not intended to enable the FOS to charge fees to complainants, which I am sure it would never do, even if it had the power. Instead, it is intended to give some flexibility to the FOS so that, for example, claims management companies might be asked to pay fees if they have been responsible for unmeritorious complaints. That in turn could help disrupt the business model of the worst offenders in this parasitic industry. I hope this will be seen as a modest change that will give greater flexibility to the FOS. I beg to move.
Baroness Bowles of Berkhamsted (LD)
My Lords, I was waiting to hear what the noble Baroness, Lady Noakes, said on this amendment. I am afraid I cannot support her this time, although we agree on a lot of things. I accept that this is a hard call. The way I look at it, this goes back to our discussion about whether you follow rigid rules or you want people to think about what they are doing. Ultimately, there has to be a desire for people operating in financial services to think about what they are doing in all circumstances. Therefore, I see that as a proper override.
What has been portrayed as the ultra-right wing libertarian approach of just doing things and then being for the high jump if you get it wrong—that is a caricature, I accept—relies on your having done what is right in principle. Some things will not be fair if you merely follow a rigid set of rules. Therefore, it is right that there is a “fair and reasonable in the circumstances” backstop. It is right that if such things happen, there should be discussions about what it means for the generality.
However, it is not right for the FCA to have an automatic override and say, “We’re right, and our rigid rules derived from principles”—because they abandon principles once we have rules—“can never be wrong”, and that people should not have been thinking actively about these things, particularly while they were dealing with customers and individuals. I understand where the noble Baroness is coming from, but I cannot support this. I plug again that we should expect that extra level of thought. This again goes to the heart of having a duty of care. It is the same argument. A duty of care does not mean, “I just do what I’ve always done and got away with” or “I just do what everybody else appears to have done, turn the handle and don’t think about it.” It is a fundamental principle of caring for the consumer that at least the ombudsman can continue with. I heartily think that we need a dash more of it in the Financial Conduct Authority.
Viscount Trenchard (Con)
My Lords, I support my noble friend Lady Noakes in her amendment. As she has explained well, Clause 38 requires the FCA, the FOS and the FSCS to co-operate and to consult with each other in exercising their statutory functions. However, it is important that FOS decisions with wider implications do not diverge from FCA rules, or there may be unintended consequences, and predictability and consistency may be negatively affected.
As my noble friend just said, this does not mean that the FCA or the FOS should act without thinking very carefully about what they are doing. Her amendment takes account of that and would be likely to encourage real thought about the consequences of making a particular decision in any case. Besides, Parliament never intended the FOS to be a quasi-regulator. UK Finance has recommended that the FCA should be given a power to overrule a decision by the FOS where it believes that the decision could have wider and perhaps unforeseen implications. My noble friend’s amendment would deal effectively with this potential problem.
Of course, the granting of additional powers to the FCA strengthens further the case that the FCA must be properly accountable to Parliament, and I regret that I have not yet heard my noble friend the Minister acknowledge that, as drafted, the Bill does not provide adequate arrangements for this. I firmly believe that a properly resourced joint committee is how to achieve that.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, the Government agree that, where there are wider implications, it is critical that the bodies within the financial services regulatory framework, including the FCA and the FOS, co-operate effectively.
As my noble friend Lady Noakes noted, that is why Clause 38 of this Bill introduces a statutory duty for the FCA, the FOS and the Financial Services Compensation Scheme to co-operate on issues which have significant implications for each other or for the wider financial services market. Clause 38 also ensures that the FCA, FOS and FSCS put appropriate arrangements in place for stakeholders to provide representations on their compliance with this new duty to co-operate on matters with wider implications.
As my noble friend also noted, these organisations already co-operate on a voluntary basis through the existing wider implications framework. The voluntary framework was launched in January 2022 to promote effective co-operation on wider implication issues. Clause 38 will enhance that co-operation and ensure that these arrangements endure over time while retaining the operational independence of the bodies involved.
Baroness Noakes (Con)
My Lords, I thank my noble friend Lord Trenchard for his support; I was not expecting the noble Baroness, Lady Bowles, to support my amendment, because she and I have discussed the FOS in the past.
There is a potential problem in the relationship between the FCA and the FOS with the introduction of the new consumer duty. I think that is particularly concerning people: we are going a little into the unknown. We know that if regulatory pressures get too difficult for firms, their natural response is, ultimately, to leave or severely curtail the elements of the market that they are prepared to operate in. We need look only at the availability of advised investment to see what can be the consequence of heavy-handed regulatory action. If the new consumer duty becomes a nightmare, with individual cases being settled on particular circumstances but then having to be read across because of the FCA handbook, which requires cases to then be followed by firms, we could end up with a very confused understanding of what the consumer duty involves. That was the main burden of my tabling the amendment, but we may just need to see what happens when the consumer duty operates in practice to see whether those harms genuinely emerge.
As for the second leg of my amendment, which should have been a separate amendment, I was very interested to hear what my noble friend said about the case having been made. What I am not quite clear about, which she may be able to clarify, is on what timescale she believes the Government will be looking at this, because not many financial services Bills come along to get things done in.
Baroness Penn (Con)
I will have to write to the Committee to clarify the timescale for the noble Baroness.
Baroness Noakes (Con)
My Lords, I look forward to that letter with great anticipation. With that, I beg leave to withdraw the amendment.
Lord Vaux of Harrowden
Member’s explanatory statement
This amendment would remove the limitation that APP mandatory reimbursement is limited to APP scams made via the Faster Payments system, so that all APP scams must be covered regardless of payment system used.
Lord Vaux of Harrowden (CB)
My Lords, it is an unexpected feeling to be zapping through groups at some speed. In moving my Amendment 202, I will speak to the various other related amendments in my name in this group. I am very grateful to the noble Baroness, Lady Bowles, for her support.
I greatly welcome the introduction of the requirement in Clause 68 to improve the current voluntary arrangements under the contingent reimbursement model, or CRM, for the reimbursement of losses resulting from authorised push payment, or APP, fraud. My amendments attempt to apply some of what we learned during the inquiry by the Fraud Act 2006 and Digital Fraud Committee, which reported at the end of last year, but I should stress that these are my amendments, not those of the committee.
The committee’s inquiry heard that the current voluntary system has led to a wide range of inconsistent outcomes for victims. In fact, the very process of claiming can add to the trauma for victims, especially when they are not applied consistently or fairly. At one extreme we have TSB, which has chosen to reimburse all fraud victims; at the other, we heard of banks that, because they are not signed up to the CRM at all and do not reimburse victims, have no incentive to try to prevent fraud going through their systems. We heard that some banks are now seen by fraudsters as a soft touch.
Levels of reimbursement vary widely even within the CRM and the scheme does not publish league tables, so consumers cannot see which banks are more likely to reimburse and which are not. That lack of consistency and of clarity over the circumstances in which reimbursement will be made leads to greater uncertainty and trauma for victims. Importantly, the lack of consistency also leads to different levels of incentivisation for banks to take the steps necessary to protect their customers. Any new mandatory scheme needs to address that and make things fairer for victims, but at the same time it needs to be balanced against the risk of unintended consequences. That is what my amendments try to achieve and I turn to them specifically.
As currently drafted, the rules will apply only in respect of fraud carried out using the Faster Payments scheme. I am sure the Minister will explain that this is because this will cover the majority of frauds by number. She is quite right; that is true. However, other payment methods are often used by fraudsters, such as CHAPS. Although smaller in volume, those other payment methods often involve larger, more life-changing sums. CHAPS is used for large payments, such as house purchases. Many frauds involve overseas payments.
Amendment 202, together with Amendment 207, would widen the scope of the reimbursement provisions so that all payments are covered, regardless of the method. I am sure the Minister will tell us that the Bill does not prevent the scheme being widened to other payment methods, but I am concerned by this statement on the PSR website:
“We are working with Pay.UK—the operator of the Faster Payments system which is how APP scams are carried out”.
That shows no recognition that the problem is wider than just Faster Payments. APP scams are carried out using all payment methods, not just Faster Payments. I wonder whether the real reason for restricting the changes to Faster Payments is because it allows the PSR to subcontract its responsibilities under Clause 68 to Pay.UK, the operator of the Faster Payments system. The Minister will be aware that concerns have been raised by the Treasury Select Committee in the other place about this approach. What are her thoughts on the PSR subcontracting its responsibilities to Pay.UK?
The Bill leaves the details of the reimbursement scheme entirely to the PSR, so Amendment 204 sets out some matters that it should consider when creating the new compulsory requirement. First, the key problem with the current situation is the lack of clarity for victims in how reimbursement decisions are made and the inconsistency of those decisions. Proposed new paragraph (a) of Amendment 204 therefore says that the PSR must consider
“how to ensure that the parameters used to determine whether or not reimbursement should be made are transparent and applied consistently”.
If that does not happen, we will not have moved much further forward, so that key point should be stated in the Bill.
I turn to proposed new paragraph (b) of Amendment 204. I have long felt that the bank that is more in the wrong in a fraud situation is the receiving bank—the one that, in effect, processed the stolen money on behalf of the fraudster. Although it is not in the Bill, the PSR apparently intends that the liability for reimbursement should be split 50:50 between the paying and receiving banks, with a mechanism to change that split in certain circumstances. I am content with that proposed approach as a starting point. Proposed new paragraph (b) of Amendment 204 simply puts in the Bill that the split must be considered but, as we move forward, the PSR and the industry should look to refine this. Importantly, discussion of how to split the reimbursement between the banks must not make things more difficult for victims.
Proposed new paragraph (c) of Amendment 204 says that the PSR should consider how
“mandatory reimbursement is likely to affect the behaviour of consumers”.
Our fraud committee deliberated long and hard on whether to recommend blanket reimbursement; in fact, we were criticised for not doing so. We recognised that there is a case for mandatory blanket reimbursement but concluded that such a policy could fall foul of moral hazard and lead to increased levels of fraud, including, potentially, directly to new avenues for APP reimbursement fraud. Our recommendation therefore was that this needed to be explored further and a solution should be found that creates a level playing field for all consumers.
I do not often disagree with the noble Baroness, Lady Kramer, but I am a little concerned by her Amendment 203, which says that
“reimbursement … cannot be refused on the basis that a victim … ought to have known that the payment order was executed subsequent to fraud or dishonesty.”
If someone really should have known but went ahead anyway, this feels reckless to me. We need people to take some basic level of precaution and we need to help them do that.
Proposed new paragraph (c) of my Amendment 204 tries to address this difficult area by saying that the PSR must consider how the reimbursement policy might alter the behaviour of potential victims. If the effect is that people stop taking any care to avoid fraud, because they are going to be reimbursed anyway, the policy might make it easier for the fraudsters; it might increase fraud, which would be an extremely undesirable unintended consequence. At the same time, we need to move away from victim blaming and ensure that, unless consumers have acted irresponsibly, they are reimbursed. There is a delicate balance here and it is something that the PSR should consider carefully and keep under review.
Finally, proposed new paragraph (d) of Amendment 204 says that the PSR must consider how appeals can be made. I hope this is self-explanatory.
Amendments 205 and 206 attempt to bring some transparency to the process. Amendment 205 would enable consumers to see which banks are most susceptible to fraud; in other words, which are doing less to protect their customers in the first place and which are better at reimbursing customers who become victims. This is important. If we want to incentivise banks to do the right thing and behave well, shedding daylight on how they perform is the best way to ensure it. Customers will be able to vote with their feet.
There is also a danger that banks might react to mandatory reimbursement by changing their behaviour in a way that disadvantages vulnerable consumers—deciding that it is too risky or expensive to provide services to those seen as more vulnerable to fraud, if the reimbursement process is seen as too one-sided. Later today, we shall talk about PEPs, which are a good example of how the banks are reacting to overzealous regulation.
Similarly, we need to avoid a situation in which the reimbursement process puts off new entrants into the system or innovation in payments. Amendment 206 requires the PSR to keep the situation under review and to report annually on the impact that the requirement is having, including whether it is causing any change in the behaviour of the payment service providers. Fraud is constantly changing—fraudsters are constantly finding new ways to get around rules and find victims—so the amendment requires the PSR to make changes to the requirement as it considers necessary, taking account of the actual impacts to keep protecting consumers better.
I will finish with a couple of general points. First, it is critical that people are properly and fully informed and educated about the changes. Clause 68(3)(b) mentions that, which is welcome, but in relation only to the draft requirement, not the final requirement. UK Finance and others have raised concerns about whether the full six-month timeframe is sufficient to ensure that that information and education process happens.
Lord Sharkey (LD)
My Lords, I will speak briefly to Amendment 203 in the name of my noble friend Lady Kramer, who cannot be with us today. She is making good progress but is still recovering from surgery. On her behalf, I gently disagree with the noble Lord, Lord Vaux. The amendment is straightforward: it would simply prevent financial services from using the “You should have known it was fraud” excuse to deny restitution. In effect, in many sectors this allows the banks to decide whether to refund.
It seems to me that it is impossible to design a fair test for “You should have known” when talking of retail customers, especially vulnerable ones. How on earth do we devise a fair test under those circumstances? It is true that most consumers will not have the ability to challenge a bank’s classification of an event as “You should have known”, because they do not have the resource or the means to do so. Effectively, without Amendment 203, banks can decide for themselves which cases to allow, and that does not seem to be a good idea.
Lord Naseby (Con)
My Lords, I will speak broadly in support of these amendments, starting with Amendment 202. The incidence of fraud is growing almost daily. It is a huge worry and, unfortunately, it rests on His Majesty’s Government to try to find an answer to it. I accept that it is not an easy problem, but we cannot shy away from it. Over lunch today I was having some discussions with Transparency Task Force, a certified social enterprise. Certainly, some of the evidence it has is quite extraordinary and deeply worrying. I do not know whether there are other types of scams not covered in the Bill. I have not given any notice to my noble friend on that, but we would certainly like an answer.
On Amendment 203 on qualifying cases, I have spoken to only about half a dozen people who have had scams, but none of them knew anything about who was behind it. It is not very likely, is it? Having watched “The Gold” on television on Sunday, I can see how creative some people can be. It does not seem realistic, which is why Amendment 203 is important.
I have had a chat with members of the All-Party Group on Personal Banking and Fairer Financial Services. The only way to get a grip of these problems is to know what is happening on the ground. The noble Lord, Lord Vaux, asked for a six-monthly report, which is quite right. A quarterly report would probably be better, though it might be too tedious. At this point in time, His Majesty’s Government do not have a handle on the rate of growth, which is deeply worrying. I do not know whether these amendments are exactly right, but the problem is there, and it is the responsibility of His Majesty’s Government to get a grip on them.
Baroness Bennett of Manor Castle (GP)
My Lords, like the noble Lord, Lord Naseby, I broadly support this group of amendments. I particularly want to address Amendment 205 in the names of the noble Lord, Lord Vaux, and the noble Baroness, Lady Bowles.
As the noble Lord, Lord Vaux, said, it is worth highlighting uncertainty and trauma. We have a society in which every time people pick up their phones or emails to look at a message, many of them think, “I’m worried. Is this right or wrong? Is this official-looking email something I should click or not?” That is where we are. These amendments seek to address some of this, although even with them we would not get far enough. In the other place, the Treasury Select Committee last month expressed concerns about the Payment Systems Regulator dealing with push payment scams regarding the banks handing out the money and controlling the Pay.UK body that would be doing that. There is a concern that this needs to be seen as fair and rapid; to take away some of that fear is the key issue.
Amendment 205 is particularly interesting because we are talking here about a league table for how fairly banks treat victims of fraud. I could not help thinking of the comparison with schools. We have intensely scrutinised and detailed league tables for schools; surely we can manage similar league tables for banks. We had a lot of debate on earlier days in Committee on whether we wish to encourage competitiveness. But however much we might debate competitiveness, surely we all agree that competition between banks to see who is fairest towards victims of crime would be good.
This may not go far enough, but there are amendments here that the Government should certainly consider, particularly Amendment 205 concerning the league table.
Baroness Bowles of Berkhamsted (LD)
My Lords, I signed all the amendments in the name of the noble Lord, Lord Vaux. We were both members of the committee looking at the Fraud Act 2006 and digital fraud. Although these amendments are not exactly what we recommended, they fairly represent the mood after what we had heard. We could not make them all exact recommendations. Some of them are difficult; there is difficulty between my noble friend Lady Kramer’s amendment and this set of amendments. I did not weigh them up beforehand, but it will be very difficult if you just allow a broad, “Well, you ought to have known” provision for the bank.
It is not a question of who you are and what you know. Some pretty intelligent people have been defrauded and you can be caught at a bad moment, but how do you prove that it was a bad moment, if you are being scammed? Say the scammer claims that a child is in trouble and says, “Send money now, mum.” Every now and then, the scammer is going to be lucky, and the message is going to arrive to a mum whose kid is off somewhere doing something, and it will look genuine. You might have been very worried about the circumstance in the first place. How do you prove that kind of thing, if the provision is going to assume that you are a sensible, intelligent person and you ought to have known? How do you discriminate against those who are not intelligent and sensible and who are vulnerable for whatever reason?
There is a lot to be said for my noble friend’s amendment, but at the same time there is the issue, which we discussed in the committee, whereby you do not want everybody to think that it is all right and that they are covered. Do you need some kind of hurdle? How do you encourage people? We need to see whether we can in some way nuance that, to make it clear that we are protecting the most vulnerable, including those with a circumstance that they might find themselves in, even though they would not have been vulnerable at other times—but then you do not want to make it even easier for scammers. People can think that it is a victimless crime, but it is not a victimless crime at all. Even if people get compensation, collectively we are all going to pay for it.
We also talked in the committee about why the proposal is just for Faster Payments. Yes, it is an easy target, because of the instantaneous nature of it. But what if, when you go into a bank to make a transfer by CHAPS—and a mortgage is the obvious kind of payment in that regard—somebody comes in with you and coerces you? What steps are taken at the counter? I have been in with someone who was doing a big CHAPS transfer for the purpose of a mortgage—it happened to be my son—and nobody questioned what I was doing there. There may have been a familial resemblance, and they may have thought that it was okay, but there was no one saying, “Would you mind just stepping aside?” No one asked him who I was, what the relationship was and why I was with him. It would be good to have some more checks to make sure what is happening, checking that the money is going to a genuine solicitor’s account and those kinds of thing. To have other payment methods included is not unreasonable, although I accept that these are big chunks of money. We also discussed in the committee the culpability of the receiving banks, if they have dodgy accounts that they have not checked out thoroughly, and have not joined up two systems to check the nature of the account and whether it is right.
As we go forward, it would be nice if we could agree that there was some kind of flavour of these amendments that the Government could bring forward so that we do not have to do anything on Report. Perhaps there could be assurances that that kind of balance, and the sorts of things that have been said in the report from the committee, are taken on board. A lot of work went into that issue. There are many ways in which we can do things—it does not always have to be through legislation—but all these points are very valid ones for what needs to be done. I think that is probably all that I need to say, but I recommend that the sense of these amendments is taken forward.
Lord Tunnicliffe (Lab)
My Lords, this group of amendments has a general direction which may be supported. It would be much better if the Government were to come forward with proposals in that general direction and improve the situation.
I, too, however, feel that there is some moral hazard. The extent to which victims are compensated draws attention from the fact that this is serious crime which, as I understand it, is growing exponentially. I hope that in looking after victims, which I am broadly in favour of, we massively increase our efforts to prevent fraud in the first place. I do not have a simple solution to that, but it is my understanding that the relationship between a preventive resource in the police and the banks is, compared to the general application to prevent crime, disproportionately low. More resource has to be put into combating this frightening industry. There is a sense of almost moral decay that allows this virulent industry to continue to grow. I hope that, while responding to the concerns of victims, there is also feedback to the Government as a whole that we must find a way to get on top of this very unpleasant crime.
Baroness Penn (Con)
My Lords, I recognise the keen interest across this Committee in the provisions in the Bill to tackle financial crime and fraud more generally, and, in this group of amendments, on tackling APP scams specifically and the related work of the Payment Systems Regulator to introduce mandatory reimbursement. The noble Baroness, Lady Bowles, said that she hoped that the sense of the amendments could be taken forward, or that the Government could provide reassurance to noble Lords that it will. I hope to be able to do so.
Measures in the Bill not only enable the Payment Systems Regulator to act on APP reimbursement regardless of the method of payment used, but also have a specific requirement mandating, within a specific timeframe, that they are taken forward under Faster Payments. We have sought within the Bill both to provide further powers for the regulator and to specify that it needs to act within a certain timeframe on the form of payments, which currently represents the largest form of fraud, not only by volume—97% of payments by volume—but by value. The figures I have are that Faster Payments account for approximately 85% of the value. The noble Lord and noble Baroness also mentioned CHAPS. That is the next highest in value, but it is about 4%, so it is right that we prioritise action on Faster Payments first. That does not rule out further action on other forms of payment further down the line.
I appreciate that we often have a debate on what needs to be in a Bill versus powers that, in this case, we are giving to the regulators to make rules. We have also heard during this debate about fraud how dynamic that situation can be, so enabling the regulator to update its response to approaching these questions through its rules is the right approach in this situation.
None the less, a lot of detail of the Payments Systems Regulator’s approach is in the public domain, and I hope it would reassure the noble Lord, Lord Vaux, on a number of his amendments that the approach being taken is consistent with many of the recommendations made by his committee. Indeed, having its proposals out for consultation on how mandatory reimbursement should work has provided an opportunity for all interested parties to comment.
Turning to the specifics in the amendments and hopefully updating the Committee on work that the PSR is taking in relation to each, I begin with Amendments 202 and 207, tabled by the noble Lord, Lord Vaux, on the scope of the requirement on the PSR to mandate reimbursement. As I have noted, under this legislation the PSR could act in relation to any designated payment system, but with a specify duty on Faster Payments which, as I said, accounts for 97% of scams by volume today. We expect the PSR to keep under review the case for action across other designated payment systems, in collaboration with the Bank of England and the FCA.
In relation to Amendment 204, on issues that the PSR should consider as part of its approach, I assure the Committee that the PSR has set out how it has considered these issues in its consultation. For example, as discussed, the PSR is proposing that the cost of liability is split equally between the sending and receiving banks, recognising that both parties have a responsibility in preventing fraud.
On Amendment 205 on the publication of data, the PSR is currently consulting on a measure to require payment service providers to report and publish fraud and reimbursement data. I was surprised to hear Green support for league tables. I did not know that they were supportive of them on schools, but in this case that data is important and the transparency we are talking about helps noble Lords keep track of how effective these provisions are once they are implemented.
Amendment 206 is on a duty to review. The PSR regularly reports on the discharge of its functions through its annual report and has committed in its consultation to a post-implementation review of its action on APP scams, to assess the overall impact of its measures for improving consumer outcomes. The Government will also monitor the impacts of the PSR’s action and consider the case for further action where necessary. While the Government recognise the intention behind the noble Lord’s amendments, we do not think it necessary or appropriate to further circumscribe the actions of the regulator in primary legislation at this stage, given the extensive consultation the PSR has undertaken on this matter and its responsibilities and expertise in this area as the independent regulator.
On Amendment 203, tabled by the noble Baroness, Lady Kramer, and spoken to by the noble Lord, Lord Sharkey, the Government’s intention, as already expressed in the legislation, is to ensure that more victims of APP scams across the Faster Payments system specifically, and wider payments systems in general, are reimbursed, and to enable the PSR to act in this area. The Government recognise that no one sets out to be defrauded and that APP scams are, by their very nature, convincing and sophisticated.
None the less, we also recognise that many banks take action to engage with their customers ahead of making a payment, and that questions of liability can be complex. As the noble Lord, Lord Vaux, set out, a blanket approach to mandatory reimbursement raises questions of moral hazard and the potential for APP reimbursement fraud itself to become an area of difficulty. This is a difficult balance to strike. While this amendment is well meaning, it will not help achieve effective resolution in these cases. We are confident that the PSR has the appropriate objectives, expertise and powers to develop proposals for APP scam reimbursement that both ensure strong protections for victims and incentivise banks to engage effectively with their customers to prevent fraud. In its consultation on its reimbursement approach, the PSR stated its intention to require firms sending payments over the Faster Payments system to fully reimburse all consumers who are victims of APP scams, with very limited exceptions. The PSR considers that this will ensure that victims are reimbursed in the vast majority of cases. In that regard, the PSR has already signalled its intention to set a high bar for customer liability—higher than currently applies within the existing code of voluntary reimbursement.
We do not believe that this amendment will improve outcomes for customers beyond the provisions already set out in the Bill, and it could impede the work of the regulator, which has already consulted on the proposals. I hope that noble Lords genuinely feel reassured by the level of detail in which the PSR and the Government have thought through these proposals, and acknowledge the ability to have a dynamic response in this area. I therefore hope the noble Lord can withdraw his amendment.
Lord Vaux of Harrowden (CB)
Can the Minister comment on the Treasury Select Committee’s recommendation on the PSR, effectively subcontracting its responsibilities to Pay.UK?
Baroness Penn (Con)
I apologise to the noble Lord; I did have an answer for him on that. The Bill is clear that the Payment Systems Regulator has the duty to act on mandatory reimbursement. The PSR has the relevant powers and expertise, as well as the appropriate discretion, to determine the most effective approach in that area.
Lord Vaux of Harrowden (CB)
I thank all noble Lords who have taken part in this short debate. I think the comments from the noble Lord, Lord Sharkey, set out the difficulty in finding the right balance to ensure that victims are not blamed and are reimbursed, unless they have really been irresponsible, versus the question of moral hazard and the issue of potentially making fraud worse. That will just have to be kept under review.
While I am reassured by a lot of what the Minister said and what the PSR has said publicly, the Government might want to think more seriously about Amendments 205 and 206 on transparency and review. The PSR may say that it will do a post-implementation review, but this has to be consistent and carry on happening, because fraud keeps on moving and changing. It is similar to the statistic that 85% of fraud, by value, is Faster Payments, but what we are doing now may change that. This will hopefully incentivise the banks to lock down the ability to carry out fraud over Faster Payments.
There is nothing specifically in here to prevent fraud, but we are providing an incentive to do that. Fraudsters are very good at moving, and if they move on to CHAPS or overseas payments—the Bill itself introduces stablecoins as a new method of payment—we can see that the situation will move. This has to be not just a one-off, post-implementation review; it has to happen regularly and be reported on. We must see which banks are doing better and which are doing worse. It is a question of not just who is reimbursing better but how many frauds they are suffering. If a bank is suffering greater levels of fraud, it is a clear sign that it is not taking as strong action to prevent it as other banks are. The only way to see that is for it to be reported on.
While I am unlikely to chase the other amendments, we might want to return on Report to Amendments 205 and 206 on transparency, reporting and review. With that, I beg leave to withdraw Amendment 202.
The Deputy Chairman of Committees (Baroness Bull) (CB)
My Lords, as Amendment 209 has not been moved, I cannot call Amendments 210 and 211.
Lord Sharkey
“Access to Sharia-compliant financial services including student finance
(1) Within six months of the passing of this Act, the Treasury must make provision by regulations to facilitate the availability of Sharia-compliant financial services in the United Kingdom, including availability to students who are eligible for the Government’s student finance provision of Sharia-compliant finance products for paying tuition fees and for student maintenance on equitable terms with students accessing the Government’s student finance provision.(2) Regulations under this section are subject to the negative procedure.”Member’s explanatory statement
This is a probing amendment to allow debate on the progress towards provision of Sharia-compliant student funding.
Lord Sharkey (LD)
My Lords, Amendment 213 addresses the provision of sharia-compliant student finance, of which there is currently none. This matters because Islam forbids interest-bearing loans and that prohibition can be a barrier to our Muslim students going on to attend our universities.
This is not a new problem, nor the first time the issue has been raised in this House. The problem became clear in 2012 when tuition fees were significantly increased and it became worse when maintenance grants were replaced by maintenance loans. In 2014, the Government published a report on the consultation they had undertaken. It attracted 20,000 responses, a record at the time. The Government acknowledged that the lack of an alternative finance product to the conventional interest-bearing student loan was a matter of major concern to many Muslims.
The report also identified a solution: a takaful, a well-known and frequently used non-interest-bearing, sharia-compliant financial product. The Government explicitly supported the introduction of such a product. That was nine years ago, and we still have no takaful. In 2013, Prime Minister Cameron promised action. He said:
“Never again should a Muslim in Britain feel unable to go to university because they cannot get a student loan—simply because of their religion.”
But nothing has changed. There is still no available sharia-compliant student finance. In fact, it now looks further away than ever.
The Muslim community and parliamentarians in both Houses have continued to press. Last September, the right honourable Sir Stephen Timms wrote to the then Secretary of State for Education to ask whether delivering sharia-compliant student finance was still a government commitment. He got a reply saying that it was. Sir Stephen wrote again in October to the new Secretary of State, the right honourable Gillian Keegan MP, asking whether government policy had changed—there was quite a lot of change around at the time.
Ms Keegan confirmed that the provision of a sharia-compliant student finance product remained a government commitment and that the Government were considering whether and how the ASF could be delivered as part of the lifelong learning entitlement. She noted that the consultation on the LLE had concluded last May and promised to provide a further update on ASF as part of the Government’s response to that consultation.
The Government published their response to the LLE consultation last Tuesday. The whole response runs to 71 pages, yet ASF gets no mention in the document’s ministerial foreword and only two substantive paragraphs right at the end of the response. This does not seem a proportionate reaction, either to the gravity of the issue or to the overwhelming number of individual respondents who asked for sharia-compliant student finance, by far the largest group of respondents. The question about sharia-compliant student finance attracted 851 unique individual responses; the average number of unique individual responses to all the other questions in the consultation was 30.
The first substantive paragraph confirms the Government’s commitment to the ASF but says, without any explanation, that it will not be delivered with the 2025-26 launch of the LLE. The second paragraph says:
“The Government is procuring advice from experts in Islamic finance and will be working with the Student Loans Company … to better understand timescales for delivery of an ASF product under the LLE. Our aim is that learners will be able to access ASF as part of the LLE as soon as possible after 2025. An update on ASF will be provided by late 2023.”
This is miserable stuff. It makes it clear that, in the past nine years, there has been no serious thinking or planning for ASF. It does not explain why ASF has to be linked to the LLE at all or why it cannot be launched simultaneously with it. It also makes no hint of an apology to the Muslim community for condemning at least four more cohorts of Muslim students to choose between faith and education.
If we interpret the Government’s vague timings generously, the ASF will arrive in the academic year 2026-27. That is four academic years away and means an additional 16,000 qualified Muslim students not going on to university. It will have taken 16 years for the Government’s firm, clear and repeated commitment to be realised. The problem remains as it was 11 years ago. This is deeply unsatisfactory and obviously has gravely disadvantaged our Muslim community. It is easy to see how the Government’s inaction over such a serious issue over such a very long timescale could look like discrimination against our Muslim community, especially since the Government seem not to have engaged with the community or explained the very long delay and lack of a target date.
Before last Tuesday, Universities UK and 68 Muslim organisations and prominent individuals had written to the Minister, pressing for speedy action and a firm date for ASF. Since then, there has been widespread disappointment and dismay at the very long further delay and the continuing lack of a firm date. The Muslim Council of Britain, UUK, the CEO of Islamic Finance Guru, the NUS and others have all written to me expressing their disappointment at the Government’s response. It is deeply distressing and shameful that the Government, despite their firm promises, should continue to treat our Muslim community in this offhand, almost contemptuous way.
It is very hard to avoid the conclusion that the Government are making a fundamental error—moral, social and political—in putting Muslim students right at the back of the queue. Will the Minister talk to her colleagues in the Department for Education to ask them to arrange an urgent meeting with interested parliamentarians and Muslim community groups? This would allow explanation of the further delay and of the work programme, and an exploration of the possibility of setting an earlier and firmer date for the introduction of the ASF.
All this has gone on for far too long. I hope the Minister will be able to give a substantive and encouraging reply. I beg to move.
Baroness Sheehan (LD)
My Lords, I support my noble friend Lord Sharkey’s amendment. I should declare that, as a Muslim woman, I have a number of relatives who will be, and are being, affected by this. Not every Muslim feels unable to take out student loans as they are currently structured but there is a significant minority. It is usually women affected because they always come at the bottom of the list of who will be financed without a loan through private means. I urge the Minister, particularly given all the conversations we had last week about International Women’s Day, to consider this.
I will not detain the Committee long; my noble friend Lord Sharkey gave us chapter and verse on the Government’s position and prevarication on this issue, which, we are told, they have been able and willing to support for over a decade now. The Higher Education and Research Act 2017 allows the Government to introduce a student finance product consistent with Muslim beliefs regarding interest-bearing loans. However, as my noble friend said, the Government have yet to launch such a product. In February last year, as part of the conclusion of their review of post-18 education and funding, the Government said that they were still considering whether and how to deliver sharia-compliant alternative student finance and whether they would do so as part of the lifelong loan entitlement.
We have a situation where, not only are 18 and 19 year- old Muslims—predominantly girls—unable to access higher education but it now looks as though, with the LLE, they will not be able to access post-18 further education either. That will curtail their life chances, their ability to contribute to the life of this country and the financial contribution that they make to their families.
Baroness Bennett of Manor Castle (GP)
My Lords, it is a pleasure to follow the noble Baroness, Lady Sheehan, who has highlighted the gender aspects of this debate, and the noble Lord, Lord Sharkey, who has been a consistent champion on this issue in your Lordships’ House. I wish to make a couple of comments additional to what has already been said, while offering support for this amendment to push the Government to take action.
It was Green Party conference at the weekend, and I found myself discussing again and again how the public, who once thought that when the Government announced something that meant it would happen, are increasingly aware of the legislative process, and even the role of your Lordships’ House, because it is taking so long between government announcements and something actually happening. That is true of the announcement of a bottle deposit scheme for England, but there has been an even longer stretch between the promise of sharia-compliant finance, particularly for student loans, and the delivery.
The last figures that I saw showed that 9% of higher education students in the UK were Muslim. Extending loans for lifelong learning into further education makes it very likely that the percentage of students affected by the lack of sharia-compliant loans will increase. It is not as though the Government have not been reminded of this again and again. I note, again, that it was in July 2021, during the passage of what became the Skills and Post-16 Education Act, that we debated this. We were promised, “Yes, it’s going to happen; it’ll come”, but, yet again, we have just had a report from the Government which shows that there has been no progress. That is simply not good enough.
We often debate in your Lordships’ House how to get trust in government and the system. One way is to deliver on your promises in a reasonable and timely manner, particularly the things that really should not be that difficult, of which sharia-compliant loans is a case in point.
Lord Carrington of Fulham (Con)
My Lords, I support the noble Lord, Lord Sharkey, in this. There is no question that there are a large number of Muslims, both students and others, who have the very strong belief that their religion forbids them from engaging in normal financial practices as recognised in the West. It is about time we did something about it; it has taken far too long to get to where we are now, and we need to find a solution, particularly for student finance, where it is urgently indeed.
I can entirely understand why there is a problem. I understand why His Majesty’s Treasury is finding it difficult to find a solution. I spent a considerable part of my banking career devising means of meeting the religious requirements of Muslim communities to access financial services, often in conjunction with the Islamic Development Bank. It is an extraordinarily complex business. There are many different ways of doing it, but one of the problems is that there is no universal agreement as to what is an acceptable form of finance under the sharia. That is partly because of the difficulties between the various types of Islam—Sunni or Shia—and the various interpretations within the various branches of Islam itself, which also impact the nature of the financial products that are capable of being used. Indeed, Islamic scholars, particularly in the Sunni version of Islam, cannot agree among themselves what is acceptable and what is not. All this leads to considerable problems in devising a universally acceptable product.
Of course, the additional problem that the Treasury will have is that there is considerable scepticism among the conventional financial markets, particularly the western ones, about the credibility of Islamic finance altogether. To put it bluntly, there is scepticism about whether it is not just a con. In some cases, it is: the market is full of rogues, charlatans and crooks who will try to put up products that do not, in fact, meet the sharia requirements. So there is no great agreement on what should be done.
Lord Tunnicliffe (Lab)
My Lords, there has been a series of powerful speeches. The Government really ought to react to this: either they believe what they have said they will do, or they do not. If they do believe in it, surely action could take place more quickly. The community concerned is now a very important part of our society, and it is crucial that we create an environment where its needs are taken seriously. It is particularly crucial that we do not create a situation where it is disadvantaged. I take the point about the gender issue, which is even more worrying, in many ways. I urge the Government to find some way of assuring us that they will act quickly.
Lord Harlech (Con)
My Lords, I thank the noble Lord, Lord Sharkey, for tabling this amendment on access to sharia-compliant financial services, including student finance. The UK is widely considered the leading western hub for Islamic finance. Institutions across the UK have been providing sharia-compliant retail and wholesale financial services for nearly 40 years, offering a range of products, including bank accounts, mortgages and insurance.
Last year, the Government expanded the scope of the alternative finance rules, which support equal treatment for sharia-compliant finance products, to include home-purchase plan providers and arrangements made through peer-to-peer platforms. This allowed for these products to be treated in the same way as conventional mortgages and loans for tax purposes, contributing to a level playing field for Islamic and conventional finance products. The Treasury is currently consulting on reform of the Consumer Credit Act, which will consider ways to make it easier to provide sharia-compliant consumer finance.
Within this context, the Government want to help ensure that higher education remains accessible to all those with the desire and ability to benefit from it. They remain committed to delivering an alternative student finance product compatible with Islamic finance principles and, more broadly, to ensuring equitable regulatory and tax treatment when compared to conventional finance. The Government legislated at the first opportunity to make a system of alternative student finance possible, taking the necessary powers in the Higher Education and Research Act 2017. However, a range of complex policy, legal and operational issues need to be resolved before a sharia-compatible product can be launched.
When noble Lords discussed this matter during consideration of the Financial Services Act 2021, my noble friend Lord True stated that the Government would provide an update alongside the Government’s response to the post-18 education funding review. As a result of that review, the Government have been progressing plans for introducing a lifelong loan entitlement, which will provide an individual entitlement equivalent to four years of post-18 education. This will significantly change the ways that students can access learning and financial support.
It is important that an alternative student finance product mirrors the mainstream student finance offer; therefore, it cannot be delivered until the LLE regulations and delivery specification are finalised. The Department for Education consulted on the LLE in February 2022 and sought views on barriers that learners might face in accessing their entitlement, including consideration of an ASF product. The Government’s response to that consultation was published last week; it provided an update on ASF and set out the Government’s aim to deliver an alternative student finance product as soon as possible after 2025.
Several Members, including the noble Lords, Lord Sharkey and Lord Tunnicliffe, and the noble Baronesses, Lady Sheehan and Lady Bennett, spoke about timespans—in particular, harking back to 2013. In September 2014, the Government published their consultation on a potential model that could form the basis of a new student finance product. The Government signalled in the consultation response that they would need to take new primary powers to enable the Secretary of State for Education to make alternative payments in addition to grants and loans. These were secured in the Higher Education and Research Act, which received Royal Assent in April 2017. Specialist consultants were appointed in October 2017 to provide advice on the range of issues that would need to be resolved for a new system of alternative student finance to be implemented.
Work has started to assess how the Department for Education can ultimately deliver an ASF product alongside the LLE. Our aim is that students will be able to access alternative student finance as soon as possible after 2025. The reason for that timespan is that a range of complex policy, legal and system issues will need to be resolved to launch an alternative student finance product. Most importantly, that includes procuring advice from experts in Islamic finance, who will be working with the Student Loans Company to better understand timescales for delivery of such a product. The Government are introducing the LLE, which will significantly change the ways students can access learning and financial support. The scale and complexity here should not be underestimated. The DfE is trying to replicate a system of student finance that delivers the same results as now and whereby students do not receive any advantage, or suffer any disadvantage, through applying for alternative student finance.
Furthermore, the ASF product will need to mirror the mainstream student finance offer to ensure that access to finance and the repayments expected from borrowers are the same. From the 2025-26 academic year, new students studying at level 6 seeking government financial support will do so using the Student Loans Company’s systems under new LLE regulations. The LLE regulations and delivery specification therefore need to be finalised before an ASF equivalent can be delivered. Finally, every “touch point” for students at the SLC—that is, marketing and information materials, application forms, online portals and correspondence—will need to be reviewed and modified to ensure sharia compliance.
The Department for Education is procuring advice from experts in Islamic finance to support delivery and planning of this product, and launched an expression of interest advertisement, which closed on 20 February, to understand the market capability to deliver this advice. The department is currently considering responses and next steps. The noble Lord, Lord Sharkey, raised the takaful. The advice will support the next phase of delivery of alternative student finance on the detailed design of an ASF takaful product, as part of the LLE, and on the delivery of ASF by the Student Loans Company.
In response to the request for a meeting, this is obviously something that will need to be done in joint consideration with the Department for Education. I cannot make promises for both departments but I will take the request back. As per the request in the previous group, I note that this would ideally be before Report.
I hope I have reassured noble Lords that the Government are committed to ensuring that sharia-compliant financial products are accessible. I therefore request that the noble Lord withdraws his amendment.
Lord Sharkey (LD)
I regret to say that the noble Lord has not convinced me at all that any progress is likely to be made and has not really explained why we are in the position we are in. I have talked to Islamic finance experts quite frequently over the last 11 years that this has been going on. They have always told me that it should take up to 18 months or so to have some kind of ASF product available on the market. They point to the Islamic version of the Help to Buy scheme, which I think the Minister mentioned. From a standing start, that was sold in the marketplace 18 months later. If that can be done, why can we not move faster? The basic question of why this is taking so long has not been answered by anybody here today.
I return to the 71-page report on the LLE. Why was the delay in ASF not explained? There was no attempt to explain why it was put back. It is quite obvious that no preliminary work of any standing was being done for the last 11 years. That in itself is deeply shocking.
It is also true that there has been no significant engagement with the Muslim community throughout this whole period. Why is that? That does not seem sensible, reasonable or honest.
I get no sense that the Government are embarrassed by their position, that they intend to move faster than they have over the past 11 years or that they understand the moral nature of this issue. I will withdraw the amendment but, unless we get the meeting that we talked about so we can sit down together to talk about this with members of the community as well as parliamentarians, when it comes to Report we will find a way, if we can, to encourage the Government to do more faster than they currently plan to do. With that, I beg leave to withdraw the amendment.
Lord Moylan
“Politically exposed persons: UK taxpayers
(1) Within six months of this Act being passed, the Treasury must take all reasonable steps to make regulations to amend the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (S.I. 2017/692) so as to secure that, for the purposes of the regulation of financial services, individuals who are ordinarily resident for tax purposes in the United Kingdom are not treated as politically exposed persons, or as family members or close associates of a politically exposed person.(2) Regulations under this section are subject to the affirmative procedure.”
Lord Moylan (Con)
My Lords, I move Amendment 215 in my name and speak in general support of the other amendments in this group, all of which tend in a similar direction. I am very grateful to the noble Baroness, Lady Hayter of Kentish Town, and the noble Lords, Lord Hunt of Kings Heath and Lord Sharkey, for adding their names to my amendment.
Noble Lords will have many personal experiences of the harm and damage being done by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 in their own lives and in those of their families and what are described as their close contacts, so I will not begin this short speech by giving a long list of examples; I will give only one. But I hope others will arise later, because while we in the Committee understand the damage done, members of the public who might be observing this debate will not necessarily know what we are talking about or why it matters so much to us.
Baroness Hayter of Kentish Town (Lab)
My Lords, I will speak to my Amendment 224 and to others in the group, including the ably moved Amendment 215, to which I have added my name.
I thought that this had been going on for a long time, but the 11 years on the sharia law amendment was even longer. This started only a decade ago, when the noble Lord, Lord Flight, raised it in 2013. Then the noble Lord, Lord Clement-Jones, raised it in 2014 and the noble Lord, Lord Flight, and my noble friend Lord Harris raised it in July 2015. I had a Question for short debate on it later in 2015, at which point the Minister at the time, who subsequently became Chief Whip—although he is no longer—completely understood it, partly because it had affected him, as he said in the debate. It was also covered in the Mail on Sunday, because Charles Walker had raised it in a debate in the Commons in January 2016. I also had a Written Question in March 2016. If we say that we are doing this quickly, I just remind everyone that this has been going on a very long time.
The problem is that neither the FCA, to which I wrote back in 2016, nor the Treasury has actually moved to lift the burden on us normal PEPs, despite the FCA’s July 2017 guidance which, if it was complied with, would solve the problem—but it has never been complied with. Since that guidance, which is FG 17/6, we have continued to raise the issue in the House—on 6 September 2021, 22 February 2021, 3 March 2021, 24 and 25 November 2021, 5 July 2022 and 28 November 2022. So there should be no surprise at anything that is being said today.
Baroness Noakes (Con)
My Lords, I am sure we all have our own stories of how we have fallen foul of the PEP regulations. My own relatively recent one is that Revolut refused to let me have an international payment card, with no real explanation. It must have been because it tagged me as a PEP, because I cannot think of any other reason why it would not want to give me one. But I do not think this is really about our individual experiences, even though they are extremely aggravating for us and, indeed, our families.
I have Amendment 227 in this group, and I am grateful to my noble friend Lord Trenchard for adding his name to it. The Minister will see that the four amendments in this group are all slightly different, but she should take no comfort that they are not taking a consistent approach to this problem. They demonstrate, as I am sure this debate will, that we have a united resolve that this has to be dealt with.
Like my noble friend Lord Moylan’s amendment, mine seeks to amend the 2017 money laundering regulations to exclude people with a UK nexus from the PEP regime in the area of financial services. My noble friend’s amendment excludes individuals who are “ordinarily resident” in the UK for tax purposes, while mine focuses on UK citizens. My amendment says that UK citizens are not to be treated as PEPs unless the FCA considers that any of the categories of PEPs set out in the regulation—my noble friend Lord Moylan read this out—presents a money laundering risk. My amendment is predicated on UK MPs, Ministers and all the others in the list not presenting a higher money laundering risk than the rest of the UK population. There may well be some bad apples in the PEP barrel, but no more so than in other segments of UK society.
I believe that the money laundering regulations are based on an erroneous assumption, at least so far as the UK is concerned, that all PEPs—and their families and associates—present a high risk in money laundering terms. My amendment leaves the decision on risk to the FCA, on the basis of a risk assessment, but I would be staggered if the FCA concluded that UK PEPs presented a particular money laundering risk. Indeed, its own 2017 guidance, which the noble Baroness, Lady Hayter, referred to—and apparently enjoys reading in the evenings—states that UK PEPs should normally be treated as low risk.
My amendment is based on citizenship. I believe that is a fairly straightforward way, because it can be established by way of a passport, which will often be required in any event as part of proof of identity for money laundering purposes, for all categories of individual. I believe it is administratively less complex than the way based on tax status in my noble friend Lord Moylan’s amendment, for a number of reasons, including the fact that more than four times as many people have passports than fill in tax returns.
In addition, my noble friend’s amendment seems to admit that foreigners can be exempt from the PEP rules if they are resident in the UK and paying tax here. I am somewhat uncomfortable with that proposition. My noble friend may not be aware that the term “ordinarily resident”, which appears in the amendment, disappeared from the tax code 10 years ago.
I am similarly not convinced that the other two amendments in this group will do the trick, because they call for consultations and reviews by the FCA, but the FCA has consulted on and reviewed this before. As we heard, the latest set of guidance, which came out in 2017, recognised that UK PEPs are not high risk, but nothing has changed, as the noble Baroness, Lady Hayter, said. The fundamental problem remains that the regulations require enhanced due diligence for all PEPs, and that is where the aggravation arises. Even low-risk PEPs have to be subjected to enhanced due diligence, with all the record keeping and evidence that entails.
Furthermore, the regulated firms that have to comply with money laundering laws are, frankly, terrified of falling foul of their regulators, whether here or abroad. It has cost them a small fortune in regulatory fines and compliance costs, and they simply will not take unnecessary risks. From their perspective, upsetting a few PEPs and their families is a lot less expensive than getting entangled in regulatory enforcement. That is why I believe that we have to change the regulations if we are to achieve a step change and get UK PEPs treated with common sense in our own country.
Lord Sharkey (LD)
My Lords, I have added my name to Amendment 215 from the noble Lord, Lord Moylan. I congratulate him on his opening remarks.
I first encountered the PEP problem in 2016, as the banks were preparing for and, in some cases, anticipating AML regulations. For years I had had money with NS&I with minimal fuss and no difficulties at all, so I was very surprised when it wrote to me demanding very much more detail about my finances and sources of funds. My three children were even more surprised to get the same letter from NS&I—they did not even have NS&I accounts, which showed overzealousness on the part of the organisation.
Lord Kirkhope of Harrogate (Con)
My Lords, I rise for a moment to support the amendments from my noble friends Lord Moylan and Lady Noakes. I spent much of my political career in Brussels, where I used to complain regularly that various directives and regulations were gold-plated when they came back to this country. We were always very stern in the implementation of just about everything that came from the European Union. I and others in this Room played some part in preparing these things, including the anti-money laundering regulations. In fact, for a long time, when I went places I endured the description, “Here’s the expert on money laundering”. This was not very nice, but it got even worse with the PEP issue.
My noble friend Lady Noakes is right to say that we should not dwell too much on our personal problems with this. I will not, although I have had problems—more particularly, one of my sons, when he tried to open an account with an emerging bank. Everything was going swimmingly until someone contacted him and said, “Are you by any chance related to a Lord Kirkhope?” He said yes, presumably thinking that it would help him get a better deal, “That’s my father—thank you very much”. That was that. He then received a communication some two weeks later telling him that his application for an account had been declined, but they would not give him a reason and apparently could not do so under our regulations in this country. It was obvious why he was declined; that information had been enough to make them use some kind of prescriptive arrangement whereby everybody is looked into not individually but under a general approach, subject to having a PEP in your family.
Again, I will not get into the point from my noble friend Lord Moylan that we can now ignore the anti-money laundering regulations or do something different. That might well be the case but I do not want to revive discussions on Europe in this debate. However, we were very careful when we drew up the regulations. It was very much a British component that insisted on the regulations being employed or deployed proportionately. The word “proportionate”, which has been referred to already, was conveyed with those regulations to us in this country. The problem was that, when we entrusted the implementation of the regulations into the hands of the FCA we failed to oblige it to follow a proportionate approach in the way we should have done, although the word “require” is set out in its instructions. It did not do so, has not done so and appears not to be willing to do so.
I simply want to make it clear that consultations, which I think my noble friend Lady Noakes mentioned a moment ago, seemed to take place, particularly in 2017. It was perfectly clearly stated how these things should be implemented. It was not expected that those holding politically exposed positions in the UK should be regarded as anything other than a low risk, rather than the enhanced risk that we seem to be stuck with. I suggest that it is too late for consultation and that it must be done by way of legislation. Very strict instructions must then follow to the financial institutions, past, present and future, that they must not deploy the draconian measures and inquiries that are totally unnecessary and unjustified.
Viscount Trenchard (Con)
My Lords, I apologise that, in the earlier group of amendments, I omitted to declare my interests as a director of two investment companies.
All four amendments in this group seek in different ways to find a solution to the problem that all noble Lords, and members of their families, suffer as a result of being designated as politically exposed persons. Regulation 35 of the 2017 regulations provides that a regulated person must “manage the enhanced risks” arising from having a business relationship or conducting a transaction with a PEP. It assumes that such a business relationship always carries a higher risk than a business relationship with a person who is not a PEP. From my experience, I suggest that the reverse is the case—in other words, entering into a business relationship with a Member of your Lordships’ House carries, in general at least, a lower degree of risk than the average risk posed by a customer of a relevant person.
However, the regulation requires more personal KYC information to be provided in respect of PEPs than for other customers. As noble Lords are well aware, it is currently hard enough for anybody to open a bank account or an account with any financial institution. Long-standing customers with active accounts with banks who fail to answer emailed requests for proof of address or the like find their account summarily closed, without any appeal. It is very difficult and time consuming to speak to anyone with responsibility for such decisions. Quite extraordinarily, when a credit card operator obtains KYC information for a customer with regard to one account, it does not automatically regard that information as being equally relevant to other accounts held with it by the same customer. The situation for PEPs is disproportionately worse.
My son, who was resident in Taiwan, was nominated by his employer as a signatory on his corporate bank accounts but was subjected to entirely disproportionate questioning which caused a considerable degree of irritation. He experienced the same thing when proposed by his employer as a signatory on a Singapore bank account. He has now had to agree with his employer not to be nominated on the corporate bank accounts in Korea, where he now resides, and in several other jurisdictions.
I have put my name to Amendment 227, well introduced by my noble friend Lady Noakes, which sensibly seeks to disapply the application of PEP status for this purpose by the FCA in respect of UK citizens. Amendment 215, in the name of my noble friend Lord Moylan and others, would place an obligation on the Treasury to achieve the same thing. But these amendments do not solve the problem for overseas relevant persons. I hope that the adoption of more proportionate and reasonable guidance, as proposed by my noble friend Lord Kirkhope in his Amendment 234, to which I have also added my name, might eventually be copied by overseas regulators too.
In any event, I ask my noble friend the Minister to respond positively and to commit to take action on these proposals. It really is time that something was done about the expensive waste of time caused by the current regulations.
Baroness Fox of Buckley (Non-Afl)
My Lords, I will be brief. The noble Baroness, Lady Noakes, made the point that this should not be just about us and anecdotes about ourselves. That is true, but the fact that family members are caught up in it leads you to think, “Maybe I could cope with it, but why should innocent members of my family be affected in this way?”
However, I am falling into my own trap because I am saying “innocent family members” as though we are not innocent. One of the most disconcerting aspects of this whole discussion is that this is about the law of unintended consequences. We all know who these regulations should be aimed at, and none of us would advocate being soft on money laundering or not having the kind of regulatory framework necessary to deal with money used for terrorism and so on. But can you imagine what it would say to the public were they to find out that the PEPs on that list that the noble Lord, Lord Moylan, read out are considered to be dodgy people who are not to be trusted? We are telling the public that political figures in this country are what some of the more cynical and nihilistic commentariat might have us believe—that everybody is on the brink of money laundering. It sends a terrible message, but I feel as though it is just the law of unintended consequences.
As noble Lords know, if you ask whether this is happening because you are a politically exposed person, the person you are talking to goes through the most extreme example of gaslighting, where they kind of glower at you and, as one noble Lord said, either imply that it is happening to everyone all around the country or that you are making it up. You are made to feel completely paranoid, even though you know that that is probably the cause. Without telling anecdotes, I can say that I am met with a certain amount of aggression.
On lots of aspects of the Bill—certainly the parts that I was involved in the other day—we have talked about the public’s frustration that banks are closing all the time. Barclays has just announced a whole set of closures. We are worried about the consequences of not being able to go into a bank and talk to a manager and about what kind of lives we will have if everything is overly removed from people’s interactions. Here we have the most unnecessary example of risk-averse, bureaucratic time wasting from banks which should be spending their time serving the public and working for society’s financial services as we face an economic crisis. Can you imagine how much time they waste checking on us? I know how much time I have wasted during their completely unnecessarily and spuriously checking on us.
I do not know which of the amendments I prefer but, for once, I just want the law to change. I shall go with whichever is likely to win and pass. We are not doing the public any favours at all by worrying that they might think that we are just talking about ourselves in this instance, because the public are having their financial services wasting time on something that is not due diligence but a complete distraction from attacking the real problem.
Baroness Bowles of Berkhamsted (LD)
My Lords, I may have had the unique experience among us here of having to chair the committees that did some of the anti-money laundering directives. It is right that the noble Lord, Lord Moylan, points at the origins and the fact that we have carried through some things that were not necessary.
We have to go back to where it all began. He was quite right that it was with the Financial Action Task Force, which related to foreign nationals. We had a problem in the EU with what that meant—foreign vis-à-vis the EU—and tried hard to construct ways in which we could exempt the whole of the EU. There were words that would do that, but they did not get past the civil liberties committee people. We kept running up against being told that we could not discriminate. It was very difficult, because two committees were involved—my committee, the Committee on Economic and Monetary Affairs, and the civil liberties committee. Most of the time, because we were a bigger committee, we managed to outvote the civil liberties people, but there were one or two places where they had unique responsibility and, unfortunately, things such as discrimination were theirs, not ours.
I am telling this story because, if we want to solve this problem—if we say, “Okay, now we’ve had Brexit, we don’t need to stick to the rules that were made in the EU”—what can we do? Can we actually do what FATF said and discriminate within the UK against people who are in the UK but foreign? Where does that leave us with our discrimination laws? I cannot solve that, but I wonder whether the Minister knows the answer—because if the answer is that we are not hidebound and can do what FATF said, let us do that and put the focus where it should be.
It is very difficult to do a risk-based approach. I am all for it, and I think that the banks should do more of it. However, as the noble Baroness, Lady Noakes, has explained, it is costly. In fact, these things are outsourced; you fill in all the forms, somebody somewhere else ticks the boxes and the bank jolly well does not know its client any better. Then two or three years later, they ask you for all the same forms again, and they do not notice if you have done it exactly the same.
When the anti-money laundering regulations first came out, we seemed to get up to speed in the UK very quickly, and we started getting all this rubbish very quickly. I got the Belgian versions, because I still had Belgian bank accounts. I got a nice little form with tick-boxes on, so I photocopied that and started sending it to some UK banks, asking them why they could not do the same thing, although it did not get me anywhere. Recently, all the EU banks have stepped up, and my son has had a lot of trouble with the Irish banks, because he was working in Ireland—and he had even more trouble once he was no longer working in Ireland and came back to the UK, even though he has Irish nationality. He has had to close his accounts, because he just could not operate them.
So there are some issues here that need to be handled. I thought, going through this and trying to remember the discussions we had, that the noble Lord, Lord Moylan, got the closest by saying that if they are already having some check, such as through the tax authority, then that is a proper and non-discriminatory way to take people out of it. It is hard to think of anything better than that, other than just taking everybody out.
It is true that these regulations were really meant for catching politicians in dodgy countries who had access to ways to bypass the normal systems and checks for moving large sums of money between countries—for pilfering it. It is very difficult to talk about who they might have been without having carefully prepared your notes—although I know we have parliamentary privilege. They were not meant to affect ordinary people. Under the FATFA provisions, it was never meant to be ordinary people or ordinary politicians in generally law-abiding countries, shall we say, where politicians are not given extraordinary access to start siphoning off money from the central bank and suchlike. I do not think there is anyone in our central bank who can do that—perhaps the chief cashier; I have not thought about that—but that is who they were meant for.
Like others, I do not have confidence that our regulators will necessarily break cover and do something dramatically new if we ask them to revise this. It will be a problem that they are entrenched in the rules they have and the thinking of the other regulators who they keep meeting when they go places. It needs something very clear in legislation—something like the amendment from the noble Lord, Lord Moylan, if we can check out the point about discrimination. It is very difficult for us, as PEPs, to vote on things such as this, but it is causing a lot of distress to a lot of people. It is potentially devastating when you cannot complete on your house purchase and such things, and when things are happening randomly. It needs to be attended to. I really do not see why the Government cannot put their foot down and say to the banks and regulators that this must be done in a way that truly reflects who the targets are.
Lord Jackson of Peterborough (Con)
I will speak very briefly in support of the amendment moved by my noble friend Lord Moylan and those spoken to by my noble friend Lady Noakes. All noble Lords have spoken very well, and there is clearly consensus here. The specific issue here has trundled on for 10 years. I remember that when I served as treasurer of the 1922 Committee, this was an issue taken up by both the then chairman and, as mentioned by the noble Baroness, Lady Hayter, by Sir Charles Walker. I naively believed that we had resolved this issue by about 2017-18; obviously, that is not what happened.
This is about the limits of a permissive regulatory regime. It is clear that the Treasury and the regulatory bodies involved have not taken a blind bit of notice of the cross-party support in Parliament. This is not a niche issue that affects just us. In my case, I was affected because I was told by my mortgage provider that I was not going to be permitted to make mortgage payments, let alone make any withdrawals from a bank account. But this is also an issue of the civil liberties of our family members and extended family members. On that basis, we must take a very tough stance.
I come back to the particular point from the noble Baroness, Lady Bowles, about what we have the ability to do now that we are outside the EU—although my noble friend Lord Kirkhope is right that we must not recapitulate the arguments about Brexit. The noble Baroness’s point was astute, in that there is no proper risk analysis and risk assessment of all of these individual cases. A generic policy is applied across all individuals.
Frankly, let us be honest: the UK is one of the most open and transparent political systems in the western world. The noble Baroness, Lady Fox, is absolutely right that people are not attracted to public service if the fallback position is, “You’re a liar, a cheat, a crook and a thief if you go into public service”. It is important that, after 10 years, we make that appropriate point.
If we do not adopt my noble friend Lord Moylan’s rather benign amendment, a future Government may well take a much more draconian approach to this, both for the regulators and for the individual financial institutions. On that basis, they have a vested interest in sorting this situation out because, when the Financial Action Task Force proposals were published in 2012, they were not about asking people like the noble Baroness, Lady Hayter, to produce a premium bond certificate from 1957—I scarcely believe that it was 1957; I thought it might be a lot later.
This is an opportunity, and I hope that my noble friend the Minister makes, or at least commits to, those changes. This is not the first time that I have been compared to a brothel keeper—although that is normally in the other House—but my noble friend Lord Moylan makes a good point. This is an opportunity to right this wrong. This is not about us and it is not a niche issue: it is about civil liberties, decency, honesty, openness and transparency. We need action from Ministers on this.
Lord Tunnicliffe (Lab)
My Lords, after so many very good speeches, I will be short. My personal experiences vary wildly. I remember a four or five-page document for a credit card, and I remember the bank that most of my money is in ringing me up and saying, “What’s this extraordinarily large amount of money that has just come into your account?” I said, “You’re not going to believe this, but it is my son paying me back a loan”, which he had. I heard nothing more from the bank. That gives an insight into the disproportionate ways in which various institutions react to this, and much of the problem is in that behaviour.
Let us not get away from the problem: money laundering is serious. If you believe all of the thoughtful reports on it, it is serious in our City. It is absolutely valid that we take it very seriously. I understand from the professionals who regulate us that it is very subtle: a lot of it is done with seemingly innocent accounts moving relatively modest amounts of money in a highly managed way. It is a profession that is, sadly and unfortunately, probably absorbing some good brains in an evil trade.
One has to accept that getting the regulations right is very challenging. I take the general view I hear today that the regulations need further improvement. Clearly, that has to go in law. Therefore, I urge those who have put forward amendments to try to address the problem and put together a common amendment that may attract support across this House and the other place. Of course, it would be much better if the Minister came forward with her own solution.
We have to think about the other agents here: the banks and financial institutions. Sadly, they seem to work like many large institutions do. They take views about spending money and about their duties; frankly, all too often their duties are not to their customers. The moment a piece of complexity is built in, they end up with algorithmic solutions and basic statements that some algorithm has been offended here or there, and they take draconian solutions: they close or block accounts. This is absolutely unreasonable.
Baroness Penn (Con)
My Lords, the Government have a lot of sympathy with noble Lords who feel that they or their families have been subject to unreasonable treatment due to their status as politically exposed persons, or PEPs. As noble Lords have mentioned, I have engaged with noble Lords to understand this issue and I am aware that the difficulties faced can range from seemingly disproportionate requests for information to accounts being blocked, leaving Peers and their family members at risk of being unable to effectively manage their financial affairs.
The Treasury and the FCA will continue to work to address this issue and to ensure that those subject to these rules are treated fairly and proportionately. Before discussing that work further, I will set out the importance of the PEPs regime to UK security and the fight against economic crime.
Enhanced due diligence by banks is a key component of the UK’s anti-money laundering and anti-corruption measures, and ensures that any suspicious activity is identified and reported to law enforcement. Given the potential for the positions of influence held by those subject to the PEPs regime to make them targets for serious and organised criminals and hostile state actors, law enforcement agencies have strongly favoured maintaining these requirements on domestic PEPs. The enhanced due diligence measures are a crucial part of the UK’s anti-money laundering regime and contribute to a coherent, systemwide approach to tackling economic crime, providing law enforcement with valuable and actionable intelligence to help protect the UK’s political system from hostile state actors, for instance.
However, the Government of course recognise that domestic PEPs often represent a lower risk than overseas PEPs. This is already explicit in FCA guidance, which states that domestic PEPs should be treated as lower risk by financial institutions unless other risk factors are present. The FCA remains committed to monitoring banks’ compliance with its guidance on PEPs, and will take action where it identifies systemic issues. The FCA did so last year, resulting in one financial institution apologising to all PEP customers after its failure to adhere to FCA guidance.
In last year’s review of the money laundering regulations, the Government committed to an assessment of the risk profile of domestic PEPs and made it clear that we would consider removing the requirement for mandatory enhanced due diligence if they were found to be sufficiently low risk. The Government’s assessment of the risk profile of domestic PEPs has concluded. As part of that work, they engaged with law enforcement and other operational partners to develop their under-standing of the risk posed by domestic PEPs. In light of that review, the Government consider that the existing requirements remain appropriate.
However, given the concerns raised, the Government will continue to work with the FCA to ensure that banks and other financial institutions appropriately and proportionately implement the guidance set out by the FCA regarding the treatment of domestic PEPs, that it is taken forward in a way that is proportionate to their individual risk and that adjustments are made to enhanced due diligence measures as necessary. I would like to reassure noble Lords that the Treasury continues to engage with the FCA on this issue and stress the importance of taking a proportionate, risk-based approach to the application of enhanced measures on domestic PEPs.
I turn to the specifics of the amendments. Amendment 215 from my noble friend Lord Moylan would remove those politically exposed persons who are tax residents from the regime entirely. As I have set out, including domestic PEPs in the regime is important because of the risks presented by their positions of influence. Such a proposal would weaken the UK’s protection from money laundering and corruption and leave us non-compliant with international standards. International standards for domestic PEPs, as my noble friend set out, are set by the Financial Action Task Force. They require countries to implement a legal framework that compels regulated firms to identify whether their customers are domestic PEPs and make an assessment of which due diligence measures to apply based on the risk presented.
Amendment 215 would remove the requirement for financial institutions to identify and treat those resident in the UK for tax purposes as PEPs, making the UK non-compliant with those international standards. The UK is a leading member of the Financial Action Task Force and was recognised in its mutual evaluation report in 2018 as having the most effective anti-money laundering regime of well over 100 countries assessed to date. The UK remains committed to ensuring that its anti-money laundering regime is compliant with these international standards. While I appreciate that, in drafting their amendments, noble Lords may have sought to remain compliant with those standards, I am afraid it is not possible to remove domestic PEPs from identification altogether and remain compliant.
Baroness Hayter of Kentish Town (Lab)
Why is it therefore possible to exclude councillors, as the guidance does, but not Peers?
Baroness Penn (Con)
That is a question of who is classed as a domestic PEP, not of the need to have a regime in place to identify domestic PEPs and then look at what enhanced due diligence measures should be applied to them.
Baroness Hayter of Kentish Town (Lab)
Does the Minister accept that we could therefore exclude all Members of Parliament?
Baroness Penn (Con)
I do not think that would be consistent with the Financial Action Task Force guidance that is interpreted at a UK level.
Baroness Hayter of Kentish Town (Lab)
I am sorry, but the Minister said that we are a leading member of the Financial Action Task Force. It has been enabled to take councillors out; it is very hard to imagine that Members of this House could not be.
Lord Moylan (Con)
I know the answer to this. It is because the FCA said in 2017 that a council was not a parliament or similar body. Those words appear in the task force recommendation. By declaring that a council was not a parliament or a similar body, members of councils immediately fell out of the regulatory scope by virtue of the guidance as it was changed at that time.
Baroness Bowles of Berkhamsted (LD)
This may not be something that the Minister can answer straightaway, but she has just finished by saying that the law enforcement agencies still wanted to keep the provisions. It would be good if she could tell me which and why, and on the basis of what evidence. How many parliamentarians have been done for money laundering, for example, and how many have featured seriously in inquiries? If that information is not to hand, I should be very happy to have it explained in detail in writing. I am still a bit perplexed, because my understanding of FATF was the same as that of the noble Lord, Lord Moylan: that is to do with foreign politicians, not our domestic politicians, or has FATF been updated? Oh, the noble Lord has it on his iPad.
Lord Moylan (Con)
It is the website with the 2021 version of the recommendations.
Baroness Bowles of Berkhamsted (LD)
So I cannot reconcile what the Minister has just told us with what is in FATF. If it needs detailed and arduous explanation, I am quite happy to have it in writing, but on the face of it, it is irreconcilable.
Earl Attlee (Con)
Further to the questions of the noble Baroness, Lady Bowles, can the Minister point to any illegal activity on the part of a parliamentary PEP that has been detected as result of the money laundering regulations?
Baroness Penn (Con)
My Lords, to deal with the question of the risk assessment undertaken as part of this work, as I have already said, the Government have engaged closely with law enforcement and the intelligence community to inform our understanding of the risk in this area. It is a difficult area, and it is not particularly appropriate to go into detail on the contents of the risk assessment, given the sensitive nature of the information. As I also set out, the context is that there is potential for those in positions of influence to make domestic PEPs targets for influencing behaviour by serious and organised criminals and hostile state actors. The potential links between domestic PEPs and criminal activity vary, including abuse of political position for personal gain or links to overseas corruption.
I very much understand the desire by those directed by the regulation to hear more about that risk assessment. It was a question that I anticipated and to which I sought to get as full an answer as possible for the Committee. I am under constraints, but I shall none the less take away the requests from noble Lords to see whether there is any more I can do to provide more information on that point.
Lord Kirkhope of Harrogate (Con)
I follow up the inquiry of my noble friend Lord Attlee about statistics—whether parliamentarians have actually fallen foul—and take it one stage further. With regard to the particularly appalling way in which family members are implicated here, do we have statistics on how many family members of parliamentarians have fallen foul? Surely, they are implicated simply because they are related to someone who is classified as a PEP. We have mentioned human rights, but this provision cannot be fair or proper and should surely be removed.
Baroness Penn (Con)
As I said, I shall take away the point about what further I can say about the work on the risk assessment. The focus has been on looking at risk, and my understanding is that, in considering that, the question of close associates or family members—I believe that is the terminology in the regulations—has also been considered.
Baroness Hayter of Kentish Town (Lab)
I am sorry about this, but the Minister will not be surprised, because we have had 10 years of this issue. There was a review last year, which she reported on in the House, which said that no change was needed, which is extraordinary. She referred to the case where we all got an apology, but that was only because we kept on standing up and asking for it, otherwise it would never have happened.
The important thing that I wanted to raise is that this somehow is going further than anti-money laundering—it is about general corruption. Some of us have been debating the National Security Bill, where it is being dealt with in another way. I do not think that the Minister has been following that Bill, but I can understand that she has not because she has been involved with this one. We now have the FIRS scheme, which will be set up when the Bill becomes an Act and which is about the other things—the approach to politicians by malign forces trying to corrupt us, or whatever. So can we take out corruption and that sort of thing, because the National Security Bill will deal with that? This is simply to be simply about anti-money laundering—in other words, dirty money.
A lot of what the Minister has said goes beyond that, and the fact that she cannot tell us means that the spooks—who tell us that they do not want it, by the way—want it for some other cause. That is not the purpose of the provisions on anti-money laundering; it is about dirty money. Perhaps the Minister could talk to the Home Office and Tom Tugendhat about how much is covered now on the approach to any of us as politicians by malign forces, because this is separate.
Baroness Penn (Con)
My Lords, although I have not been following the detail of that Bill, I am aware of the provisions in it. As part of looking at this question, one question asked is, in our broader ecosystem of the checks and balances that we have on our politicians and people defined as PEPs—the other requirements of disclosure that they are held to and the other tools that we have at our disposal—how they influence the risk assessment has been done. I reassure noble Lords that that question has been asked. I should also reassure noble Lords that I am seeing the Security Minister tomorrow to discuss economic crime, but also that issue. We are seeking wherever possible to ensure that there is join-up across government in our assessment of the risks and the tools available to deal with them, ensuring that where we have measures in place they remain proportionate. That is something that I continue to engage with, with the Security Minister and others across government.
I shall just try to answer the point on the Financial Action Task Force, the difference between domestic and foreign PEPs, and the requirements within that, as I understand it. I commit to following up in writing if it remains unclear or if anything I say is not correct. The requirement for automatic enhanced due diligence applies to foreign PEPs. However, within the FATF guidance on recommendations 12 and 22—I think that this is particularly around 12—there is still the need to take steps to identify whether someone is a domestic politically exposed person and then review the relevant risk factors. So they need to determine whether a customer or beneficial owner is a domestic PEP, then determine the risk of the business relationship in that context—and then, in low-risk cases, there are no further steps to determine whether a customer is a PEP. In other words, there is still a requirement to identify whether someone is a domestic PEP or not and to look at the risk around that.
Where there is a difference, in my understanding, from the Financial Action Task Force requirements, is that for foreign PEPs you need to apply automatic enhanced due diligence. Under the EU regulations, that also applied to domestic PEPs—and we therefore ensured that automatic enhanced due diligence applied to domestic as well as foreign PEPs was a system in our regulations. The review we did last year into all of our anti-money laundering regulations did not conclude that on this matter no further action was to be taken but that we needed to look at the risk profile and risks associated with domestic PEPs before determining whether those requirements of automatic enhanced due diligence remained appropriate, now that we had the ability to vary our money laundering regulations, having left the EU. So that was a further piece of work that needed to be done after the review was published last summer of our money laundering regulations overall. That further piece of work has been undertaken, and I have undertaken to write to noble Lords with further details if I can provide them on that risk assessment, but that concluded that it was appropriate to maintain automatic enhanced due diligence for domestic PEPs.
Baroness Noakes (Con)
Did this review involve the FCA? When the FCA reissued its guidance in 2017 it was very clear about domestic PEPs being low risk, but it was constrained by the regulations, which said that you had to do enhanced due diligence. It was within that context. There seems to have been a shift between the FCA’s apparent position on the risk profile of UK PEPs and what my noble friend the Minister is now saying that she is being told by the security services, which will always try to find things that can go wrong. It is quite easy to construct a case that we are potentially capable of being corrupted by whoever and involved in money laundering, but they are not involved in the money laundering processes; the FCA is. I am getting a bit confused about how robust this risk assessment is in the context of money laundering.
Baroness Penn (Con)
I believe that it aimed to get relevant information from all those involved and take a holistic view. I appreciate and agree that we need to ensure that, when these measures are put in place, they are proportionate to the risk faced, so it is entirely right to interrogate that risk assessment. I also appreciate that it is a slightly frustrating process when the sensitive nature of some of these issues means that we cannot always go into all the details noble Lords want at this time. I have tried to explain the context as to why domestic PEPs are viewed as having sufficiently high risk so that enhanced due diligence should still apply. I have the FCA guidance in my pack but I will not go through it, but it is also true to say—this is another point that I checked—that although the risk is sufficient to have enhanced due diligence measures, it is lower for domestic PEPs than for foreign PEPs. That assessment still applies.
Lord Jackson of Peterborough (Con)
The Minister is doing a very good job on a very sticky wicket. I am not surprised. Notwithstanding what she said about risk assessments and how that has to be, of necessity, a discretionary issue, the problem we are identifying, which the Government should address if they come forward with an amendment at Report, is the opaque nature of identifying these individuals and the offence against natural justice, because when people have accounts closed they are often not told why, who made the decision, on what basis and using what methodology. That is a serious issue and, after 10 years, one that the Government should address, if necessary by a government amendment.
Baroness Penn (Con)
I absolutely take that point. It comes back to the appropriate and proportionate enforcement of these regulations. I know that that is something noble Lords have raised previously, but we need to continue to work to ensure that it takes place.
Baroness Bowles of Berkhamsted (LD)
This goes back to when the Minister mentioned the FATF provisions. I thought she mentioned the risks in business relationships. All the stuff we get as PEPs is our personal stuff; it is nothing to do with business relationships. I have not been interrogated about anything to do with the London Stock Exchange, of which I am a non-executive director; I am interrogated about my father’s will and that kind of stuff.
Again, I am happy—in fact I would almost prefer—for the Minister to write the replies because it is hard to put together quoted bits and pieces, even when we get them back in Hansard. It seems that the whole risk assessment business is being set aside at the behest of the security agencies, which just like the idea that they have another captive load of people and that they may be able to track something with money—which I doubt, because these forms go to an outsourced place, they are filed, and nobody ever looks at them. There is no “know your client” going on. They may look at one or two, but I do not see how it adds up at all, even taking that security aspect into account, because if anybody was really a security threat, there are other ways of vetting.
Baroness Fox of Buckley (Non-Afl)
I am confused. I always encourage people to find out what is happening in this House by telling them to look at the speeches and follow Hansard, but now I am dreading anyone watching this because we have a government Minister implying that the security services at looking at us, particularly our private financial affairs, because we are high risk. Why? I do not think that is true. I want to denounce the notion that because you are in the House of Lords you are more likely to be doing something such as that.
I do not think the Minister can answer my second point, but I think we would all feel that it is a generalised accusation rather than specifically going after individuals who might be doing things that are wrong based on evidence, which nobody here objects to. Never mind the families; I have got to the point now where it is not just the families. I am sitting here feeling embarrassed, thinking, “Oh god, somebody is basically saying that the security forces think that we are all up to no good”. If the public find that out, it is said by a Minister and it is the general atmosphere, that is not good, is it? I usually put my speeches up on social media; I am not putting this one on. I do not want anyone to know about this conversation, because it will discredit the reputation of this House far more than anything else.
Baroness Penn (Con)
My Lords, I have already set out for the Committee, and I repeat now, the reasons why UK domestic PEPs may be at greater risk of money laundering. For example, in the general sense, the positions of influence that we have can put us at greater risk. I have also tried to set out—and will set out in writing for noble Lords—the approach that we are taking to look at risk in this area. I will share any further details that I am able to.
Baroness Bowles of Berkhamsted (LD)
Following on from what has just been said, I would quite like the Minister to rephrase what she said: that we are at greater risk of money laundering. I cannot let that stand on the record.
Baroness Bowles of Berkhamsted (LD)
I can let stand that we might, in some instances, be at greater risk of being targeted for various things, and I hope that we also have a greater capacity for repelling such actions, given the experience of people in the House and having done the sorts of things that we have done throughout our lives. I am not prepared to accept that kind of statement with any acquiescence whatever on my behalf or, by the sound of it, on behalf of colleagues here.
Baroness Penn (Con)
I am very happy to clarify for the Committee and anyone who may be reading our proceedings, that we, due to our positions of influence, are at greater risk of being targeted by those who may seek to engage in money laundering.
Earl Attlee (Con)
My Lords, I say to the Committee that if someone tried to target me in any inappropriate way, I would report it to the appropriate authorities immediately.
Baroness Penn (Con)
I am sure that many of us in this Committee would do so—
Baroness Penn (Con)
I am sure we all would. The noble Baroness, Lady Bowles, asked me to set out in writing the position of the Financial Action Task Force in terms of the requirements for foreign and domestic PEPs. I will also set out in writing the position on the risk assessment that has been undertaken, so that everyone has it and it is not just in the toing and froing of the exchanges in this Committee. I will clearly set out for the Committee the Government’s position on this.
Baroness Noakes (Con)
This is a risk of money laundering, not anything else. What wider implications should be taken into account? The FCA knows about money laundering and its risks. How could there be wider considerations than money laundering?
Baroness Penn (Con)
Others are involved in looking at the risks of money laundering in counterterrorist and proliferation financing, which I believe are subject to these regulations.
Baroness Noakes (Con)
As far as financial institutions are concerned, all of those are dealt with by the FCA, not the security services or any other shadowy agencies that seem to be involved in this latest risk assessment, so I am struggling to see what wider issues could possibly have been taken into account.
Baroness Penn (Con)
The Government believe that the decision about the scope of the money laundering regulations is best taken by, and should remain with, the Government, rather than being delegated to the FCA.
I turn to Amendment 224 from the noble Baroness, Lady Hayter of Kentish Town. This would require the FCA to consult with consumers with regard to its functions relating to PEPs. In the discussion—
Baroness Hayter of Kentish Town (Lab)
The noble Baroness does not need to respond on this; it was a placeholder.
Baroness Penn (Con)
Okay—I was going to talk about the engagement that we have conducted so far and will continue.
My noble friend Lord Trenchard touched on my noble friend Lord Forsyth’s Amendment 234, but I am not sure whether anyone spoke to it specifically. In my response, I addressed the Committee’s desire to focus its attention on the statutory changes, and I am not sure we had a detailed discussion on the other proposals put forward here.
Noble Lords have made their position on the issue very clear. I hope that, to some extent, they have also heard the rationale for the Government’s approach and would agree with the desire to be in line with international standards in any action that we take in this area. As the noble Lord, Lord Tunnicliffe, said at the start of his remarks, we should bear in mind the context of the Government’s efforts, very much supported by this House—we are often pushed to go further by this House—in tackling issues of economic crime, which include money laundering. We have to recognise that London and the UK being such a centre for financial services, and the great benefits that that brings, also brings greater risks. It is right that we make sure that we have a regime that manages those risks as effectively as possible.
I shall write to noble Lords on the matters that I have mentioned, and any other matters in looking at this debate again, on which I can provide further clarity. I am sure that I will engage with noble Lords further on this issue ahead of Report.
Lord Tunnicliffe (Lab)
Would the Minister also engage with the banks and financial institutions to see whether they can improve their performance in being reasonable?
Baroness Penn (Con)
The noble Lord is absolutely right to say that. This Government are committed to do that with the regulator. I understand this Committee’s desire to look at legislative change, but I have also heard from the Committee that the guidance is clear on the lower risks of PEPs, and the challenge really lies in the effective implementation of that guidance. We should not take our eye off that work. It is something that the Government are absolutely committed to doing.
I know that noble Lords have raised the challenges of engaging with the FOS on this issue, but I remind them of that route. I have also said to noble Lords, as the FCA has said, that in the list of contacts that we have provided to parliamentarians with issues with their status as politically exposed persons, the FCA will monitor any of those points of contact in terms of complaints to look more systematically at whether there are issues in individual institutions so that further action can be taken on that basis. The Treasury will continue to engage with the FCA on how we can ensure that that takes place.
Baroness Hayter of Kentish Town (Lab)
I think that we have already mentioned why the FOS is so inappropriate. To expect a judge to take a complaint to the FOS is frankly out of order. It is no way for this issue to be raised. It is a very small number—but it is not appropriate to ask very senior judiciary to go via FOS, if their children are being affected. That is really not the right way forward.
Baroness Penn (Con)
I appreciate that it will not be the right route of recourse in many circumstances, but I do not agree that it is never the right form of recourse for people. It is important for people to know that that route is there. For particular cases, it may be appropriate. The noble Baroness has set out why, in many other cases, that is not the form of recourse that people want, which is why we have also set out other points of contact and ways in which to try to resolve these issues, which also act as a data point for the FCA as the regulator to look at issues in particular banks or institutions that are not applying the guidance appropriately.
Lord Moylan (Con)
My Lords, we have had a very valuable debate. I am grateful to all noble Lords who spoke in it and, if I do not thank them individually, I hope that they will forgive me, given the length of the debate so far. It is unusual, at the end of such a long debate, to be able to summarise the arguments made in one or two sentences—but I can, because everybody, in effect, said the same thing. That is that we want to see change, and the majority of us want to see legislative change.
Having said that I am not going to refer to individuals, there are two speeches to which I will briefly refer, because they were important. The first was the winding-up speech from the Labour Party Front Bench by the noble Lord, Lord Tunnicliffe. He spoke very briefly, but his words were very pregnant and important as we approach Report.
The second, which I will deal with at greater length, was the speech made by the noble Baroness, Lady Bowles of Berkhamsted, who acutely put her finger on a key issue that must be addressed if we are to achieve the legislative change that we want to see. That is about the definition that we choose. When I spoke earlier, I said that there must be a way in which to distinguish satisfactorily between domestic and foreign. In doing this, I will not use the term “non-discriminatory”, because that has legal implications, but we want to do it in a way that is fair and is seen to be fair by everybody who might be affected. At least a couple of suggestions have been made, and they both have merits. This is something to which we need to return as we approach Report, to make sure that we are comfortable with it—but I thought that the noble Baroness put her finger on that very acutely.
Normally, at this stage in a speech of reply, I would turn to a lengthy and careful analysis of the remarks made by the Minister, but she has been subject to a lengthy and careful analysis by practically everybody else in the course of her winding-up speech. So perhaps I will spare her that, and congratulate and thank her for taking, with such good grace, the questions and points that were put to her.
However, I shall refer to two points, the first being the security services. Frankly, I have never come across a case where the police or security services have given up a right to scrutiny that they already have. There is always some excuse for why it is necessary. I find that unconvincing—and the reasons are not, per se, on the grounds that it is the security services, but because of the arguments made here. It is astonishing that there is a special list of people in scope of suspicion of money laundering and terrorism, who happen to be the list in Regulation 35(14), when all of us could supply—even a five year-old could supply—a list of people much more likely to be in scope, who are not being subject to the same scrutiny.
On my second point, I do not think that I am in the wrong here, and suspect that my noble friend has not quite got it right, but am happy to be corrected. What are our international obligations to the FATF, insofar as we have legal obligations to it in a legal sense, given that it is not a legal body?
From this little iPad, I read out and referred very carefully to the current version of recommendation 12. It quite clearly says “foreign”; it places no obligation on the parties to the agreement to do anything about domestic PEPs. Clearly—this is where there may be a degree of confusion—in deciding who is a foreign PEP, you have to make a decision, if you like, that they are not a domestic PEP. Naturally, a sift is therefore required to get to the point of identifying that this is a foreign PEP, but I suspect that too much has been built on that, and there is some suggestion that that sift—are they foreign or are they domestic?—involves some obligation to scrutinise them. However, it simply is not there, so I referred in the course of my noble friend’s speech to the interpretative notes, and there is an interpretative note to recommendation 12, but it deals entirely with life assurance policies.
I think I also heard my noble friend say that recommendation 22 was relevant. That may have been a mishearing on my part but, looking at recommendation 22, it deals almost entirely with casinos, real estate managers and trusts. I do not know why they are all in the same recommendation, but there we are.