Financial Fraud: Vulnerable People

Baroness Kramer Excerpts

Thursday 2nd December 2021 Grand Committee

[Baroness Kramer (LD)]

My Lords, there is one great advantage of there being a limited number of speakers in a short debate, which is that it really does not make a whole lot of sense for someone in my winding position to go and repeat everything that has just been so well said. I particularly want to raise two issues that I think have not been covered here, and will then make a final comment.

The first is the regulatory perimeter, which determines which activities the FCA regulates and therefore when it will or will not tackle financial misbehaviour by financial firms. The perimeter sets a boundary on regulated activities and has been given as the reason why the FCA has failed to act in so many scandals: the asset-stripping scandal of the RBS Global Restructuring Group, which destroyed small businesses and their owners by undervaluing their assets in order to seize them; the mis-selling of interest rate caps to small businesses; the abuse of the Libor-setting system, which mispriced trillions of loans across the globe; and endless investment scandals, of which London Capital & Finance is just one of the more recent.

I join the noble Lords, Lord Davies and Lord Vaux, in saying that ordinary people, even savvy people, usually have absolutely no idea that the financial product promoted or sold to them is unregulated, particularly since other activities carried out by the same firm may indeed be regulated. Pretty much everybody other than a highly sophisticated multinational with a phalanx of lawyers is exposed to financial fraud in one way or another today. Of course, we need some special protection for people defined as vulnerable, as described by my noble friend Lord Sharkey. But, as others have said, today everyone needs financial products just to participate in normal life, so rules based on caveat emptor—buyer beware—which is the backbone of the current system, are simply not good enough.

I have long argued that regulating activities is a charter for mis-selling. If the FCA authorises any activity carried out by a financial company, it should regulate all its activities so that the line is clear. In other words, regulate the firm and all the activities it is involved with. Other countries do it without serious problems.

Following the LC&F debacle, the FCA’s relatively new CEO Nikhil Rathi said that the FCA would change its approach to tackle more effectively the issues of fraud risks that sit outside the perimeter of regulation, but he gave no detail. Will the Minister tell us whether there has been progress? Mr Rathi also insisted that he needed more investment and resources to take on the task. Will he get them? At one time the senior managers regime was touted as a possible tool for tackling such fraud and abuse of clients, but the FCA has used that with such deference that it no longer receives any respect. Will the FCA get new duties and powers?

My second issue is that of whistleblowers and the dreadful way we treat them in the UK. The United States is probably the exemplar of how to value financial whistleblowers. Regulators and enforcement agencies in the US have told me that whistleblowers are the citizens’ army that enables them to clean up and deter bad behaviour in an industry where money creates so many temptations. They are the canaries in the mine, to pick up the point made by the noble Lords, Lord Davies and Lord Vaux: early action is absolutely critical when fraud begins to arise.

Financial whistleblowers in the US are protected from both retaliation and financial ruin. California has just enacted another step, a new law called “Silenced No More”, to prohibit the use of non-disclosure agreements that are so often embedded in any employee settlement as a gagging clause. Now the EU is moving in the US direction. The UK, once a leader in protecting whistleblowers, is now one of the most risky developed countries in which to speak out. I have complained before that whistleblowers to the FCA are assumed to be troubled people, not vital informers. They are triaged by call handlers trained in dealing with complaints and with minimal financial knowledge. In contrast, in the US a senior financial investigator does the triage to capture early and critical leads.

The protection that the UK regulator offers a whistleblower is simply anonymity: it will not disclose their name to their employer. But most employee whistleblowers are easily identified both by their specialist knowledge and because most will have raised concerns with line managers and others before turning to the regulator. The regulator then stands aside and offers no support if they are penalised, demoted or fired, and will not even give evidence to an employment tribunal—and woe betide the whistleblower who has to go public and reveal themselves to the press, or even to give evidence to Parliament, because the regulator will not act. The norm for whistleblowers in the UK is years of legal battle and financial and career ruin. Even when settlements are made, typically they rarely cover the extortionate costs of bringing the various cases and attempting to resist retaliation.

Whistleblowing protection, little though it is in the UK, is limited to employees. Advisers, clients and accountants—indeed, anyone else—have no protection at all. I heard just this morning from an IFA who has identified potential fraud at a major insurance company and has been unable to report it to the FCA whistle- blowing team, although they attempted to do so, because he/she—I will disguise their identity—is not an employee. If he/she speaks out, he/she will effectively be put out of business as an IFA.

I have a Private Member’s Bill before the House to create an office of the whistleblower to turn this issue around. But I am not precious. What I want to hear from the Minister today is that the Government will now take serious action and come up with legislation of their own if they dislike mine. If we are going to end financial fraud, we have to unleash all the power of that citizens’ army I talked about.

I will make one last comment, because the next piece of legislation that will be used to deal with at least a subset of these issues—online financial fraud—is the draft Online Safety Bill. I have read the various briefings and it is completely beyond me to understand why actions that facilitate fraud through adverts or cloned websites will not be prohibited by the Bill. I cannot understand why, in the draft, paid-for advertising is explicitly carved out of the scope of the Bill. I have no idea what pressures were brought, but frankly the Government ought to dismiss them, and I would say to the Minister that if she and her colleagues do not make changes to the Bill, I think I can guarantee that both Houses of Parliament will. We have had enough of fraud and we need strong, clear action and leadership. I hope the Minister in her answers today will indicate that that will happen.