Financial Services and Markets Bill

Baroness Kramer Excerpts

Committee stage
Monday 30th January 2023 Grand Committee

The third amendment in this group creates an offence when any person, whether authorised or not, by their actions or omissions suggests to a reasonable person that their activities in whole or in part are authorised when that it not the case. There is already an offence in FSMA for making out that you are regulated when you are not, but my amendment is broader because it covers omissions, and omissions are where frequently people are misled. This amendment overlaps with the second amendment in this group, Amendment 39, but it also covers unregulated persons. These differences may seem like splitting hairs compared with the existing FSMA provisions, but they are the differences that fraudsters exploit. Some may think that a little implied enhancement of status is no big deal. Unfortunately, it is, and it must be stopped. I beg to move.

[Baroness Kramer (LD)]

My Lords, my noble friend Lady Bowles’ speech was so powerful that I saw a lot of heads nod, but perhaps that has discouraged other noble Lords from standing up to speak on this occasion.

I am not going to attempt to repeat an excellent speech which made the points which such clarity. I just want to underscore two things. Whenever I have conversations with the FCA and whenever you read its articles, it prays in aid the complexity of the regulatory perimeter so that on so many occasions it is hard to know exactly where it is and how it is applied. However, when you look at abusers and scammers, they have absolutely worked out where the regulatory perimeter stands and know exactly what scope they have, and they make sure they use every scrap and every inch of that space which is provided to them. That is addressed by these amendments.

The second issue that I want to underscore was raised by my noble friend. It is that, culturally, the FCA seems to be very timid about pushing to the limit of the perimeter the regulatory powers it already has. It is so because it is very afraid of stepping over the boundary at any point. These amendments provide not only much more clarity but some backbone for the FCA to take a far more positive stance. It is quite shocking to most people that the key financial regulator can be absolutely aware that abuse is taking place, that mis-selling is taking place, but feels that it is unable to do or say anything because there is a regulatory perimeter after which the issue is caveat emptor and those who are defrauded can turn only to the enforcement agencies, which relies on finding a local police force that has the resources and capacity to pick up the issue. We know that with the Lloyds Reading case small businesses that were very badly abused went to police force after police force and were turned down until they went to Thames Valley Police, which had more resources, and the police and crime commissioner, Anthony Stansfield, whom I utterly praise in this issue, decided to take on the case—a very rare instance. They got no help from the National Crime Agency or the Serious Fraud Office because they considered that the fraud that everyone recognised was taking place was too small fry to occupy them. Frankly, it is a shocking situation to be in. Many people have said that this must be remedied. I congratulate my noble friend on bringing forward an amendment that aptly provides that remedy. I very much hope that the Government will take it up.

[Lord Tunnicliffe (Lab)]

My Lords, I am impressed by the arguments made by the noble Baronesses, Lady Bowles and Lady Kramer. To me, the fundamental issue seems to be the asymmetry in both power and information between those who have been defrauded and the fraudsters. These amendments are a useful vehicle to try to adjust that asymmetry, at least in part. I look forward to the Minister’s response and hope that she says something positive.

[The Parliamentary Secretary HM Treasury (Baroness Penn) (Con)]

My Lords, tackling fraud requires a unified and co-ordinated response from government, law enforcement and the private sector to better protect the public and businesses from fraud, reduce the impact of fraud on victims and increase the disruption to and prosecution of fraudsters.

As the noble Baroness, Lady Bowles, explained, Amendment 38 targets fraudsters; the Government strongly agree with the spirit of it. However, strong punishments for those carrying out these acts already exist under the Fraud Act; also, the police and the National Crime Agency already have the powers to investigate fraud, with the FCA providing strong support. That is why we are ensuring that the police have appropriate resources to apply the existing powers to identify and bring the most harmful offenders to justice, including through severe penalties for those who target some of the most vulnerable in society. The Home Office is investing £400 million in tackling economic crime over the spending review period, including £100 million dedicated to fraud.

As the noble Baroness noted, although FSMA does not provide the FCA with an express power to prosecute fraud, it is able to prosecute fraud if it furthers its statutory objectives. The FCA continues to pursue firms and individuals involved in fraud; most of this work is against unauthorised activity operating beyond the perimeter, which is where the FCA sees most scam activity occurring. As at the end of September 2022, the FCA had 49 open investigations, with 217 individuals or entities under investigation.

In its 2022 strategy, the FCA outlined and emphasised its broad existing remit in relation to reducing and preventing financial crime, including fraud; it also recognised the important role that it plays in tackling this issue.

[Baroness Kramer (LD)]

I am sorry but can I ask the Minister a specific question? The Blackmore Bond case was a massive abuse in the mini-bonds scandal when 2,000 people lose something like £46 million. Other than dealing with a small entity that was doing some illegal promotion, the FCA declared that it could not act because the case was beyond the regulatory perimeter. I am therefore rather befuddled by the Minister saying that the FCA acts beyond its perimeter when it is associated with its principles; the principle of integrity obviously applies.

[Baroness Penn (Con)]

In dealing with the noble Baroness’s points, I should perhaps write to her on the particular case to which she refers. However, as I understand it, the FCA has a remit to tackle fraud, for example where unauthorised firms are purporting to undertake authorised activity—a point that we may come on to in our debates on later amendments.

[Baroness Kramer (LD)]

May I just have clarity? The Minister said, “Only where an unregulated firm undertakes an authorised activity”. Blackmore Bond was selling mini-bonds, which was not a regulated activity at that time. Is the Minister explaining to us that the FCA and regulator do not or cannot act in that area and that she is satisfied with that situation?

[Baroness Penn (Con)]

No, I am saying that I gave an example of where the FCA could take action for activity beyond the regulated perimeter, but I will write to the noble Baroness on the specifics of the Blackmore Bond case as an example of the question that she asked about this interaction and limitation on where the FCA can act.

Further action was taken to avoid a repeat of cases such as Blackmore Bond and London Capital and Finance. In November 2019, the FCA banned the promotion to ordinary retail investors of high-risk speculative illiquid securities, which includes the types of bonds sold by Blackmore and LCF. The Government have also set out our intention to include non-transferable securities, including mini-bonds, within the scope of the prospectus regime. This would mean that issuers of mini-bonds would be required to offer their securities via a platform when making offers over a certain threshold, which would ensure appropriate due diligence and disclosure and be regulated by the FCA, providing stronger protection for investors. However, I know that that does not address the noble Baroness’s particular point, on which I will write.

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[Baroness Altmann (Con)]

My Lords, I too support both amendments in this group. I congratulate my noble friend Lord Holmes on his Amendment 219, and the noble Lord, Lord Sharkey, on Amendment 40 and the way in which he explained it. I urge my noble friend the Minister to take seriously the comments that have been made and the reference to the Treasury Select Committee, which recommended just this kind of change.

I would like to understand from my noble friend: if the Government do not agree with the Treasury Select Committee, why? How do they believe that SMEs are protected against the kinds of scandals and bad behaviour that have clearly been rife within the sector over a number of years? Does my noble friend seriously believe that small and medium-sized enterprises are equipped enough to stand up against the information and resources available to the financial services industry to avoid the kind of problems that we have seen in the past?

[Baroness Kramer (LD)]

My Lords, the last group of amendments and this one are not identical and cover different aspects of abuse by financial institutions. Were the Government to accept them, together, or to draft their own versions, that would completely change the playing field. Small businesses would be in a position whereby they could breathe easily and make business decisions, and not worry that, embedded in whatever product they were purchasing—

[The Deputy Chairman of Committees (Lord Geddes) (Con)]

I hate to interrupt the noble Baroness, but a Division has been called in the Chamber. The Grand Committee stands adjourned until 5.20 pm.

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[Baroness Kramer (LD)]

My Lords, in light of all the pressures we have—the speeches were so brilliant—I will not try to add to them, other than to say that I very much support the amendments in this group.

[Lord Thomas of Cwmgiedd (CB)]

I will make one brief observation and declare my interest as chairman of the Financial Markets Law Committee. It seems to me that the real problem, which both amendments rightly seek to address, is to give SMEs an effective remedy. The courts system—for various reasons—and the costs that lawyers charge make it almost impossible for SMEs to take on the banks. Therefore, there seems a good deal of force in the arguments that have been put forward. I would be grateful if the Minister were able to tell us what the attitude of the regulators, particularly the FCA, would be to extending the position in this way. It is very important for the Committee to know what they think of this amendment. Really, the object of it is to cure a deficiency in the way in which our legal system functions.

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[Baroness Penn (Con)]

I do not have the figure to hand. I note that it started in 2021, so is a relatively new organisation. Perhaps I could also—

[Baroness Kramer (LD)]

Perhaps the Minister would confirm that the only cases in which the BBRS will intervene is where the bank complained against is Barclays, Danske, HSBC, Lloyds, NatWest, Santander or Virgin Money and that any institution outside that group—and there is a great range of new banks, challenger banks and others—is not included in its activities? Is that correct?

[Baroness Penn (Con)]

I note that it is a voluntary body. I do not have the list of those who have signed up to it to hand. If it differs from those outlined by the noble Baroness, I will write to the Committee, but she may well have listed those who have signed up to it. I note, however, that the combination of that service, and the scale of those involved in it, with the ability to go to the Financial Ombudsman Service means that research suggests that more than 99% of UK businesses can access independent dispute resolution. We should look at the size of the customer base as well as the number of organisations signed up to such dispute resolution mechanisms. I will write to the noble Lord, Lord Sharkey, on the number of cases taken by the organisation.

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[Baroness Penn (Con)]

In relation to Amendment 40, there are benefits—which we have heard about—and costs to any activity being brought within the regulatory perimeter. I think that point is fairly well accepted. The noble Lord, Lord Tunnicliffe, asked me for further details on that, and I will write to the Committee.

On my noble friend’s Amendment 219, there are costs related to bringing disputes through the courts system as opposed to other dispute resolution mechanisms. There can also be benefits to that mechanism, but it is not enormously contentious to say that there are both costs and benefits to these solutions, which need to be weighed up when we consider them.

[Baroness Kramer (LD)]

I will add one more piece to the response from the Minister—one more request. I just want to double-check what she said. She said that small businesses could go to the FOS and that they have to employ fewer than 50 people. The definition of a small business seems to encompass something much larger than that. Can she help us understand what happens to the businesses that are still considered small but have more than 50 employees? I would imagine that they are pretty easy targets. As I say, one of the things that is always noticeable is that those who decide to exploit are very clear about where the perimeters are and who they can freely approach, so they get away with it.

[Baroness Penn (Con)]

As I hope I was setting out for the noble Lord, Lord Sharkey, there are different definitions of businesses that can have different protections and routes of redress within a system of small business lending. The system that we have is aimed to be proportionate, focusing on the smallest SMEs which are at the most risk. On the difference between the voluntary measures that are in place and bringing it within the regulatory perimeter, we are not saying that those are entirely equivalent protections but that they are proportionate protections to the risks faced by those firms. I set out different thresholds in my answer in relation to both those businesses that are protected under the Consumer Credit Act, which are sole traders, loans under £25,000 and a few others there, and businesses that are able to access either the FOS or the Business Banking Resolution Service. There are other thresholds too. Therefore I appreciate the point that that is different from the definition of a SME that the noble Lord asked about. The system is designed to be proportionate to the size of the SME and the protections it affords to them as regards business lending.

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[Baroness Bennett of Manor Castle (GP)]

My Lords, I will briefly express support for this amendment, which has already been so powerfully argued for. I would have signed it had I caught up with the legislative deluge.

I want to make two additional points. First, the Pensions Regulator’s most recent survey of defined contribution schemes found that more than 80% did not allocate any time or resources to managing climate risk. It would be interesting if we were to see the way in which fund managers were voting, not only to have that recorded, but I would assume that they would have to have some kind of thought behind it to explain what was recorded. The transparency might force some more thinking to happen, which would clearly be a good idea.

I also want to ask a question of the proposers of this amendment because I was slightly puzzled by the information on request element of the amendment. The noble Baroness, Lady Sheehan, noted that US regulators forced this to be published openly as a matter of course. It seems that that would be the logical thing, that this should be available not only to clients but to anyone who might like to make an assessment of how companies and asset fund managers are behaving and why they are behaving in that way. Perhaps in my classic Green position, I wonder whether we should not go further, and, rather than saying “to clients on request”, say that this should be freely published and available to all.

[Baroness Kramer (LD)]

My Lords, with three outstanding speeches, I have very little to add other than to say that I very much support this. However, I have a question for the Minister. I was just looking up the definition of a fiduciary duty, which is when someone

“has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.”

We know that many people feel that there is an implied and inherent fiduciary duty between the person who puts their money into a pension fund and those who act to invest it—I see that the noble Baroness, Lady Noakes, is shaking her head. I know that in various pieces of legislation there has been an attempt to clarify that. However, surely at the very least there is a responsibility to transparency. This seems to me a very mild but important principle to establish. I suspect the Minister would be very concerned if she were to put her money into an entity and did not know, within reasonable boundaries, how it was being invested and used and what impact it had. Surely, these amendments are minor and mild but important.

[Lord Harlech (Con)]

My Lords, I thank the noble Baronesses, Lady Sheehan, Lady Wheatcroft, Lady Hayman, Lady Bennett of Manor Castle and Lady Kramer, for raising voter reporting.

The Government recognise that the ability of investors to exercise their voting rights is an important issue, which is why they are taking steps to address barriers in this area. The Financial Reporting Council’s world-leading UK Stewardship Code 2020 already requires detailed and annually assessed reporting from its voluntary signatories on voting disclosure, and the recent stewardship guidance for pension scheme trustees from the Department for Work and Pensions, which included substantial guidance on the exercise of voting rights, came into effect in October 2022.

However, the Government recognise that there is still more work to do. The DWP’s guidance includes sustainability-related issues, and its stewardship guidance focuses on areas where existing policies and reporting appear to be weakest: stewardship and, to a lesser extent, consideration of financially material ESG factors and non-financial factors. Stewardship encompasses a range of activities, and this guidance focuses specifically on voting and engagement; it is about creating long-term, sustainable value for savers and includes recognition of environmental and social governance factors, which is encompassed in the DWP’s guidance.

Furthermore, the DWP has already made a public commitment to review voting disclosure requirements in the response to the consultation on Climate and Investment Reporting: Setting Expectations and Empowering Savers. This review will be conducted jointly with other government departments, including the Treasury, and regulators. This will ensure consistency across the investment chain. The review will begin in late 2023, which will give the Pensions Regulator time to gather evidence on how the DWP’s existing guidance has influenced standards of voting disclosure.

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[Lord Northbrook (Con)]

My Lords, I listened with interest to my noble friend Lady Noakes moving her amendment. Clearly, consumer credit is at a record level, due, I am sure, to a long period of low interest rates. I just find, probably deliberately, that the amendment is a little vague. Like the noble Lord, Lord Tunnicliffe, I like the idea of focusing on specific issues such as buy now, pay later. Perhaps more power should be given to the FCA to look at institutions that are offering huge rates of interest on loans.

[Baroness Kramer (LD)]

My Lords, I take a slightly different view on the two amendments in this group.

I say to the noble Baroness, Lady Noakes, on her amendment that I am entirely sympathetic to the idea that we need an up-to-date Consumer Credit Act sooner rather than later. However, I am concerned about the absence of parliamentary engagement in the process. To understand how controversial this is, we just have to look back at some of our discussions on amendments earlier today in which Ministers prayed in aid the Consumer Credit Act for taking no action to protect, for example, small businesses from abuse by a great variety of lenders. It is quite a controversial Act, in many ways, and it is one where, when the Government enter into a review, there tends to be quite a bit of industry capture, as we see in virtually all consultations. Essentially, Parliament tends to be the body that brings forward the consumer voice, so the absence of parliamentary engagement in the process as envisaged in the noble Baroness’s amendment troubles me hugely.

I say to the noble Lord, Lord Tunnicliffe, that we are very supportive of his amendment on buy now, pay later. I am disturbed by the growth of the industry, particularly at a time of such huge economic pressure. I think something like 17 million people in the UK have used buy now, pay later, with two in five young people using it regularly. It is particularly around young people that there is the greatest concern because they lack life experience to recognise the consequences of their purchasing habits and find it particularly tempting to exceed the budget that they should observe because buy now, pay later makes it sound so utterly painless. In discussing this issue, many people have looked at what happens to people when repayment eventually becomes due: individuals find themselves is very deep trouble indeed. That is one of the reasons why I am supportive of this amendment.

I have to say that I get angry with many of the companies that offer this because credit is never free. Someone is picking up the time value of money; in other words, the cost of the financing, the cost that is embedded in the reality that payment comes later. That presumably encompasses all the people who pay on time. I am curious to know whether we have any kind of assessment of how much more people who pay on time are paying as they pick up the cost of the credit that is extended to others. I think there might be some backlash to buy now, pay later, if people were conscious of what is added to their bills as a consequence. I admit that I am one of those stuffy people—I am sure we are laughed at—who pay on time rather than trying to use some mechanism to provide credit, so I admit to a personal interest but, in the end, young people may find themselves trapped.

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[Baroness Bowles of Berkhamsted (LD)]

My Lords, I had not intended to speak on this subject, but I very much agree with everything that has been said, especially by the noble Baroness, Lady Young, just now, about the lost opportunity if we do not take climate change and embedding it in financial services seriously. ESG investing is the big growth area at the moment, and what message are we giving if we say, “Well, we’re not really that interested in the ‘E’”? I am not sure about the “S” and the “G” either. We will potentially lose out.

It is not as if this will be an environmental tax on every business, or as if it has to be woven into every last little bit of financial services, like some chain round their neck. I spend some time looking at the general duties of the regulators, and, if I were to say anything about the positioning of this, I would say that it is not necessarily high enough up in the hierarchy because it is entirely forgettable within the layering that we have. I object to the notion that we are still in an era where we can do damage and compensate; you cannot compensate for a ruined planet. That is very much old thinking. It is almost centuries old in my book.

The FCA’s general duties state:

“In discharging its general functions, the FCA must, so far as is reasonably possible, act in a way which … is compatible with its strategic objective and … advances one or more of its operational objectives.”


What we are talking about here is a secondary operational objective, but the whole thing could be forgotten. If you ask me, it should be in the strategic objective, which is the only thing that cannot be rubbed out, because that is where we are at. We can go through this lovely list. Integrity gets rubbed out when it comes to SMEs—we have been through that debate—so climate things will be rubbed out if you want to be one of the rough-and-tumble financial firms that wants to deal with gas and oil exploration. Money is needed for that to work it all through and make sure that there are no stranded assets.

What is the big problem with what I would call a measly secondary objective? I understand the competitiveness and growth objective, which seems to be liberally sprinkled throughout to try to give it some kind of priority, but you have to balance that with sustainability in its broadest sense. All these things are about balance. We cannot have a Climate Change Act that says we will do things and then just ignore it in our biggest industry. It is the biggest case out there and we need something on it here. I will look at this again on Report and the Minister jolly well knows where I will put it.

[Baroness Kramer (LD)]

My Lords, this has been such an enjoyable debate, although I fear that the Government may not be listening as much as they should. When I first looked at this Bill, I was absolutely shocked that the word “sustainable” was not in front of “economic growth”. That seemed quite extraordinary in the era in which we live. It is a very old-fashioned, limited kind of approach that does not recognise the significant intertwining between finance, economic growth, the future of the planet and meeting our targets on climate change and protecting nature. It is extraordinary that it was removed.

I want to pick up the comments of the noble Baroness, Lady Lawlor, in particular. I disagree with her purpose but in one thing she is exactly right: as this Bill is currently written, that international competitiveness objective will largely drive us to try to compete with Asian financial centres that, frankly, could not give a single hoot about climate change and nature. That is why, frankly, the way in which the Bill is currently structured is so weak. As my noble friend Lady Bowles, who knows about this even more than I do, said, we have seen how the FCA deals with secondary operating objectives—I forget the exact phrase—in the past. Occasionally, it might pay attention to them if it suits it but they are certainly not embedded in its culture and do not light the core of its thinking or drive most of the decisions it makes.

I very much support the amendments led by the noble Baroness, Lady Hayman, and joined by others, as well as Amendment 69 in the name of my noble friend Lady Sheehan. However, I will talk in particular to two of the other amendments: first, that from the noble Lord, Lord Tunnicliffe, which asks, as the noble Lord, Lord Vaux, said, that we get this green taxonomy in our sustainable disclosure requirements fast because we desperately need that structure and strategic update.

This is in the context that the European Union already has its sustainable financial disclosure regulations; noble Lords may notice that the initials are exactly the same, bar one letter, which is part of my general concern in all this. Financial investors based in the UK are now using that as their template. As far as they are concerned, having to run one regime if they fall under EU regulations and a different one if they fall under UK regulations would be a nightmare. They are now wondering whether they are being pushed to choose between the two.

In its consultation on sustainable disclosure requirements, the FCA very helpfully provides a chart of how you can cope if you are trying to be under what is contemplated for the UK regime while also dealing with the EU regime. I honestly think that that is in there because the FCA thought that it would be helpful, but I recommend that somebody go and look at it, because it is a nightmare. You can see that it will be incredibly difficult and very costly for companies that work in both arenas to deal with these different alignments.