Authorised Push Payment Fraud Performance Report

Lord Sandhurst Excerpts

Tuesday 14th November 2023 Lords Chamber

[Baroness Penn (Con)]

I congratulate the noble Lord, because he was a strong advocate for the publication of this data. As he says, it has indeed been revealing, and I assure noble Lords that action has already been taken on the back of it. On 27 October, the Financial Conduct Authority imposed restrictions on Dzing Finance Ltd, which was the worst-performing payment service provider for fraud volumes received. It now cannot on-board any new retail customers or allow any new incoming funds from retail customers for the purposes of issuances of electronic money or providing payment services without the written agreement of the FCA. In March this year, the FCA wrote to all payment firms, highlighting fraud risks and instructing them to take action to address this. Where issues are identified, the FCA will continue to take action. I also congratulate my friend in the other place on his appointment, but I assure noble Lords that his excellent work will continue under the work of the Home Office.

[Lord Sandhurst (Con)]

My Lords, the Payment Systems Regulator aims to provide consumers with better information about fraud and the risks associated with each bank and payment services firm. If the volume and value of frauds and scams enabled by particular tech sectors and social media platforms were also published, that publicity would drive those institutions to improve standards and protect users. Will the PSR be asked to direct all payment service providers to include in their APP fraud data submissions for the next publication the value and volume of fraud enabled by the largest social media and tech platforms?

[Baroness Penn (Con)]

My Lords, it would be interesting to look at that and at how that data might be collected. The point at the heart of my noble friend’s question is absolutely right. Banks have a responsibility in this area, and that is why the reimbursement obligation is coming forward, but others have an obligation in this area too. The recent Online Safety Act imposes new obligations on the largest social media companies and platforms to prevent their users being exposed to harmful content, including fraudulent content. I am sure those measures will make a real difference too.

Financial Services and Markets Bill

Lord Sandhurst Excerpts

Committee stage
Wednesday 1st March 2023 Grand Committee

[Lord Turnbull (CB)]

My Lords, I have not spoken before in this Committee, but as one of the surviving members of the Parliamentary Commission on Banking Standards, I want to address an instance where an amendment directly challenges one of the proposals that was incorporated following the commission’s report. Earlier in proceedings—on day three, I think—the noble Lord, Lord Tyrie, addressed Amendment 46, which introduced the concepts of predictability and consistency. He asked, “Who could possibly object?”, and went so far as to describe them as “motherhood and apple pie”. On examination, these principles, particularly predictability, can be seen to be simply duplicating the existing provisions of administrative law, but also as introducing provisions that could limit the scope of the regulator to address new and previously unforeseen problems.

A similar problem arises with Amendment 174 in this group. How could one possibly object to acting

“reasonably and in good faith”

as a defence against sanction under the senior manager conduct regime, the SMCR—the principal sanction being disqualification from practising? By way of a bit of background, the PCBS spent a great deal of time on structural issues—bank break-up, ring-fencing, capital adequacy, liquidity adequacy and so on—but it also attached a great deal of importance to conduct issues, hence the creation of what was then called the senior person conduct regime and is now the senior manager conduct regime.

Is there evidence that this regime has proved oppressive and needs to be relaxed? Quite the contrary, in my view. There have been very few cases, although it has only been fully in force since 2018. Following the 2008-10 financial crisis, Mr Peter Cummings of HBOS is the only senior person to have been seriously sanctioned. One can debate whether that verdict was fair or unfair, but it is undeniable that it is unfair that he should be the only person sanctioned of the big players in those events. I do not think the case for further easing has been made out; more effective application is needed.

The introduction of a defence of acting

“reasonably and in good faith”

would, in my view, be a serious weakening of the regime. Very few people who made serious errors—which were costly to their customers, their own companies or the economy at large—set out intentionally to do harm. The thinking behind this amendment is that it is unfair to sanction people who claim that they did not intend to do harm, even if their actions were genuinely harmful. The protection of consumers is not achieved if those who mis-sell financial products or take what prove to be excessive risks are immune from regulatory action if they can show that they did not intend to do so.

Once again, these amendments look superficially desirable, but they would weaken the SMCR and could cause a lot of damage. The normal pattern in Committee is that an amendment is proposed and others stand up to support it. I want to do the opposite: I urge the Minister to stand firm in rejecting Amendment 174. In any case, I wonder whether the right way to change the underlying philosophy of regulation and the balance between the regulator, the common law and the courts should be to set out a comprehensive proposal, rather than through the accumulation of a disparate set of amendments in this Bill.

[Lord Sandhurst (Con)]

My Lords, I speak in support of Amendments 169 to 174 and 200. These have been proposed forcefully by my noble friend Lord Lilley and are, I suggest, worthy of acceptance.

I speak from the perspective of a lawyer. First, I suggest that three adjustments are needed to the decision-making and supervision of regulators to drive predictability and consistency in rule-making. Amendment 200 would make the regulators’ enforcement committees more independent in their decision-making. This should reduce the number of firms that bring unnecessary challenges to regulatory decisions in the Upper Tribunal.

Secondly, Amendment 173 gives the existing Financial Regulators Complaints Commissioner power to order the correction of regulators’ errors. Currently, the FRCC can find that regulators have acted unlawfully, but the regulators are free to ignore that finding. In fact, the FCA has ignored the FRCC’s only such finding. So, the overarching oversight of the FRCC is toothless; it will, if our amendment is accepted, have some teeth.

Thirdly, we propose a set of adjustments to the supervision of regulators by our judiciary in the Upper Tribunal and courts. Currently, challenges by financial institutions to supervisory decisions in the Upper Tribunal are rare, and rarely successful. That is because the tribunal is reluctant to interfere with regulatory decision-making and lacks a framework within which to consider regulators’ decisions. Judicial review is even rarer. To succeed, firms have to prove that the decision was not just wrong, but unreasonable.

The problem is that because it is so difficult to overturn a decision, firms rarely go to the Upper Tribunal or seek judicial review, so there is no body of jurisprudence by which financial companies can set their practices consistently. The lack of predictability therefore means that firms have to build compliance programmes based in part on guesswork as to how the regulator may react when applying its rulebook in the future. This is particularly so when considering the vaguely drafted rules known as principles.

Financial Services and Markets Bill

Lord Sandhurst Excerpts

Committee stage
Wednesday 1st February 2023 Grand Committee

[Lord Naseby (Con)]

My Lords, I will speak briefly to Amendments 54 and 64. They are vital to the future planning of existing companies, but they seem even more important to people entering a financial market, whatever it may be. When they are doing their planning, they must recognise—it must be self-evident to them—that there is consistency and objectivity. Most of my commercial life has been in the creative world and bringing it into the ordinary world—for want of a better description.

It may be that there is a difference between what is required for growth, which is the primary objective behind the Bill, and the competitive nature. They are two distinct objectives.

[Lord Sandhurst (Con)]

My Lords, I first apologise for not having spoken at Second Reading. I speak in support of Amendments 46, 54, 57, 64, 82 and 85 tabled by my noble friends Lord Lilley, Lord Moylan and Lord Trenchard. When effected, they will provide a much-improved basis for regulation. These amendments introduce an additional statutory objective, consistent with the existing objectives—namely, predictability and consistency.

Amendment 85, as we can see, obliges the FCA and PRA to apply common-law techniques of interpretation to regulations. These are to be interpreted in the same way as a court would look at them. That is critical for the promotion of predictability and consistency. Here I speak, as noble Lords know, as a lawyer, not a financier. By Amendment 85, rules of high-level generality will be used by the FCA only to assist in interpreting specific rules, not as stand-alones, as a general principle.

The context of these amendments is important. First, the ombudsman can award as much as £375,000—that is a lot of money—in an individual case and there might be 50 claims. Secondly, its determination is in respect of a vast body of technical rules with which the financial companies have to comply. Thirdly, as we have heard, the ombudsman decides a dispute on the basis of what is “fair and reasonable”, but is under no obligation to be predictable or consistent, nor to explain its reasoning. Indeed, the ombudsman is

“free to make an award different from that which a court applying the law would make”

when applying a rule. Lack of consistency results in unpredictability. We need legal accountability and predictability. We are dealing here with complaints about potentially large sums of money.

Lack of predictability means that firms must build compliance programmes based, in part, on guesswork about how the regulator might react when applying its rulebook. This is particularly so when considering the vaguely drafted rules known as “principles”. To take one example, it will be a principle for there to be a new vague duty to

“act to deliver good outcomes for retail customers”.

That is a rule with a high level of generality, which our amendment will address. It should not stand alone.

To apply such concepts to specific fact situations, without case law precedent, can be contentious. It is hard to challenge the assertions of the regulators as to how their rules are to be applied. Lack of definition in the rules cannot be good for entrepreneurs or for the competitiveness of the United Kingdom. Compliance activity becomes materially inefficient where there is lack of clarity and certainty in drafting and where there is lack of predictability and consistency in application. Costs are driven up; ultimately, the consumer pays.

We seek to introduce a new approach which produces predictability. Having established the principles set out in the amendments in this group, there will follow in later groups the means to give them practical effect through properly conducted adjudications. The gain for all concerned will be consistency and predictability, flowing from having to apply the regulations consistently and in accordance with ordinary legal principles of interpretation. Everyone concerned will know where they stand.

It will be simple, therefore, for the regulator to see whether a regulation is being applied—by adjudication or on appeal by the courts—as it would wish. It can then make changes based on hard evidence. Consumers and financial companies, meanwhile, will know where they stand. We invite my noble friend the Minister to acknowledge the need to incorporate these new objectives and the need for consistent, predictable application of the rules.

[Baroness Noakes (Con)]

My Lords, I have added my name to Amendment 70 in the name of the noble Baroness, Lady Bowles of Berkhamsted, because any way that we can reinforce the need for the regulators to be efficient is welcome. I look forward to hearing what she has to say when she speaks to her amendment.

I also have two amendments of my own in this group: Amendments 72 and 77A. Amendment 72 deals with proportionality, which the noble Lord, Lord Tunnicliffe, referred to in the discussion on the first group of amendments. My amendment seeks to raise proportionality from a regulatory principle to a general duty. I have to say that I have always found the hierarchy of what the regulators have to follow rather difficult. They have general duties, strategic objectives, operational objectives, secondary objectives and a number of statutory “have regard” duties, which include regulatory principles. On top of that are the so-called recommendations from the Treasury to which they also have to have regard.

The regulatory principles in Section 3B of FSMA are a list of eight motherhood and apple pie things about which I am sure there is little debate, but there should be a debate about whether all or any of them have any practical impact on the way in which regulators behave. For example, one of the principles is that consumers should take responsibility for their decisions, but the FCA’s direction of travel is the opposite. Indeed, I do not think that caveat emptor has any part in the FCA’s thinking. There are other principles on value for money and transparency, but if we thought that they had any impact, we would not have the amendments that we have in today’s Marshalled List.

I am sceptical about regulatory principles not because they are bad things but because they appear to be ineffective. With Amendment 72 I have sought to elevate the proportionality principle, which is one of the eight, into a duty so that it has more meaning in how the PRA and the FCA go about their business. In case anybody has any doubt about whether proportionality concerns are real, I will give a few examples.

The first is PEPs, which we will be debating later in Committee, but, for today, both Houses of Parliament are full of people who have faced wholly disproportionate action by financial services providers. Of course, at the end of the day, it is the financial services firms—the providers—which apply the rules, but the FCA has done nothing of substance to ensure that the firms act in a way that is proportionate. Had it done so, the aggravation that we and, importantly, our family members have had to face would have been considerably reduced. It is obvious that we present no more risk than the general UK population, yet enhanced due diligence is still required—and is often extremely officiously applied.