Authorised Push Payment Fraud Performance Report

Lord Sikka Excerpts

Tuesday 14th November 2023 Lords Chamber

[Baroness Penn (Con)]

As I have said to noble Lords, through the Online Safety Act, platforms and services in scope will be required to take action to tackle fraud where it is facilitated through user-generated content or via search results. They must take preventive measures to prevent fraudulent content appearing on their platforms and swiftly remove it if it does. Additionally, there will be a duty on the largest social media companies and search engines to prevent fraudulent adverts on their services. Ofcom has the power to fine companies failing their duty of care up to £18 million or 10% of annual global turnover, so there will be accountability in the system for online companies too.

[Lord Sikka (Lab)]

My Lords, only 59% of the stolen money has been returned to customers, according to the PSR report. Can the Minister explain what pressures there are on bank directors to, as it were, take care of the customers’ interest? The regulators seem to be incredibly complacent that over 40% of the money still has not been returned. Is it not really a case of restructuring the FCA and the PSR, to ensure that customer representatives have the majority of the seats on the boards of those regulatory bodies so that they can get the protection they need?

[Baroness Penn (Con)]

My Lords, I believe that an alternative route forward is already in train: the mandatory reimbursement requirement, which will apply across all payment service providers. As I said, there is currently a voluntary approach in place; a mandatory approach will ensure a much more consistent response for consumers when it is introduced next year.

King’s Speech

Lord Sikka Excerpts

Monday 13th November 2023 Lords Chamber

[Lord Sikka (Lab)]

My Lords, a sustainable economy requires high investment and good disposable income for the masses. The Government have failed on both counts. The OECD’s data shows that, despite low inflation, corporation tax and interest rates since 2010, the UK is almost the lowest investor in productive assets; it is ranked 35th out of 38 OECD countries. There are two major reasons for this, and neither is addressed in the King’s Speech.

First, until the late 1970s, the state directly invested in industry and emerging technologies, such as aerospace, biotechnology and information technology, especially as the private sector showed little appetite for long-term risks. The entrepreneurial state has been replaced by one which guarantees corporate profits, as evidenced by privatisations, outsourcing and corporate subsidies, typified by the £45 billion handed to privatised rail companies in the last five years. Did they invest in Crossrail or HS2? No, none of that. Yet the Government skimp on direct public investment: investment into HS2 has been axed; roads are full of potholes; schools and public buildings are crumbling; and NHS England has 2.3 beds per 1,000 population and is on that basis ranked 23rd of 24 European countries. So there are plenty of opportunities for public investment, but there is nothing in the King’s Speech to suggest that the state will return to its entrepreneurial role.

Secondly, low disposable income of the masses is a disincentive for long-term investment by the private sector. Who will buy goods and services, even if we produce them? With a government-led drive to cut wages, the average real pay is back to the 2007 level. Some 14.4 million people live in poverty. One in 20 people—that is, 3.8 million people—is unable to afford food or other basics, and half of those have a weekly income of less than £85. This mass exclusion from consumption cannot provide the basis for building a sustainable economy.

People’s incomes are further eroded by the Government’s inflation strategy. Everyone knows that corporate profiteering is the main cause of higher rates of inflation. The Government could have checked it with price controls, the break-up of monopolies, windfall taxes and selective taxes on those who have excess cash, especially given that nearly £1 trillion of quantitative easing has been handed to financial speculators. But no, they do not do that—instead, they attack wages and further deplete household incomes through higher interest rates.

People have been forced to hand more of their wealth to banks. In the first nine months of 2023, the big four banks have reported profits of £41 billion, compared with £23 billion for the same period last year. Huge bank profits have increased business and household costs and destroyed many SMEs. The Government have enriched bank shareholders and executives. This policy has increased inequalities and squeezed economic growth, because people simply do not have the resources to buy goods and services. Even worse, Ministers are saying that they will continue with this forced transfer of wealth from the poor to the rich. The Government have declared war on the poor.

There can be no economic renaissance without redistribution of income and wealth. The richest 1% have more wealth than 70% of the population combined. Just 50 families have more wealth than 50% of the population—but any mention of wealth taxes and the Government say, “Not us, we’re not going to do this”. Instead of taxing wealth, the Government have anti-worker policies. Wages are taxed at a higher rate than capital gains, dividends and investment income. This needs to be rebalanced; we need to rebalance the tax system by increasing taxes on wealth and reducing taxes on work and the less well off.

This afternoon, I attended a meeting with the Patriotic Millionaires, which includes some of the country’s richest individuals. They have openly urged the Government to tax them more heavily, so that inequalities can be reduced, public services can be rebuilt and we can have a just society. I hope the Minister will tell us why the Government will not listen to the richest and tax them more.

Finance (No. 2) Bill

Lord Sikka Excerpts

Committee negatived & 3rd reading
Tuesday 4th July 2023 Lords Chamber

[Lord Sikka (Lab)]

My Lords, I thank the Minister for her speech. This Bill fails to address the fundamental problems that we all face. Economic recovery is hampered because the Government have depleted people’s disposable income through real wage cuts, high inflation, high interest rates and high taxes. This Bill depletes incomes even further by continuing the freeze on personal allowance and income tax thresholds. Without adequate income, people simply cannot buy goods and services and there will not be investment.

The poorest fifth of households in this country pay 22.9% of their income in indirect taxes. The richest fifth pay 9.1%. The Government could have helped the poorest by cutting the rate of VAT or even abolishing VAT on domestic fuel, but they have not done so.

There is nothing in the Bill for women although they are on the receiving end of real wage cuts. The majority of public sector workers are female and their wages have been cut in real terms—so this Bill does not help women either.

Tax cuts for the rich are disguised as tax relief on pension contributions; the Bill estimates that they may be worth more than £1.1 billion a year. The Government say that this is really to help doctors but, of course, it helps accountants, lawyers, architects, engineers and many others too—and the Government are inflicting a real wage cut on doctors as well, which does not help in any way.

The Bill offers nothing to the millions of people who earn less than £12,570 a year or the 28.8 million basic rate taxpayers. The biggest winners are the rich, who will benefit from the pension tax changes. Can the Minister explain why tax cuts for the rich are not matched by tax cuts for low-income and middle-income earners?

The Bill is also unjust. It taxes salaries and wages at rates between 20% and 45% but capital gains are taxed at between 10% and 28%. Why is the return on the investment of human capital taxed more heavily? Why are the Government taxing workers highly? The recipients of capital gains also do not pay any national insurance, even though they use the NHS and social care. Why are they given a free ride? I hope that the Minister can explain that.

There is a sleight of hand on corporation tax. The headline rate will go up from 19% to 25%, but it is estimated that only 10% of companies will pay that because of numerous tax reliefs, some of which the Minister mentioned. Can the Minister say now, as we are possibly heading towards a recession, how many companies will pay the full tax rate of 25%?

The Bill does not expand the tax base at all. It does not consider a financial transaction tax, wealth tax, sugar tax, salt tax or any other tax, which would at least broaden the tax base. None of that is there.

The Government’s central claim is that lower corporation tax rate will somehow encourage investment. Well, we had a corporation tax rate of 19% from 2016 to 2022. That era also had low interest rates, a low inflation rate, negative real wage growth and high tax incentives, but that did not lead to any higher investment. I hope that the Minister can explain the real reasons why the UK is a laggard in investment.

On the basis of private and public sector investment in the UK, the OECD ranks the UK 35th in its league of international investment—below Portugal, Lithuania, Latvia, Mexico, Colombia and Costa Rica. That is a total policy failure, yet all the Government are doing is repeating the same thing—which will get exactly the same results. Hopefully, the Minister will confirm that.

The OBR says that the 4% loss of UK productivity is due to Brexit, but nothing in the Bill or any ministerial Statement deals with Brexit. The Government say they are creating 12 new investment zones and that the businesses operating inside them will receive £80 million over five years. Well, the cost of that will be borne by people outside. Why penalise those who operate outside those investment zones? The OBR says that the Government have not provided enough information to enable it to

“estimate the impacts that these investment zones might have”.

Can the Minister provide us with an estimate of what will happen inside these investment zones?

A few days ago, HMRC published its tax-gap figures. It said that it failed to collect £36 billion of taxes for the year 2021-22, mainly due to avoidance, evasion, fraud and error. Adding up the years from 2010, that is about £450 billion. Other models estimate the number to be over £1,500 billion. What is the Government’s response? It is to cut HMRC’s budget from £5.9 billion for 2022-23 to £5.6 billion in 2023-24 and £4.6 billion in 2024-25. Dealing with tax abuse is a labour-intensive job, but the Government are not providing resources to HMRC.

On 23 March 2023, in response to my Written Question, the Minister said that only eight enablers who devised the tax abuses—accountants, lawyers, bankers—had been prosecuted in the last two years. That is pitiful. The Government clearly are soft on tax cheats and, despite strong court judgments, have failed to investigate, fine or prosecute even one of the big accounting firms. I challenge the Minister to name even one, if she can. I will never ask this question again, so I hope that the Minister will rise to that challenge and tell us which of the big four accounting firms is being challenged. In Australia, the Government have come down hard on PwC. Here, we give it public contracts. We reward it. That is a real failure of the Government.

Can the Minister explain why HMRC’s budget is being cut and why the Government are soft on the tax abuse industry—especially the big accounting firms?

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, I was speaking about the difference between changes to any scheme and abolition of the status altogether, but I would say that there is a high degree of uncertainty about the impact of changes made in this area.

Finally, I turn to the pension tax changes made through this Bill and the Budget, which many noble Lords have spoken about. To respond to the noble Lord, Lord Eatwell, I was not implying that only the most highly skilled and productive workers benefit from these changes, but many of them will. They have been designed in response to feedback from the NHS in particular that there was an impact on retention of the most skilled staff.

Regarding the suggestion that a doctors-only change could have been implemented instead, unlike more targeted policies, the Government have considered a range of options to address this issue over a number of years. One of the elements which means that a more targeted approach would not be appropriate in these circumstances is the time it would take to implement. These changes could be implemented quickly, from April 2023, minimising the risk of early retirements in the NHS before any changes take effect.

In the Statement taken before this debate, we heard about the pressures on our NHS workforce and the pressing need to address those immediately. If we were to take a targeted approach to one profession—NHS doctors—we may well come back to the same issue, as the same issues are faced by employees in other sectors, such as air traffic controllers, the police, the Armed Forces and senior teachers. To introduce targeted measures for each profession would not be an effective way to deal with challenges across those different workforces.

The Government are aware of the concern raised by the noble Lord, Lord Eatwell—

[Lord Sikka (Lab)]

I am grateful to the Minister for giving way. Will she take up my challenge and tell me which of the big four accounting firms, with strong court judgments against them in the cases brought by HMRC, has been investigated, fined, disciplined or denied government contracts because they are peddling tax abuses? If the Minister cannot name such a firm, can she tell me why the Government are soft on tax abuses by big accounting firms?

[Baroness Penn (Con)]

I think one of the reasons why I frustrate the noble Lord in this area is that the Government do not normally comment on individual taxpayers. On his more general point, the Government have taken action to tackle tax avoidance and evasion over many years and to reduce its incidence in our economy.

Finally, I turn to the impact of the change to the annual allowance and its potential inheritance tax impacts. Noble Lords are right that the annual allowance has meant that there has been a limit on how much individuals can put into their pensions and therefore pass on. The Government are aware of concerns that some may be using their pension pots to reduce future inheritance tax liabilities, rather than for their purpose: to fund their retirement. As with all taxes, the Government keep the rules under review.

Income Tax Threshold

Lord Sikka Excerpts

Tuesday 4th July 2023 Lords Chamber

[Baroness Penn (Con)]

My Lords, of course, the Government want to bring taxes down. It is worth reminding noble Lords that since 2010 we have nearly doubled the personal allowance and, this year, around 30% of those with income are projected to pay no income tax at all. In our current circumstances, we need to be fiscally responsible, and the best tax cut we can give people is to cut inflation.

[Lord Sikka (Lab)]

My Lords, the income tax threshold and personal allowances are frozen at the April 2021 level until 2027-28. At that time, the real value of the personal allowance—to which the Minister just referred—will be less than it was in 2013. As a result of government policies, an additional 4.2 million people are expected to pay the basic rate of income tax this year; that is, 20% plus national insurance of 12%. Can the Minister explain the rationale for extra taxes on the poorest, already hit hard with negative wage rises and rising bills? How does the Government’s hiking of the taxes of the poorest reconcile with their levelling-up, or is it squashing-down, agenda?

[Baroness Penn (Con)]

My Lords, I could not disagree more with the noble Lord. On the personal allowance, the increases we have seen under this Government since 2010, even with the freeze in thresholds, will be more than if it had been raised in line with inflation. We have put in place unprecedented support for people after the two major shocks of Covid and Russia’s invasion of Ukraine. We need to consolidate our public finances in the face of that and it is right that everyone contributes. We have looked to change corporation tax rates while protecting the smallest businesses, and we have frozen tax thresholds. We brought down the additional rate threshold at the Autumn Statement 2022, which is a sign of those with the broadest shoulders bearing the biggest burden.

Corporate Profits: Inflation

Lord Sikka Excerpts

Thursday 29th June 2023 Lords Chamber

Asked by

[Lord Sikka]

To ask His Majesty’s Government what assessment they have made of the extent to which increases in corporate profits have contributed to inflation.

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

My Lords, UK inflation has been affected by global factors, including Russia’s invasion of Ukraine which has affected energy and food prices. The UK is not alone in facing these challenges: advanced economies across the world are feeling the impact of inflation. That is why halving inflation is one of the Prime Minister’s top five priorities, as a staging post to returning inflation to the 2% target. Evidence that corporate profits play a role is inconclusive.

[Lord Sikka (Lab)]

My Lords, the Minister is in total denial of reality here. The pandemic of profiteering is driving inflation. The IMF and the ECB have said so, but the Government are in denial. Look at the accounts of banks, oil and gas companies, supermarkets, food, internet and mobile phone companies, and others, and you will see that their profits have doubled within the last couple of years. The Government have a whole array of policy options, including price controls, windfall taxes, prosecution of profiteers, and breaking up oligopolies to encourage more competition to curb profiteering, but they choose to do absolutely nothing. Can the Minister explain what assessment the Government have made of the corrosive impact of profiteering on people’s standard of living and what they will do about it?

[Baroness Penn (Con)]

My Lords, I note that the noble Lord referred to the recent IMF analysis, which looked at the euro area. The Governor of the Bank of England recently said that it does not see a higher trend in non-North Sea corporate profits. Of course, we have the energy price levy in place with respect to North Sea corporate profits, but we keep it under close scrutiny. I am sure the noble Lord will be pleased to know that, yesterday, the Chancellor of the Exchequer met with the main regulators and agreed a new action plan to ensure that consumers are being treated fairly and to help those struggling to meet their bills.

UK Economy: Growth, Inflation and Productivity

Lord Sikka Excerpts

Thursday 29th June 2023 Lords Chamber

[Lord Sikka (Lab)]

My Lords, I thank my noble friend Lord Eatwell for facilitating this debate. I will say a few words about investment and productivity. Between 1974 and 2008, the UK’s productivity grew at an average rate of 2.3% a year, and it has really stagnated ever since. It is not the workers’ fault. UK workers work for longer hours than many of their European counterparts. In 2022, average annual hours worked by a German worker were 1,341, compared with 1,532 for a British worker. Yet, productivity of a German worker is up to 19% higher.

The reason for that is higher investment into productive assets and skills. With 17.3% of GDP going into productive assets in 2021, the UK is ranked 27th out of 30 OECD countries. This is despite a period of low inflation, low interest rates and low corporate taxes, with high tax incentives and negative real wage growth. None of those managed to address the block to investment—what I call the investment strike.

Private sector investment is some £354 billion less in real terms compared to the G7 median position from 2005 to 2021. The major reason for that is that British workers’ spending power has been depleted. Why would somebody invest when people just do not have the money to buy goods and services? The UK is a major financial centre, but the City of London is hooked on short-term returns, which is aided by a shareholder-centric model of corporate governance. The Bank of England chief economist, Andy Haldane, noted that in 1970 major companies paid out £10 in dividends out of every £100 of profits, but by 2015 that became between £60 to £70. I have been looking at the accounts of water companies, and they have been paying up to 80% and even more of their earnings in dividends, which is accompanied by a squeeze on labour and investment.

The private sector has little appetite for long-term risks. The state traditionally filled that void in a mixed economy. After the Second World War, the entrepreneurial state built ships, railways, steel, water, gas, electricity, mining and many other industries. It directly invested in emerging technologies and emerging industries such as biotechnology, information technology and telecommunications industries. As a result, by 1976 the proceeds of prosperity reduced the national debt from 270% to 49% of GDP.

But now the state has basically been sidelined—the mantra of the neoliberal coup that has plagued this country from the late 1970s. The state has been restructured and become a guarantor of corporate profits, as evidenced by PFIs, privatisations and outsourcing. Privatised industries have rarely provided the promised investment—just look at the water industry. Since its privatisation in England in 1989, no new water reservoirs have been built, while the population has increased. It just does not respond. If the UK public sector had emulated the G7 median practices over the period 2006-21, an additional £208 billion in real terms would have been invested, but the Government basically opted out of that.

UK productivity is damaged by what I call dead weights. One good example of that is the City of London and the finance industry. We all need bank accounts, insurance, pensions, debit and credit cards and so on; what we do not need are the destructive practices of the City, such as frauds, mis-selling, rigging interest and foreign exchange rates, money laundering, tax abuse and unrestrained gambling. None of that generates any productivity. One study at the University of Sheffield estimated that between 1995 and 2015 the finance industry made a negative contribution of £4,500 billion to the UK economy—and it sucks up a lot of graduates, which denies other industries skilled labour.

Accountancy is another dead weight. We have nearly 400,000 professionally qualified accountants in the UK, the highest number per capita in the world. About 100,000 of these are devoted to tax abuse, although they call it tax planning—a euphemism. It does not generate any productivity; it actually takes money away from the public purse and ensures that the state cannot invest in social infrastructure or other industries. The Government do absolutely nothing, and have not investigated any of the accounting firms involved in this—they have not prosecuted any or fined any. It is business as usual.

I hope the Minister can tell us whether the Government are willing to change their economic and political model and address the systemic problems that are plaguing this country. That will include reforming the shareholder-centric model of corporate governance, which will mean addressing issues about equitable distribution of income and wealth, dealing with the dead weight and, above all, giving the state a direct role in the economy. If the state will not take long-term risks, nobody else will.

Energy Profits Levy

Lord Sikka Excerpts

Tuesday 7th February 2023 Lords Chamber

[Baroness Penn (Con)]

Renewable levies have helped drive the successful track record I referred to earlier, but we are always conscious of consumers’ bills rising. That is why we have put in the significant support that we have.

[Lord Sikka (Lab)]

My Lords, unlike those of many other countries, the UK version of windfall tax, which the Government like to call the excess profits levy, excludes excess profits made at forecourts, at refineries and through trading, otherwise known as speculation. Can the Minister explain why these exemptions were created?

[Baroness Penn (Con)]

The profits levy builds on the specific tax regime we have in place for oil and gas production in the UK. Perhaps I can reassure the noble Lord that the 75% headline tax rate applied to the sector is one of the highest among comparable North Sea basins, which include Norway at 78%. Other comparable regimes include the Netherlands at 65% and Denmark at 64%.

Financial Services and Markets Bill

Lord Sikka Excerpts

Committee stage
Monday 6th February 2023 Grand Committee

[Lord Naseby (Con)]

My Lords, I support Amendments 67 and 75—obviously, as I added my name. I will speak only to Amendment 67. I have spent nearly 50 years in Parliament, legislating on issues that needed urgent attention. I cannot think of any issue more important in monetary affairs, now or in previous years, than the one before us in this group of amendments.

In particular, I am very grateful to the UK Finance Annual Fraud Report, which highlights in some detail what is happening. Indeed, one of the paragraphs at the end says that the Bill before us, which the Government proposed, will legislate to deal with it. Look at the figures and the sheer scale of it:

“Most notable is the rise in impersonation scams and in authorised push payment (APP) fraud overall. In 2021 communications regulator Ofcom found that eight out of ten people that were surveyed had been targeted with scam texts or phone calls, intended to convince them that they were from trusted organisations such as banks, the NHS or government departments.”


The report goes on to say:

“The majority of APP fraud starts with some type of social engineering. As well as scam texts, phone calls and emails, more and more of us are paying for goods and services remotely”,


which opens the door to the fraudsters.

I will say no more other than this. My friend the noble Baroness, Lady Bowles—I greatly respect the work she does in this area—has produced a very simple amendment, but it is very powerful and clear and I highly recommend it to His Majesty’s Government.

[Lord Sikka (Lab)]

My Lords, I find all the amendments and all the arguments made by various speakers very persuasive, and I hope the Government take note of that.

I have some concerns that I do not think have yet been aired. Do we have the regulatory architecture to deal with fraud? There are at least 41 financial regulators. Just think about the duplication and buck-passing. Is it not time for us to have a British version of the Securities and Exchange Commission, or something equivalent, to deal with that? It may help not only to save resources but to have a co-ordinated approach.

The people perpetrating banking fraud do not live in one particular district of the UK; they are spread all over. The police in Bristol cannot go and raid somebody in Reading or Glasgow; they need permission from and to co-ordinate with somebody there. We do not have a national police squad to look for or investigate fraud. They are utterly fragmented. That itself encourages buck-passing.

--- Later in debate ---

The noble and learned Lord, Lord Thomas of Cwmgiedd, asked how we are engaging other sectors on the development of the fraud strategy, specifically the accountancy and legal sectors. I reassure all noble Lords that the Government are working closely with the private sector in tackling fraud, because as part of the fraud strategy it will play a key role in removing the vulnerabilities that fraudsters exploit. The Home Office has agreed sector charters with the private sector to deliver voluntary, innovative action to counter fraud in relevant industries. The accountancy sector charter was published in October 2021, and the Home Office also intends to launch one for the legal sector. Those sectors are being engaged on this.

[Lord Sikka (Lab)]

I am encouraged by the Minister’s determination to tackle fraud. Can she answer the three specific questions I asked? First, can she give us a commitment that a copy of the Sandstorm report in relation to BCCI, which is now more than 30 years old, will be placed in the Library of this House? Secondly, can she make a statement now or come to the House soon to tell us why the Government covered up criminal conduct by HSBC in the US and how many other instances there are of that kind of cover-up?

Thirdly, in this country we have virtually eliminated the risk of bankruptcy for major banks and insurance companies. That then raises questions about the pressure points on directors to behave and act honourably. Fines are fairly puny and have not made much of a difference. Personal prosecutions of directors of banks hardly ever take place, and neither do they face any personal fines. Can the Minister explain what the pressure points are on the directors of major financial institutions to act with honesty and integrity?

[Baroness Penn (Con)]

I am afraid I will not be able to address the noble Lord’s first two points, but I will happily write to him. On his third point, I referred to the fact that, as part of the Economic Crime and Corporate Transparency Bill, we are looking to take forward the issue of corporate criminal liability and the offence of failure to prevent fraud, which would strengthen action in the areas he talks about.

I was talking about our work with other sectors. My noble friend Lord Northbrook and the noble Lord, Lord Sikka, raised the issue of online fraud. There is an intention to bring forward a tech sector charter with industry, to include public and private actions to drive down fraud in this area. Of course, fraud has been brought into the scope of the Online Safety Bill to better protect the public from online scams through, among other measures, a new stand-alone duty requiring large internet firms to tackle fraudulent advertising, including that of financial services.

The Government also recognise the particularly devastating impact that fraud can have on the elderly and the most vulnerable people in society and on people’s mental health. They have taken various steps, including banning cold calls from personal injury firms and pension providers and supporting National Trading Standards to improve the quality of care available to vulnerable fraud victims. More broadly, the FCA’s guidance on vulnerability explores how firms can understand the needs of vulnerable customers. This includes those who are older or have mental health conditions and sets out how the sector can provide targeted services for this cohort, including in the context of fraud. Where firms fail to meet their obligations to treat customers fairly, the FCA will take further action. I hope noble Lords are assured that further work is being taken forward on data sharing and on supporting older people and those with mental health conditions who are victims of financial fraud.

The noble Lord, Lord Davies of Brixton, mentioned measures in the Online Safety Bill, as have I. I have also mentioned the measures in the Economic Crime and Corporate Transparency Bill and revisions to the Data Protection Act. I am cognisant of the need to ensure that this work is well co-ordinated and that the progress we are making in other Bills is co-ordinated with the work we are doing on this issue more generally.

I turn finally to Amendment 217. Currently, the proceeds of such fines imposed by the courts must, by law, be paid—

--- Later in debate ---

[Baroness Tyler of Enfield (LD)]

I support Amendment 76 in the name of my noble friend Lord Sharkey, to which my name is attached. I will say briefly that I support Amendment 77, which we have just heard set out very persuasively by the noble Lord, Lord Davies of Brixton. The links between money problems and mental health are now very well established. They were covered in some detail by the 2017 Lords Select Committee on Financial Exclusion, which I have already referred to. We had a number of recommendations in this area. Five years on, the case is stronger than ever. I hope the Minister will be able to respond sympathetically to that point.

Turning to the duty of care to replace the consumer duty—indeed, having a duty of care was another of the Select Committee’s recommendations—I concur with the sentiments expressed by my noble friend Lord Sharkey. A consumer duty of the sort in the Bill and which was brought forward for consultation by the FCA is not a duty of care. The former has many exemptions and, critically, does not provide wronged consumers with the right to secure monetary redress through litigation. This point was made very compellingly by my noble friend. While the purpose of the consumer duty is to deliver improved outcomes for consumers, because the proposals are diluted from the duty of care—which was voted on in Parliament and enshrined in the Financial Services Act 2021—we have to ask why this has happened.

The external bodies calling for a duty of care, the financial services Consumer Panel, many consumer organisations and the House of Lords Liaison Committee were all clear that what they wanted was a duty of care, not a consumer duty. I would be grateful to the Minister if in summing up she can explain why this move from a duty of care to a consumer duty was made and why it was allowed to happen. In terms of accountability and parliamentary sovereignty it is of real concern that, after Parliament passed the Financial Services Act 2021, the regulator chose to consult and bring forward rules on something different. This amendment provides an opportunity to remedy a very unsatisfactory state of affairs.

In my view, the consumer duty provides little more consumer protection than is in the existing “treating customers fairly” principle. Nor do these proposals really help to rebalance the power and information imbalance between financial services providers and vulnerable customers, which is a real concern of mine. We need a convincing explanation of how the consumer duty enhances the “treating customers fairly” principle and how this new approach will provide the regulator with more of an ability to ensure better outcomes for consumers than at present. I must say that is not at all clear to me.

Finally, the problem is that, as currently drafted, the consumer duty places the responsibility on consumers to understand the benefits and risks of different products and services. There needs to be less emphasis on what consumers should be able to discern for themselves and more emphasis on what should be in place to stop firms exploiting that power and information imbalance between themselves and customers. This is something that a duty of care amendment would do.

[Lord Sikka (Lab)]

My Lords, I will speak to Amendments 229 to 231. They overlap with the amendments tabled by the noble Lord, Lord Sharkey; I congratulate him on his excellent speech and the wonderful case that he made for a duty of care.

The key theme of these three amendments is the empowerment of consumers—that is, enabling consumers to secure redress from negligent authorised persons for failure to act with due care as well as enabling them to seek compensation from regulatory bodies for their failures. Empowering consumers generates pressure points for regulatory bodies and authorised persons to ensure that they act diligently, efficiently, honestly, fairly and with some care.

The key element in these amendments is a duty of care, about which the noble Lord, Lord Sharkey, has already said a few things; I will add just a few more. The FCA has failed to carry out the mandate given to it by Section 29 of the Financial Services Act 2021. The consultation was fundamentally flawed; indeed, the wording of its questions indicated the bias against its mandate to create a duty of care.

I have time to go through only one example. Question 12 on the consultation paper was very badly designed. As an academic, I have carried out many questionnaires over the years, but I have never written a question like this with so many questions in one:

“Do you agree that what we have proposed amounts to a duty of care? If not, what further measures would be needed? Do you think it should be labelled as a duty of care, and might there be upsides or downsides in doing so?”


That is supposed to be one question. This question and the accompanying information provided in the consultation paper are severely misleading. The FCA asks, “Do you agree that what we have proposed amounts to a duty of care?” Does it not know what a duty of care is? Has nobody there ever studied any English case law from the 20th century to understand what it is? What a strange question to ask.

First, it was not for the respondents to inform the FCA whether or not it had proposed a duty of care; that was for the FCA itself to do. Secondly, if it is not a duty of care but the majority of respondents believe it to be one, does that make it so? Thirdly, if it is a duty of care but the majority of respondents believe it not to be, does that mean it is not one? It is very strange. Fourthly, if it is a duty of care then the FCA has proposed such a duty without asking the question, specifically mandated by Section 29 of the 2021 Act, as to whether there should be one. Fifthly, if it is not a duty of care then the FCA has proposed that there should not be one. If you look at it on logical grounds, none of it makes any sense. The questions and the accompanying statements do not make any sense, so the FCA has not really consulted on a duty of care.

The FCA’s consultation paper says that a duty of care “may have different meanings”—in other words, that is why it did not really want to go down that route. That is misleading. Just because the meaning of duty of care evolves does not mean that the FCA should not carry out its statutory duties. The principle of duty of care is well established in English law, especially since the 1932 case of Donoghue v Stevenson. It is found in fields as diverse as sale of goods and professional negligence, but it seems to have eluded the FCA.

The FCA has failed to create a duty of care as that phrase is commonly understood in law. What it has done is propose general rules about the level of care that must be provided to consumers by authorised persons. That is not a duty of care. Principle 2 of the FCA’s handbook does not create a duty of care because a breach of the FCA’s Principles for Businesses does not give rise to a right of private action by parties injured by a breach thereof. That has already been commented on; unless consumers can enforce something, it is not really a duty of care.

The FCA’s chair, Charles Randell, rejects the commonly accepted legal definition of the term “duty of care” and states that, for the FCA, it means nothing more than

“a positive obligation on a person to ensure that their conduct meets a set standard.”

That does not sound like a duty of care. Randell further commented in relation to the consultation paper that

“whether or not a private right of action for damages should attach to the duty … there would be alternative ways of enforcing such a duty. These include not only voluntary redress or a restitution order, but also our routine supervision and enforcement activities. And individuals have the ability to seek compensation by referring complaints to the Financial Ombudsman Service, which would have regard to the duty in its decisions.”

In a sense, I have no problem with regulatory remedies being in place in addition to the private right of action—I welcome them—but they cannot be a substitute for that right, which is what Amendment 229 calls for. There are two reasons for rejecting the FCA’s position. First, elsewhere—for example, in the sale of goods or professional negligence—a breach of a duty of care is by definition actionable, so why is that prevented in the world of finance? Why are the financial services and the FCA an exception to it? Secondly, the alternatives listed by Randell and the FCA have consistently been shown to be unsatisfactory. Individuals are therefore left in the lurch with nowhere to go.

A right of private action is desirable and creates a pressure point for financial services providers. While the consumer duty has many exclusions and qualifications I do not welcome, attaching a private right of action to it would materially strengthen consumers’ rights in relation to wrong scores and be of benefit to consumers. A right of private action would enable consumers to seek redress and compensation in the event that they are dealt with badly by a financial company. In the absence of that right, consumers, investors and pension savers remain dependent on the FCA. As we have already heard, the FCA is always dragging its feet to do anything. We need to set consumers free. In essence, I am supporting what the noble Lord, Lord Sharkey, said.

--- Later in debate ---

[Baroness Penn (Con)]

With apologies, the lack of redress is around the right to private action. I will come to that point and, when I have said my piece, the noble Lord can intervene, if it is not sufficient.

Amendment 231 from the noble Lord, Lord Sikka, is similar in intention and would introduce a statutory duty of care owed by authorised persons to consumers. Again, this proposal was considered by the FCA, and it sought views from stakeholders through its consultations. As noble Lords have noted, this issue has been under consideration for some time. In its 2019 feedback statement on a duty of care and potential alternative approaches, the FCA explained that most respondents, including industry stakeholders and a number of consumer groups, did not support a statutory duty of care. Of course, the two subsequent consultations were undertaken by the FCA in response to the amendment put down by Parliament and included in the Financial Services Act 2021.

The new consumer duty comes into force on 31 July for new and existing products. It represents a significant shift in regulatory expectations, and there is a large programme of work under way within the sector to implement it. It would be wrong to seek to replace it now or seek to duplicate it with an additional statutory duty of care before it has been given a chance to succeed.

Amendment 229, along with Amendment 76, seeks to attach a private right of action to the consumer duty. This is an issue that the FCA has considered and consulted on extensively as it developed the consumer duty.

[Lord Sikka (Lab)]

Could the Minister clarify something? If I buy a bar of chocolate, the producer owes me a duty of care and, if I get injured, I have a right of redress. If I buy financial services, why can I not have the same rights?

[Baroness Penn (Con)]

My Lords, the concept of a duty of care in financial services may be different to the concept of a duty of care in other contexts. This was considered very carefully and consulted on by the FCA in 2019 and in 2021. It considered these questions and the issues we have discussed in the Committee today.

Financial Services and Markets Bill

Lord Sikka Excerpts

Committee stage
Wednesday 1st February 2023 Grand Committee

[Lord Sikka (Lab)]

My Lords, I and the noble Baroness, Lady Bennett of Manor Castle, oppose the Question that Clause 24 stand part of the Bill.

As I read the Bill, I wondered why growth and competitiveness as a regulatory objective appear at all. A friend in the City reminded me that the Government have been unable to deliver any Brexit benefit and have to show that they are doing something; therefore this had to be tagged into the Bill—although I understand that this clause was written at the behest of TheCityUK and UK Finance, which wanted to sponsor it.

The secondary objectives of growth and competitiveness cannot be reconciled with the main role of ensuring financial stability and consumer protection. If there is growth because of financial stability and consumer confidence, that is fine, but to go out of your way and say that the regulators must somehow grow the finance industry and promote international competitiveness is something else. Unless the Minister points me to it, I could not find anything in the Bill which indicates exactly what kind of weight is to be attached to each of those four conflicting objectives.

How much growth are the Government trying to secure in the finance industry? Are there any limits, and what are the economic and social costs? What would be the opportunity cost of more graduates going into the finance industry and shunning other careers, whether in manufacturing, chemicals or any other industry? How will the regulators ensure that somehow the UK has a greater supply of graduates? How will they ensure that there is adequate infrastructure? I could not see that any of these issues were answered in the long and hefty impact assessment.

The promotion of competition is an existing aim of the financial regulators. Here we can see that the FCA has persuaded some challenger banks to enter the market, although it has been utterly unable to tame the major banks that dominate the market; they have not been broken up and have reduced people’s access to the market—for example, by closing bank branches. Is taming the banks and breaking them up a matter for the FCA or for the CMA? The regulatory architecture continues to become more and more complex. Each regulator already passes the buck to somebody else, saying, “It’s your job to secure competition”, and that is domestically. When we move on to the bigger picture, it becomes even more complicated.

The common understanding is that the notion of competition relates to the state of the market and access to it. That is very different from the notion of competitiveness, which as a discourse does not have any permanent meaning in any sense; its meaning is always constructed and needs to be given. Essentially, however, it relates to the industry as a whole. That is a task for the Government, not for the regulators at all.

International competitiveness, as many noble Lords have already said, is about the ability to attract business from other financial centres. In the words of the former Business Secretary, Vince Cable,

“chasing ‘competitiveness’ really means … a race to the bottom—watering down standards in the hope of attracting more dubious sources of money to an industry.”

That is quite an indictment of the government objectives by a former Minister. Similar principles—that is, the principle of competitiveness—and approaches were behind the 2007-08 crash that hammered the whole economy. We are yet to recover from that folly, but they are being brought back. The Governor of the Bank of England, Andrew Bailey, said that before the last crash the regulator

“was required to consider the UK’s competitiveness, and it didn’t end well, for anyone”,

yet we are embarked on exactly the same course again.

There was an unprecedented bailout of the finance industry. No other industry in British history has needed that kind of state support, and we continue to be plagued by all kinds of scandals, even in an environment where regulators are not pursuing international competitiveness. We have had nearly £1 trillion of quantitative easing to the finance industry. The result is that there is asset price inflation and real wages are still down, yet it is hard to see any reflection of that in the Government’s impact assessment.

Competitiveness, as we all know, was specifically removed from financial regulation in 2012, but it is being unceremoniously smuggled back in. The Government are clearly opting for a race to the bottom for a sector that has been a serial offender and has actually eroded growth. The finance industry has mis-sold numerous financial products over the years, including pensions, endowment mortgages, precipice bonds, split capital investment trusts, payment protection insurance, mini-bonds and much more. It has led the field in international tax abuse, money laundering and sanctions busting. Is that what the Government really want to grow? Is that what the regulators are supposed to be growing?

Rather than cleaning up the industry, this Bill should have been preceded by a public inquiry into the finance industry to see what exactly needs to be cleaned up, but that never happened. Rather than cleaning up the industry, the Government, the Bank of England and other regulators have actually colluded with the UK banks over the consequences of their own criminal conduct. I have given examples, and I will repeat one here. HSBC was fined $1.9 billion in the US for facilitating money laundering. It admitted in writing that it had been engaged in “criminal conduct”. The then Chancellor, George Osborne, in collusion with the Bank of England and the head of the FSA, secretly wrote to the US regulators to say that they should go easy as HSBC was too big to jail and too big to fail. The result is that HSBC continues to commit financial misdemeanours.

Is that an example of the regulators somehow managing to balance growth and competitiveness? There is certainly growth in dirty money; that has continued. As for competitiveness, all the banks are still charging us roughly the same fees for overdrafts, and they are engaged in other nefarious practices as well. I provided that example regarding HSBC in the previous debates on the Bill.

Scholarly research carried out at the University of Sheffield, where I am emeritus professor, shows that between 1995 and 2015 the finance industry made a negative contribution of £4,500 billion pounds to the UK economy, yet the Government are weakening what modest regulation there is under the guise of the pursuit of growth and competitiveness. Just how bloated does the finance industry have to be before anyone recognises the danger signs flashing all over it? What evidence is there to show that the financialisation of everything is a positive development?

At the next crash, which will come if these objectives are implemented, not just banks but the whole high street will be in trouble, because organisations such as Morrisons, Asda and many others are under the control of private equity, which is utterly unregulated but meshes into the sector that we are trying to regulate. I hope the Minister provides us with some evidence to show that the financialisation of everything, which is inevitable if we grow this sector, will somehow be positive. I look forward to that reply.

The Government have provided no evidence to show that the finance industry has turned a new leaf. Since the 2007-08 crash, there have been scandals galore, whether London Capital & Finance, Blackmore Bond, the Woodford fund, banks forging customers’ signatures or numerous others. What are regulators going to do when faced with multiple objectives?

Do the Government and the regulators even know what the finance industry does? Mini-bonds came as a shock to the FCA; when people told it about them, it did not pay much attention. After the Kwarteng Budget, the gilt market declined because neither the Government nor the regulators knew anything about the impact of market yields on liability-driven investments and pension funds. Just yesterday, the Work and Pensions Committee was told that that Budget resulted in a £4 billion loss to pension funds. The Bank of England earmarked £65 billion of expenditure to bail out that market. As a result, some people made fortunes, but many innocent people made huge losses. There were huge wealth transfers from City speculators to pension funds.

How is the regulator going to adjudicate which kind of wealth transfer is good and which is bad? Regulators have no mandate to do that; only Parliament has that mandate and only the Government can act on behalf of Parliament to do that. Financial stability, growth and competitiveness cannot be reconciled, because there are too many contradictions and the Government are not willing to deal with them.

These kinds of losses are part of the reason why our economy is in the doldrums. The IMF is telling us that we are a basket case in terms of economic growth, yet we are piling on more and more of exactly the same. Ministers have not explained what the competitiveness and growth objective will do to regulators’ duties. We have about 41 regulators in the finance industry; will they all be required to promote competitiveness? How will their efforts be measured? There are 25 anti-money laundering regulators; how will they promote growth? Will they encourage more money laundering and bring in more hot money? Will they object? What will they actually be doing? Perhaps the Minister can spell that out.

We have a real patchwork of enforcement. We have the FCA, the Serious Fraud Office, the Crown Prosecution Service, HMRC, the Bank of England and others. How will they be promoting competitiveness and growth? Will they be lax? Will they copy Chancellor George Osborne, secretly intervene and say to somebody, “Please do not prosecute HSBC, even though it has been caught laundering money and admitted to it”? The Government have provided no answers to these questions and there is nothing about in in the Explanatory Notes. The Government are, in effect, laying the foundations of the next crash, just as the Conservative Government’s light-touch regulation laid the foundations of the 2007-08 crash.

Experienced voices are telling us to change course and not to go down the line that the Government are pushing. For example, Howard Davies, who served as chair of the Financial Services Authority between 1997 and 2003, said that

“he was ‘not keen on’ the competition clause, which went further than the guidance laid out prior to the financial crisis. At that time, he said the FSA only had to prove that issues such as competitiveness were ‘taken into account’ and were not something ‘you were trying to achieve directly’.”

So that is a warning. He added:

“In my view, to give the regulator the objective of promoting competitiveness, could be the thin end of a rather peculiar wedge. I mean, why would … the regulators not come in and tell us to cut our cost-income ratio? That would improve our competitiveness. And if they had a competitiveness objective, it seems that would give them an ‘in’ to the way we run our business, which I think would be a bit tricky, really, and that is one reason why the regulators aren’t really keen on it either.”

Financial Services and Markets Bill

Lord Sikka Excerpts

Committee stage
Wednesday 25th January 2023 Grand Committee

[Baroness Penn (Con)]

My Lords, I will begin by speaking to government Amendments 26 and 191 to 195 in my name, and Amendment 27, tabled by the noble Baroness, Lady Kramer. As she described very well in her contribution, CCPs are a type of market infrastructure and play a vital role in promoting financial stability in markets.

Government Amendment 26 will allow the Bank of England to extend a firm’s run-off period to the temporary recognition regime from a maximum period of one year to a maximum period of three years and six months. This will ensure that overseas central counterparties, or CCPs, within that run-off can continue to offer services to UK firms during that period.

While the UK was an EU member, access to overseas CCPs for UK firms was determined centrally by the EU. Following the UK’s exit, the Government put in place a new process to tailor access to the UK market, together with a temporary recognition regime, or TRR. The TRR allows UK firms to continue to use overseas CCPs while the Treasury and the Bank of England make equivalence and recognition decisions in respect of those CCPs. Once made, these equivalence and recognition decisions will provide the basis for long-term UK market access for overseas CCPs.

The TRR was accompanied by a year-long run-off regime, intended to ensure that CCPs that leave the TRR before it expires, without gaining recognition, can slowly and safely unwind transactions with UK members before exiting the UK market. Remaining within the TRR requires CCPs to take a number of steps, including submitting an application for recognition to the Bank of England by 30 June 2022. While the majority of CCPs in the TRR did this, a small number did not apply for recognition by that deadline and have consequently entered the run-off regime. UK firms therefore stand to lose access to these CCPs at the end of June 2023 under the current arrangements.

Amendment 26 will allow the Bank of England to extend a firm’s run-off period to the temporary recognition regime from a maximum period of one year to a maximum period of three years and six months. This extension is appropriate as the Government understand that some of the CCPs in the run-off may wish to apply for recognition in future. A temporary loss of access for UK firms to these CCPs would be highly disruptive. The extension therefore provides time for CCPs in the run-off regime who wish to apply for recognition to do so and ensures that the relevant CCPs can continue to offer services to firms during that period. It also ensures that, where necessary, UK firms can wind down their exposure to CCPs, leaving the run-off state in a safe and controlled manner.

Amendment 27 from the noble Baroness, Lady Kramer, seeks to remove proposed new sub-paragraph (3), which makes it clear that the Bank of England can vary any decisions it has already made on the length of the run-off period for a particular firm. I understand that this is a probing amendment to understand how that works. However, the Bank already provides dates by which these firms must exit the run-off, in line with the existing one-year limit set in legislation. This amendment extends the limit set in legislation and then gives the Bank the power to vary those dates under it. It is important for the Bank to set the exact date on which a particular CCP will exit the run-off in order to carefully manage the process for the reasons the noble Baroness points out. The run-off period for a firm cannot be more than the three years and six months specified in this legislation.

The Bank can specify a period shorter than this for a particular CCP. This does not affect the equivalence process as described by the noble Baroness. Equivalence is a separate process managed by the Treasury where the Treasury determines that an overseas jurisdiction is equivalent to the UK’s regime based on an assessment of the jurisdiction and its regulatory regime. Amendment 26 therefore allows the Bank to set specific dates for when CCPs will exit the run-off, with a maximum period set in legislation, which the Bank is currently responsible.

Briefly, Amendments 191 to 195 to Schedule 11, which introduces a special resolution regime for CCPs, are technical amendments which will ensure that Schedule 11 functions as intended and reflects the original policy intent, by correcting drafting and clarifying the scope of certain provisions.

On Amendments 21 to 25 and 41, tabled by the noble Baroness, Lady Worthington, the Government believe that effective commodities markets regulation is key to ensure that market speculation does not lead to economic harm. This is a lesson we all learned from the food crisis in the 2000s, and the Government remain committed to the G20 agreement that sought to address that.

However, the current regime, which we have inherited from the EU, is overly complicated and poorly designed. The application of limits to close to a thousand different types of commodity derivative contracts is far too broad. It captures many instruments that are not subject to high levels of volatility or speculation, and therefore unnecessarily undermines trading and liquidity in some contracts. Since the UK left the EU, the EU has significantly reduced the scope of its regime to only a handful of contracts—just 18—and no other major jurisdiction applies position limits as widely as the current UK regime.

To ensure that the regime is calibrated correctly, the Bill makes trading venues responsible for setting position limits. As some in the Committee have noted, they are well placed to ensure limits apply only to contracts that are subject to high volatility. However, the Bill empowers the FCA to put in place a framework for how trading venues should apply position limits and position management controls. As part of this, the FCA will continue to require trading venues to set position limits on contracts which pose a clear threat to market integrity. The FCA has confirmed that agricultural and physically settled contracts, among other highly traded contracts, will continue to be subject to position limits, in line with the UK’s G20 commitments, and therefore consistent with international standards.

The FCA will also retain its ability to intervene directly to set position limits if it believes it is necessary. However, Amendments 21 to 25 would require the FCA to instead continue setting position limits on all commodities that are traded on a venue or economically equivalent over-the-counter traded derivatives. This would place unnecessary restrictions on investors, to the detriment of all market participants, and would place the UK at a disadvantage compared to other international financial centres, such as the EU and the US, which apply restrictions to contracts that genuinely pose a risk of volatility. It would change existing market practice that has been shown to work effectively.

I will address more directly a number of the points that the noble Baroness, Lady Worthington, raised. On how to manage the “conflict of interest”, as she put it, for trading venues, as I said, under the measure in the Bill the FCA will establish a framework that will govern the way venues set and apply limits. The FCA will also have powers to intervene and require venues to set limits on specific contracts that pose a risk to market integrity.

On the FCA’s information-gathering powers, in particular in relation to over-the-counter trading, the FCA will have more powers to request information from any participants about contracts it is considering applying limits to. This includes, but is not limited to, over-the-counter contracts. I assure the noble Baroness that over-the-counter contracts will remain in scope as the FCA will have the ability to set limits. This means that over-the-counter traded agricultural products will remain in scope.

The noble Baroness also asked how, given that the FCA often participates in international fora, exchanges will be plugged into them. Market participants, including exchanges, are often invited to participate in round tables organised by international bodies, such as IOSCO, to discuss specific regulatory issues. They can also respond directly to consultations.

I hope that provides some reassurance to the noble Baroness on some of the specific questions that she raised.

[Lord Sikka (Lab)]

I thank the Minister. Unless she is going to in a moment, she did not specifically refer to Amendment 41. What it proposes is very reasonable, for two reasons. First, the information that the noble Baroness, Lady Worthington, requests is costless. It is readily available within the organisations. Secondly, if we go back to the last crash, one of the complaints about Bear Stearns was that it made almost 100% of its income from risky speculation, but the breakdown of that income was not available. Therefore, the creditors and other stakeholders were unable to make an assessment of the likely continuation of that income or the risks attached. This kind of disclosure gives us insights into the risks and enables market punters to make their own predictions about future cash flows and riskiness, and it is all costless. Therefore, it is hard to see what objections there can be to this disclosure.