Financial Services Bill (Fourth sitting)

Alison Thewliss Excerpts

Committee stage & Committee Debate: 4th sitting: House of Commons
Thursday 19th November 2020 Public Bill Committees

[The Chair]

So we go to the Scottish National party spokesperson, Alison Thewliss.

[Alison Thewliss (Glasgow Central) (SNP)]

Q The briefing that you provided on the Bill mentions referring any disputes to the Financial Ombudsman Service. Can you tell me a bit more about how that works at the moment and your fears about what the proposals might mean?

Hugh Savill: There was a question about whether British consumers who were using Gibraltarian firms had access to the Financial Ombudsman Service in the UK. We think it is extremely important that all British consumers have access to the Financial Ombudsman Service—it looks at individuals’ difficulties in a way that other regulators cannot. I am particularly pleased that that has been clarified in the Bill. Let us hope that it works well.

[Alison Thewliss]

Q Are there any other risks to consumers within the UK from this move?

Hugh Savill: I never say never, but all the people who operate in the British market are subject to the conduct rules of the Financial Conduct Authority, so I think there should be the same standards for those selling from Gibraltar as in the rest of the UK.

[Alison Thewliss]

Q Do you think that consumers are aware of where their insurance policies are coming from? Will this lead to people thinking about that a little bit more?

Hugh Savill: Some of them will be, some of them will not. I am not a great reader of the small print in my insurance policy, any more than anybody else is, but if we have a similar regime, I hope that that would not be a major preoccupation of somebody buying an insurance policy.

[The Chair]

I open the questioning to other members of the Committee. Does anyone else have questions? I call Miriam Cates.

--- Later in debate ---

[The Chair]

We await it with impatience.

[Alison Thewliss]

Q I am happy to let other Members come in if they have questions, rather than hog the platform. There were some comments on equivalence in the briefing you put together. Can you tell us a wee bit more about your thoughts on equivalence both in the wider sense of it being used as a potential political weapon and in the narrower sense of what happens to investors if equivalence is withdrawn?

Hugh Savill: We do not think very much of equivalence as a means of arranging market access. As set out by the EU, it is extremely easy to end equivalence and to leave both provider and client hanging and not knowing where their policy is going to go. We also think that the European system of equivalence is far too open to political interference in what ought to be a technical matter.

This said, if I look back to the Chancellor’s very welcome statement last week, in the supporting document to that, the Treasury set out a far more grown-up view of what equivalence ought to be—a rather more technical decision, where there is open consultation and a discussion between the two jurisdictions, that is actually looking for a long-term relationship between the two jurisdictions, and that cannot just be terminated at short notice. On equivalence generally, we really do not think much of the way that the EU runs its equivalence regime. We are very reassured by the vision of equivalence that the Treasury has put out.

Turning to the detailed point about those accessing the overseas fund regime, what is important is that, in the unlikely event that a trusted jurisdiction moves out of trusted jurisdiction status into untrusted jurisdiction status, there are, as the Bill suggests, mechanisms for ensuring that customers are not orphaned from their provider. That is extremely important, particularly when you have some long-term contracts such as annuities.

[Alison Thewliss]

Q What further information do you think would be required for people who have invested, to give them further reassurance?

Hugh Savill: I think they should have enough reassurance here. The overseas fund regime allows investors to access a much wider range of funds than would otherwise be available. As I said, choice is a good thing. It gives a wider choice and, ideally, better products and prices. I think the safeguards are there.

[Alison Thewliss]

Q I am just curious because you said that, for the regime to fully work for customers, situations such as this need to be clarified. I thought that you were asking for further detail or reassurance.

Hugh Savill: Not at the moment, no.

[Mr McFadden]

Q I had a further thought on the question of tax advantage. A quick search tells me that Gibraltar’s corporation tax level is 10%. There may be some caveats around that—it was a quick search—but if that is the case, that is quite a hefty advantage for a company, compared with the UK rate, is it not?

Hugh Savill: I am not aware of the corporation tax differences between the UK and Gibraltar, so, again, I am sorry but I will have to cover that in my reply later.

--- Later in debate ---

[The Chair]

I call the third Front Bencher, Alison Thewliss, for the Scottish National party.

[Alison Thewliss]

Q Thank you, Dr Huq. I agree with a lot of what you have said, Duncan. Having served on the Joint Committee on the draft Registration of Overseas Entities Bill, I am also hugely frustrated that nothing really has happened with that, since all the evidence was given and the recommendations to Government were quite clear. Are there any other aspects you have not touched on so far where you feel this Bill is a missed opportunity, and where amendments could easily be tabled to improve it?

Duncan Hames: We might want to talk about beneficial ownership transparency. As I say, Ministers had a duty placed on them in the Sanctions and Anti-Money Laundering Act in relation to Britain’s overseas territories and what would need to happen if they did not adopt public registers of their own volition, and I think they have found that duty helpful. Certainly at a diplomatic level, Ministers in the Foreign Office would celebrate the statements that have been made by those overseas territories as that deadline has approached. That is illustrative of how effective using legislation like this to convey a duty on a Minister can be, in order to rachet up the pressure for change.

The problem we have, of course, is that in some cases, those overseas territories are quite grudgingly coming around to this position. The last statement to complete the set was from the British Virgin Islands, and in his statement the Chief Minister—having agreed to the things the Government were hoping he would agree to—started to list a whole list of reservations and conditions, and concluded by saying that of course, this would only happen at a pace at which they consider deliverable. That does not fill me with hope that, without further incentive or, ultimately, the threat of action through Orders in Council, this will actually happen, which brings me back to my original point about implementation. It is one thing to have the policy—another, even, to have the laws—but if we have not had the implementation, we have not really changed anything. I would encourage you to look at what levers you might be able to grant Ministers through additional measures in a Bill such as this.

[Alison Thewliss]

Q Indeed. I remember from previous conversations about the overseas territories and Crown dependencies that they were essentially turning things back on to us and saying, “Get your own house in order as well”, in terms of Companies House and other accuracy issues and registers here. Is there anything further on that that you think ought to be in this Bill?

Duncan Hames: That is a creative tension, isn’t it? I think we should welcome international scrutiny of the effectiveness of our own measures. As the Minister said, there has been a consultation about new powers and duties for Companies House, in relation to the quality of the data we have. We are already beginning to see signs of a cultural change in Companies House as a result of the directions it is being given and the anticipation of future legislation. We need it to be a partner in preventing crime, not just a registrar—not just providing a service to companies that wish to be registered.

As I say, we recognise the pattern of change there, but ultimately it has to work within the law, and if the laws do not empower it to take the actions necessary, we need to change that. We are anticipating that the Government will bring forward legislation, so that when we are trying to persuade other financial jurisdictions to address their own contribution to money laundering, including in Britain’s family of offshore financial centres, we are able to hold our head up high and know that we are doing everything we can to ensure that the quality of our own defences is adequate.

[Alison Thewliss]

Q I absolutely agree. You talked about the outsourcing of regulation. Do you think Parliament needs to have more of a role in terms of scrutiny, rather than handing things over to regulators? My concern is that once we hand everything over to the FCA and the Prudential Regulation Authority, we will not really know that there is a problem until something gets too big.

Duncan Hames: I suspect that it is Parliament’s role to hold Government to account for acting on what those regulators are finding. They are often quite forthcoming in their criticisms of where things are going wrong, but they need the frameworks in which they can act on that. As I have said, I think the powers rest with Government to strip supervisory bodies of their duties where they are failing, but I cannot think of a time when it has happened. I believe OPBAS has provided plenty of evidence—indeed, unattributed in some reports—but I am sure it could point the finger for Ministers where necessary, in order to be able to take action.

[Alison Thewliss]

Q Is there more that could be done in the Bill to open up trusts and make them more open to scrutiny?

Duncan Hames: I think trusts are intended to be in the scope of the registration of overseas entities Bill. That is definitely something required by the fifth anti-money laundering directive as well, so we should consider them within scope. Whether we have yet got that working, I am not so confident. For example, if we take something that I am sure is of interest to you—Scottish limited partnerships—the Financial Action Task Force report, which the Government are very pleased with, noted that there remains a weakness in terms of scope for abuse of that corporate structure. I should acknowledge that those are regulated by UK law, not by decisions made in Scotland. Those partnerships can be partnerships with two corporate entities—so, no human personality. If those two corporate entities are registered in jurisdictions where beneficial ownership is not clear—it is not public—we essentially have a UK entity that has got around all of the strictures that the Government are very proud of, in terms of the transparency that the UK’s own registry demands.

There are other issues with having corporate partners of a legal partnership. Obviously, it all comes down to accountability. It is very important if we want to be able to hold corporate entities accountable for their role in economic crime. I am afraid that many such complexities remain to be addressed. We cannot just take the bits we like when a report like that is presented.

The Minister is correct: the UK outcome was very favourable compared with other FATF evaluations. I hope, by the way, it will give the Treasury the confidence next time around to invite civil society representatives to give evidence to the FATF assessors. None the less, FATF came up with a number of things that it identified needed to be addressed, and the Government have a plan, but we seem to lack a timetable for implementing a number of these things. If the Minister is able to give us a timetable for when the legislation to introduce measures such as robo, which is in the economic crime plan, will be introduced, I think we would all be very glad of it.

[John Glen]

The point is, as Duncan well knows, that a whole range of interventions have been provoked by that FATF report. I am glad he acknowledges its world-leading nature for the UK. It is good that we should be pleased about that, but there were significant elements that need to be worked on. They are obviously taken in different ways across Whitehall, and there will be more to be said about that in due course. I am responsible for what I am responsible for in this Bill, and the purpose of this conversation is about that.

[Alison Thewliss]

Q An issue that I have around SLPs and enforcement is the fines. Is there work to be done within the scope of the Bill to increase fines in any of the parts mentioned? You mentioned earlier that the level of the fines is minuscule compared with the profits made.

Duncan Hames: I doubt you need primary legislation to fix that. I expect that secondary legislation giving direction to Ministers and regulatory bodies to ensure that fines are commensurate with the level of offending would be helpful. I suggested that the level of fines by these professional bodies supervisors and by HMRC is just not commensurate with the financial advantage of taking part in these transactions.

Indeed, if you are a solicitor, and someone complains to the Solicitors Regulation Authority about you because you have been holding up a transaction, that will still be investigated. You will still incur quite a discomfort in responding to that investigation. That is quite a powerful incentive just to go along with the transaction, whereas the fine you might receive for having gone along with a transaction that you should not have could well be less consequential for you. That needs to be addressed.

Fines wielded against trust and company service providers by HMRC, for example, are pitifully low. We were told by the trade body that its experience of fines imposed by HMRC on trust and company service providers was typically no more than £1,000.

[Alison Thewliss]

Q Even when fines ought to be due, they are not enforced. I ask periodically about Scottish limited partnerships and how many people have been fined for failing to register a person with significant control. Every time I ask, it is not in, which is ridiculous. My last question is about the issues to do with Gibraltar. Do you have any concerns about that, or anything that the Committee ought to know?

Duncan Hames: I do not think that the measures with regard to Gibraltar particularly focus on money laundering. Obviously, Gibraltar is covered by the fifth anti-money laundering directive. I think they would consider themselves to be among the earlier adopters of the measures required under that directive. What we see in the Government’s language is an emerging global standard. That has been recognised in the past year or so by the Crown dependencies and, increasingly, by British overseas territories.

Although the US starts from a very far-back position on public beneficial ownership transparency, on the basis of bipartisan—as I think they call it, or on both sides of the aisle—working on this issue, even with a Republican Senate it seems set to advance new regulatory requirements around a central register of beneficial ownership. The tide is definitely moving in the direction of greater transparency. I think it would help British overseas territories to be encouraged to keep up with that direction of change.

[Julie Marson (Hertford and Stortford) (Con)]

Q Thank you for your evidence; it is really interesting and this is an important area. We have heard reference to—you used the phrase—the UK outsourcing the prosecution of financial crime to the US. I am sure you will correct me if I am wrong—I do not have it in front of me—but on Transparency International UK’s own list of corruption, the UK comes out 12th out of 198, whereas the US comes out at 23rd, so by comparison with the US, the UK does very well.

I am interested to hear your reaction to the criticisms of the report that that phrase came from. It was felt that the scope of the report did not include, for example: the bribery and corruption statistics, including on the “failure to prevent” provisions; the period after the financial crisis, which meant that much implementation was not included in the report; or the way prosecuting in the US often involves plea bargains, which are used to extract fines, so the measurement of the extraction of fines is not necessarily a justified comparison between the UK and the US. What is your reaction to that?

Duncan Hames: The corruption perceptions index measures views of the prevalence of corruption in public sectors, whereas for the most part here we are talking about enforcement of corporate wrongdoing. None the less, you are right to record where those countries are in the index.

“Exporting corruption”, our recent report produced for the OECD anti-bribery working group—part of a series of reports published every other year—is the one in which the UK is recognised to be an active enforcer of anti-bribery laws and laws to prevent foreign corporate bribery. None the less, the US is top of the table and, while it is good that Britain remains an active enforcer, the calculation that grants that assignation is such that the UK hung on by a hair’s breadth this year and there is no room for complacency.

The statement that I reference from the Secretary of State for Justice was made when he was Solicitor General, at the Cambridge International Symposium on Economic Crime. His words were that these differences in how the law operates

“result in other jurisdictions holding British companies to account where ours has not.”

He said he was making that observation in an argument in favour of moving towards the “failure to prevent” approach to economic crime.

For all of America’s challenges, I do not think anyone would criticise it for being less assertive in enforcement of the law that it has. Even at a time when one might have feared political interference or the undermining of the Department of Justice, its level of enforcement has remained high, without signs that it is falling back. I think we have to reflect on why that is. It is partly to do with resourcing, but it is principally to do with the challenges of our arrangements for prosecutors.

Lisa Osofsky, the director of the Serious Fraud Office, describes what we have as “a very antiquated system”. She said:

“We are hamstrung right now by the identification principle”.

She explained to the Justice Committee that she can “go after Main Street”—forgive the American references; I am sure you will be able to translate them—but she

“cannot go after Wall Street, and that is unfair”.

When we think about the businesses that each of you represent, you would want there to be a level playing field, where traditional businesses with perhaps traditional ownership models are not facing a greater requirement to uphold the law than much larger, perhaps more anonymous, conglomerates in complex corporate structures spread over many jurisdictions.

--- Later in debate ---

[Mr McFadden]

Okay. I will stop there and leave it to others.

[Alison Thewliss]

Q I would like to thank Finance Innovation Lab for the briefing, which was really quite interesting and a different approach. Pat has hoovered up some of the questions that I was going to ask, but is there anything else in particular that you would like to see in the Bill?

Jesse Griffiths: One of the main issues that we would have loved to have seen in the Bill—I recognise that it would be outside the scope to introduce it now—is a proportionate regulatory regime for mutual banks. One thing that is important, or one problem that is very evident in the UK financial sector, is its lack of diversity of institutions. Across Europe, co-operative banks have an average of more than 25% of assets, and in the UK they were not even legal until 2014. The mutual banking movement is now trying to establish that vital part of the system that would help to improve services for customers, improve competitiveness and bring important countercyclical and social and environmental benefits. That would have been nice, given that the Bill recognises that there is a need for a different regime for investment firms from banks, for example. There is a huge unmet need for a more proportionate regime for those institutions. That would be my wish list of what might have been in the Bill. Perhaps as part of the Bill discussions, we might get a commitment to consult on such a proportionate regime.

Of course, the other point to make here—to repeat some of the points we have made about social and environmental purpose and accountability—is that the main issues with the Bill are the things that are missing that could make it much more ambitious and set a much better precedent for financial sector regulation going forward.

Finally, one issue that is worrying to us is the danger of a return to framing the purpose of financial regulation as being about the competitiveness of the UK financial sector globally. That appears in a few places in the Government’s explanatory notes to the Bill. The key point is to make a distinction between competition, which is good, and competitiveness, which can be dangerous when applied as a principle for regulation. Framing regulation within that competitiveness framework is widely recognised as one of the main contributors to the global financial crisis. It was easy to make the case for relaxing regulation to make any particular financial sector more competitive compared with others, when actually I think what we want to establish, through the Bill and other actions, is that the UK financial sector will seek to set high standards and to be the leader in that, not to introduce a competitiveness framing that raises the risk of standards being lowered.

Fran Boait: I can build on that. I agree with a lot of what Jesse has said. For us, the overarching areas are accountability and seeing more that it in the Bill, the environmental, social and governance aspects, and the purpose. On that last point, while we understand the Bill is onshoring and tidying up, as I have said before, it sets the direction, and that strategy for the financial services sector has not been laid out by the Government. I think that is key because, as Jesse has mentioned, it is concerning to see competition and competitiveness in there—in the run-up to the crash, that was shorthand for deregulation—at the same time as handing a lot of power to regulators. Again, it is worth noting that the FCA chief executive said himself that they would prefer high standards to the idea of competition, so there is support for that. Making the direction clear is critical.

On a few specifics that have been left out, over the last few years Positive Money has been working on things such as access to cash and the need to protect people’s right of payment in different ways—I noted that there were a few questions on that—and thinking about financial inclusion. Thinking more about the financial services’ role in the wider UK economy is absolutely critical at this time, and there is not too much in the Bill in terms of the direction of that.

[Alison Thewliss]

Q In terms of saving for people who are at the margins, have you any thoughts about the Help-to-Save scheme and the measures on that?

Fran Boait: I welcome the Help-to-Save scheme, but again, I point to the wider issue—it is the focus of what Positive Money does—of how the financial services sector contributed to the global crash, which has undermined a lot of our economy in terms of people being able to meet living standards, pay bills and so on. Critically, we have to understand that where the money goes from financial services really determines that shape of the UK economy. If most of the money goes into property and financial markets, which it does, and we have four big banks occupying pretty much the whole market in the UK, as Jesse mentioned, we have an economy that has an oversized finance sector and property bubbles, and we have less money going into creating jobs, supporting small and medium-sized businesses and getting into people’s wages. We have a crisis of living standards in this country, as well as a household debt crisis. I am not a debt specialist, but I welcome some of the changes put forward for breathing space and debt repayments.

Again, we need not only to look at fixing some of the symptoms, but to think about the cause. I sound a bit like a broken record, but this is why, unless we get a grip on the direction of the financial services sector that we want—whether we want financial services to serve the UK domestic economy and not just international financial markets—I do not see us really stemming the problems with problem debt, limited savings and incredibly low savings across low-income households in the short, medium and long term.

[Alison Thewliss]

Q Lastly, Jesse, I think the phrase you coined, accountability deficit, is quite useful. Can I ask a wee bit more about the risks that moving everything over to the regulators might have?

Jesse Griffiths: Before I turn to the risks, I want to recognise that it is not the case that more regulation is better or that regulators should not have leeway to design proportionate regimes. That is absolutely not the case, and we need to recognise that. However, I think there are risks involved in turning over quite so much authority to regulators as the Bill proposes. As we mentioned, it will allow them to make changes to important regulations with limited parliamentary oversight. Secondary legislation will become one of the main ways in which regulations are changed.

The risks come from different angles. The obvious risk—we have seen this in the past in the run-up to the global financial crisis—is that there is a potential problem of regulatory capture, where the regulators become very close to the people they are regulating, who have regular discussions and meetings with them. The more those decisions take place behind closed doors, the greater that risk becomes.

From our perspective, another big risk is that you miss out on the opportunities to have a broader section of voices contribute to framing regulatory changes, from the kind of organisations that Fran mentioned, which represent the people who are the most badly affected by problems in the financial sector—those with problem debt or who are highly financially vulnerable—to those who think about the environmental impacts of the different regulations. The other risk is that we will not be able to reflect some of the most important impacts that changes in regulation will have.

I will make one final point. It is extremely important for Members to think about how they can actively encourage participation and engagement in those discussions by more of the groups that represent those affected by the financial system. This is in no way a criticism of the Treasury, which I know has a lot on its plate now, but there was an important consultation we noted over the summer that had a one-month consultation window during August, which basically made it impossible for groups that are not directly involved in that particular issue to think about the implications and whether they should contribute. Having requirements to consult in a certain way that allows more groups to participate would be useful.

[The Chair]

I have seen two other Members indicating. First, I will come to Abena Oppong-Asare.

--- Later in debate ---

[Alison Thewliss]

Q I just have a couple of questions. You mentioned that insurance is the largest area; are there any other aspects of financial services that require any further legislative action, or are you content with the way in which the legislation is set out?

Albert Isola: Forgive me, I did not hear the question particularly well. Would you mind repeating it?

[Alison Thewliss]

Apologies; you are quite far away, I suppose. You mentioned that insurance is the largest area in which you have dealings. Are there any other aspects of financial services that are not covered in this Bill that require any further legislative action, or does the Bill cover everything that you require it to?

Albert Isola: This legislation is like the enabling legislation, if I can call it that. If I can just say what it does for us, this requires alignment of normal practice, and it also requires, as a secondary condition—if I can call it that—co-operation between regulators and between Governments. In terms of the aspect that you are referring to, what will actually happen post 1 January 2020, I expect, when we begin the serious work, is that we and the Treasury will work through each of the different activities that we wish to have to access to, to the United Kingdom. The Treasury will then satisfy themselves, or not, that we meet the standards required to be able to have those passed through a statutory instruments in 2022, as one of the subsets of the activities that we can do. Insurance will be one; banking will be another; funds will be another. All of these are different subsets of controlled activities regulated in the United Kingdom, which we will work on with the Treasury in the coming 12 months to satisfy it of our ability to meet and match the standards that we have discussed here today.

[Alison Thewliss]

Q Thank you. Presuming that all these standards are met at the current time, do you have any worries about meeting those standards or any implications that not meeting those standards would have?

Albert Isola: No, not at all, but again, simply because today we can passport our services under the European Union or Gibraltar order, mirroring the European Union provisions. We both have the same rules today: that is obviously true in insurance, in banking, and in the funds sector. We all have the same rules and regulations today, so I have every confidence that we will meet the standards that the Treasury will ask us to meet in the next 12 months in each of those different areas, because we are at one already today.

[Alison Thewliss]

Q Do you think that the rules give adequate protection for UK as they are set out in the legislation?

Albert Isola: Yes, because we need to be aligned in terms of authorisations, supervision, capital finance and enforcement, so the whole array of measures that a UK consumer can expect to receive in the United Kingdom, they can fully expect to receive from us also.

[Alison Thewliss]

Q You do not foresee any diminution of that protection that UK consumers have?

Albert Isola: No, no, absolutely not. On the contrary, as the UK moves in whichever direction it moves post 1 January 2021, whether there is divergence or not, we will obviously, in respect of the areas that we seek market access, follow those through.

[Alison Thewliss]

Thank you very much.