Financial Services Bill

Alun Cairns Excerpts

Monday 6th February 2012 Commons Chamber

[Alun Cairns (Vale of Glamorgan) (Con)]

Is the shadow Chancellor telling us that he accepts absolutely no part, bearing in mind his key role in the Treasury at the time, in the failure of the financial structures in the banking sector in recent years?

[Ed Balls]

I have apologised to the country and have asked the Chancellor of the Exchequer to do the same. Did this Chancellor ring the alarm bell in the crisis? No, he did not. Did he worry that regulation was insufficiently tough? No; he said in 2006 that financial regulation was

“burdensome, complex and makes cross-border market penetration more difficult”

and that it

“threatens the global competitiveness of the City of London.”

If the hon. Gentleman wants to have a debate about who should apologise and who should accept responsibility, he should look at the evidence and the judgments of the past 10 years. Let us not forget that it was the Conservative party that voted against Bank of England independence and the move from self-regulation of the City by the City to statutory regulation for the first time in this country. It was this Chancellor who personally opposed the rescue of Northern Rock, saying:

“I am not in favour of nationalisation, full stop.”—[Official Report, 19 February 2008; Vol. 472, c. 186.]

It was this Chancellor who opposed the rescue of RBS; who negotiated the flawed and foolish Merlin deal; who refuses to enact proposals on transparency for bonuses of more than £1 million; who resists the reform of remuneration committees; who is selling off Northern Rock at a loss, prompting a National Audit Office investigation; and whose decision to cut the deficit too far and too fast has choked off the recovery and led to us borrowing £158 billion more. We will take no lectures on judgment from this Chancellor of the Exchequer.

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[Stella Creasy]

I have answered this question in previous debates. I do not think that we should set a single rate of APR and I do not think we should have an interest rate cap: I believe we should have a total cost cap. In the absence of the Government making progress on such a cap, however, I view the FCA as offering an opportunity to start the more effective regulation of this industry. I hope that the hon. Gentleman would agree that the opportunity to have the industry and consumers setting rates and clarifying what is excessive and what counts as consumer detriment in the listing of these products represents a way forward. That is the argument of Labour Members, and we shall seek to table amendments on that basis. It is no wonder that the number of complaints about these companies and these loans is sky-rocketing in the UK.

[Alun Cairns]

Will the hon. Lady give way?

[Stella Creasy]

I am sorry, but I will not, as I do not have much time left and I have already taken some interventions.

Between October and December last year, there was a 25% increase in the number of people complaining about these companies, and three quarters of those complaints were upheld by the financial services ombudsman. Demand for these products will only get stronger. Two in five people are expecting a pay freeze this year, and one in five expect to lose their job. Inflation rates might slow, but that will only slow the pace of the cost of living, especially in the capital city. Six million people are already considered financially fragile; if one more bill goes up—their mortgage, transport costs or even their food bills—they will be pushed further and further into debt. With banks not lending to these people, it is these legal loan sharks who will pick up the pieces.

We should reflect on the fact that the one industry growing in this country is these legal loan sharks. Cash Converters proudly says it is going to open another 40 new shops—at 1,413% APR; while Albemarle is opening 300 new shops, charging 853% APR. This is also a serious issue for our economy. If millions of families have thousands of pounds worth of debt that they cannot escape, it is clearly going to impact on consumer confidence. This will be the new economic crisis that will come to Britain in the years to come if we do not deal with this problem, as we have concentrations of communities with thousands of pounds of debt hanging around their necks, limiting the choices they can make for their futures and limiting the kind of lives they can lead. The failure to tackle these issues will leave millions of people with unmanageable debt, yet we have an opportunity to make progress through this Bill.

This problem is not going to go away. It is right to look at the industry and for consumers to be involved in setting the rates and determining what is consumer detriment. Let me tell the Minister that the public clearly want action on legal loan sharks. His own Back Benchers want action on them. I welcome the conversion of Government Members to this cause. I just hope that it is a conversion that will continue all the way through to voting in favour of our amendments. Even the industry wants action. It does not want the current uncertainty.

My simple question to Ministers, if they will not accept our amendments, will not send out the message and will not finally tackle legal loan sharking is this: how much worse does it have to get for the people affected in our communities? We know that 4 million people in Britain are already borrowing from these companies, and there could be as many as 10 million if we do not deal with these problems within the next year. That will be 10 million people stuck in a cycle of toxic debt that will damage them and their families for years to come.

I therefore ask the Minister to take on board the suggested amendments and to take account of the desire of Members on both sides of the House for action on legal loan sharking. Let us finally make the third time a charm.

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[Tom Greatrex (Rutherglen and Hamilton West) (Lab/Co-op)]

I wish to make a relatively brief contribution. I do so without the degree of expertise that has been exhibited by a number of right hon. and hon. Members who have spoken, particularly those who have served on the Joint Committee and on the Treasury Committee. I know that they have examined the detail of this Bill and have taken evidence on it over a period of time. My expertise on and knowledge of financial services has largely come about as a result of issues raised by constituents since my election to this House. That is why I wish to spend a little time discussing part 2 of the Bill, which creates the Financial Conduct Authority, which we have heard referred to as one of the successor bodies to the Financial Services Authority, and part 5, which deals with independent inquiries into investment schemes, among other things.

I come to those parts of the Bill as a result of what I suspect will become known soon enough as the latest in a long line of mis-selling episodes, to which the Chancellor and shadow Chancellor referred. My right hon. Friend reminded the House that there have been a number of these episodes over the course of 30 years and under various different regulatory regimes and set-ups. The issue that I refer to is the collapse of the Arch Cru investment vehicle in 2009 and the interests of the 20,000 individuals who have, almost certainly, been adversely affected by it. As many hon. Members will be aware, Arch Cru was established in 2006 and was sold as a vehicle to provide low-risk, cautiously managed funds that were sold through independent financial advisers and, like all investment funds in the UK, were regulated by the FSA. The authorised corporate director was Capita Financial Managers, part of the Capita group, and the two depositories of the fund were the Bank of New York Mellon and HSBC, whose activities were, again, regulated by the FSA. Many of those who invested in Arch Cru did so on the basis that it was managed cautiously, and the use of those household names gave people comfort that the regulator was overseeing those bodies and that people’s money was indeed being invested cautiously and wisely.

As many hon. Members will know, the fund was suspended in March 2009. At the time, it was worth £363 million but by March 2011 its value was estimated at £148.8 million, which means that many people have suffered losses as a result. Far from being cautiously managed, funds were invested in cells registered in Guernsey in a cavalier manner. Investments were made in off-plan property, in real estate in Dubai, and in Greek shipping and ferries. It remains highly dubious as to what level of recompense investors are likely to receive.

The collapse of a supposedly low-risk collective investment scheme such as Arch Cru has caused a high degree of anxiety. Although we accept that no regulatory system can provide absolute protection, the failures of the FSA, in many respects, in this case mean that it is important that the measures being put in place give consumers the right amount of protection. That is why I particularly welcome clauses 64 to 68, which deal with independent inquiries into regulatory failures in respect of collective investment schemes. However, clause 64(5) has the effect of meaning that events occurring before 1 December 2011 will not be subject to the power of inquiry, and Arch Cru’s collapse occurred well before that cut-off date. The Government have the power under section 14 of the Financial Services and Markets Act 2000 to institute an inquiry, and I hope that they will still make use of that power.

Clause 67 deals with the conclusion of an inquiry, noting that the person holding that inquiry must

“make a written report to the Treasury”.

The existing legislation contains a provision stating that the Treasury may publish the whole or any part of a report and, should it decide to do so, the report should be laid before Parliament. However, a similar provision appears to be missing from the Bill, so perhaps the Financial Secretary will enlighten the House on whether I have missed it or whether we will need to make an amendment in Committee to ensure that that degree of transparency is in place for such inquiries.

If we are to minimise the chances of another episode such as the Arch Cru collapse happening again, the people who invest their retirement nest eggs on the basis of being told that a fund is cautiously invested need to be adequately protected by the regulatory regime. There should be some governance over the terms used to describe investment vehicles, especially where, as in this case, the reality turns out to be very different from the description.

[Alun Cairns]

I pay tribute to the work that the hon. Gentleman has done on Arch Cru. Does he share my concern that the risk category of any financial product is assessed by the Investment Managers Association and that there is no regulatory framework or matrix by which such an organisation conducts its work on assessing the risk of a product?

[Tom Greatrex]

I thank the hon. Gentleman for his intervention. I do not wish it to appear as if we are just congratulating each other, but I want to place on the record my appreciation of all the work that he has done on Arch Cru as co-chair of the all-party group on Arch Cru. It is my pleasure to co-chair that group with him and he makes an important and significant point.

As the Bill goes through Committee, we need to consider that issue in detail as it relates to the set-up of the FCA, to ensure that we are never again in a position in which descriptors with no value are attached to investment opportunities, almost as a marketing exercise, with nothing behind them. I hope that the Financial Secretary hears the hon. Gentleman’s important point, and that we can return to it in more detail.

One way in which to prevent a repeat of the experience is fully to learn the lessons of the Arch Cru collapse, and to ensure that, as a result, the consumer is protected by a more robust regime. The Financial Secretary will no doubt recall that in a Westminster Hall debate on Arch Cru last October, many Members on both sides of the House asked the Government to instigate a section 14 inquiry. The Financial Secretary replied that he did not think such an inquiry appropriate at that point and he continued:

“The powers are available where it appears that significant damage has been done to the interests of consumers that might not have occurred but for a serious failure of regulation. It is worth pointing out that the power has never been used.”—[Official Report, 19 October 2011; Vol. 533, c. 285WH.]

First, I am not quite as convinced as the Financial Secretary is that the fact that the power has never been used means that it should not be used. Secondly, to my mind, Arch Cru is an example of regulatory failure. The FSA failed properly to regulate the fund, and let down my constituents and thousands of others across the country by not stepping in earlier. The FSA was statutorily responsible for regulating Capita Financial Managers, which was the authorised corporate director for Arch Cru, yet Capita failed to see what was going on until it was far too late.

As the intervention by the hon. Member for Vale of Glamorgan (Alun Cairns) illustrated, there is cross-party consensus on the issue, and the all-party group extends across the whole House, with members from every party other than the Scottish National party—that might be pertinent. When answering questions in December, the Prime Minister was receptive to the idea of considering what more the Government could do to address this important issue. One course of action could, and I would argue should, be to establish a section 14 inquiry, the findings of which could be used to inform a detailed discussion of the proposed FCA, and to ensure that the body is established with the resources, expertise and powers necessary to minimise the opportunity of anything like the Arch Cru failure happening again.

Even at this late stage, I ask Ministers—the Economic Secretary is now on the Front Bench and might be less familiar with the issue than the Financial Secretary, who was there when I started speaking—to reconsider the position on a section 14 inquiry, so that this part of the Bill can be as robust as possible. When the current regulator admits that it did not know what was happening, because of the structure of an investment vehicle and the nature of some of the investments in Guernsey and elsewhere, in my mind it becomes the responsibility of the Government to minimise the risks of the same thing happening again. The Government have an opportunity, as do we, through the Bill, to ensure that the successor body is better placed to ensure such a result.

It is sometimes easy, when getting into the weeds of an issue such as Arch Cru—as I and others have done over recent months—to forget that ultimately this is about people. It is about my constituents and others who deserve the right consumer protection, and we must be confident that in dealing with the consumer aspects of regulation, the successor body does not fail in the way its predecessor did. To ensure that, we need to know what did not work under that predecessor regime, so that there is confidence in the successor body and people are protected in the right way. That is why it is still relevant and important that the Government consider a section 14 inquiry into Arch Cru under the current legislation, and I hope that Treasury Ministers understand that this point is being made in the best interests of scrutiny, of effective regulation and of the consumers who expect, and deserve, to be protected when purchasing financial services products.

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[Alun Cairns (Vale of Glamorgan) (Con)]

I will endeavour to say as much of what I planned to say as I can in the existing time frame.

There is no doubt that the Bill should be welcomed and that it will help right the wrongs of the former tripartite structure that contributed to the banking collapse. The tone of this debate is important. It would be easy to labour the failures of the previous Administration and highlight why Opposition Members, particularly those on the Front Bench, must accept their part in the financial crisis of 2007 onwards and the subsequent fallout. It is all too easy to use the banks as whipping boys, but in reality it was politicians and Governments who allowed many questionable practices to go on.

I regret the tone of some recent news stories about bankers, whether they relate to bonuses or to other controversial issues. We must consider how such matters destabilise an extremely valuable sector that employs more than 1 million people across the United Kingdom, amounts to 10% of our GDP and contributes between £35 billion and £63 billion to the Treasury every year.

I do not seek to defend the indefensible, but let us at least consider the longer-term consequences of what is said and done, and the tone in which it is said. In considering last week’s debate on bonuses, for example, I hope that Stephen Hester does not choose to leave RBS any time soon, as it could cost a significantly greater sum to attract someone to fill the post, particularly in this difficult public climate. A mature debate is needed on remuneration, which many in this debate have mentioned, but we should be level-headed and remember that how we conduct the debate, as well as its outcome, will affect our economy and growth prospects.

To the Minister’s credit, a huge amount of work has been done on the Bill. Not only have there been several opportunities to pursue the matter here in the Chamber, but the pre-legislative scrutiny Committee chaired by my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley) developed the Bill further, as did the Vickers report and the scrutiny of the Treasury Committee.

My first substantive point relates to structure and culture. The tripartite structure had to end; we are all aware of its deficiencies. The twin-peaks approach and the establishment of the FPC, the PRA and the FCA also make sense, but it is important to recognise the need for the legislation to be forward-looking rather than focused on the mistakes of the past.

It was interesting to read evidence from a number of witnesses who supported the proposals but still refused to commit to saying that if the new structure had been in place in 2007-08 or before, the banking collapse would not have happened. It is important that we seek to develop a regulatory framework that can adapt. A simple tick-box approach—we have heard much about that—or an isolated approach set up to prevent the recurrence of the last crisis will do nothing for a dynamic industry always seeking to evolve, to be innovative and to generate income for the country and its shareholders.

The Minister is taking the right decision to set up those bodies, but much will depend on the leadership that their members will offer. Several times in the past the House has been involved in the establishment of new agencies only to have to return to their shortcomings within a year or two.

The culture that each chairman or chief executive develops with the Governor will be crucial to the success of this legislation. The relationship between each organisation is also important and, as ever, will inevitably depend on the Governor, chairmen and chief executives. Such relationships need to be open, and there needs to be a clear understanding of the part that each person plays. They should not operate in isolation, and there needs to be clear accountability, with the ultimate test of knowing who should get fired.

I want to highlight the issue of concentration risk or groupthink, given the huge emphasis that is placed on the Governor. In that respect, amendments suggested by the Joint Committee to strengthen ties with the Treasury and Parliament are welcome. I am grateful that the Minister has accepted some of them.

It is clear that, within the proposed structures, the judgments of individuals will ultimately make the difference. The Bill provides the FPC with considerable powers of direction, but the levers generally used by the PRA or FCA will also determine the fate and future of the industry. That is the area of greatest concern across all three bodies, yet there is no alternative if we are opposed to the inflexible tick-box approach criticised tonight. Regular parliamentary scrutiny will be essential, and the role of Treasury officials on many of these bodies will be crucial for feedback to the Treasury and parliamentary scrutiny.

In making their judgments, the PRA and the FPC will need to respond to the evidence. A one-size-fits-all approach will not serve the economy or the financial services sector well. Their engagement with the organisations that they regulate will need to be risk-based, but that flexibility, which is needed, must not lead to inconsistent actions. Sir Mervyn King stated that judgments are undermined when we end up with a game in which regulators are continuously rewriting the rules as firms devise new products to get around the detailed legal rules in place before. A tiered approach is needed, therefore, to allow certainty and due process that also reflects the risk and culture of the organisation.

The FPC and regulators do not operate in isolation, and international factors need to be considered. It is fair to be concerned, therefore, that UK authorities could seek to raise the bar, and the risk of super-equivalence is real and always worries the leaders of many of these organisation.

Mr Deputy Speaker, I am sorry that time does not allow me to complete my remarks about the FPC.