Financial Services Bill (Ninth sitting)

Angela Eagle Excerpts

Committee stage & Committee Debate: 9th sitting: House of Commons
Tuesday 1st December 2020 Public Bill Committees

[John Glen]

There is no intention to moderate or significantly alter the effect of the regulation. This is about doing what is necessary to ensure that we regulate the services and activities of overseas investment firms following an equivalence determination. The changes are designed to be consistent with the direction of travel that we have pursued within the EU, but making changes that are necessary for the different outcomes-based approach that we have always taken in the UK.

[Ms Angela Eagle (Wallasey) (Lab)]

Just briefly to add to the questions from my right hon. Friend, why on earth is there all this faffing about when we are having total equivalence and companies will want the rules to be the same? Is this just another obtuse obsession with sovereignty, which will cost a hell of a lot more money because we will have to have our own bespoke regime that is meant to do exactly the same thing?

[John Glen]

I think the hon. Lady’s point goes back to the decision made to leave the EU and the implications of that. I recognise that we had a conversation in the previous sitting about the nature of the regimes that have been mooted as a possible solution.

I did an extensive session with the Lords EU Services Sub-Committee yesterday morning dealing with the issue of equivalence. We see this as a technical process. We have filled in several thousand pages of forms across 17 questionnaires for the EU, and it has not made those determinations, so we moved forward and made our determinations of the EU and are seeking to bring as much clarity as possible. This is another example of our bringing clarity to industry in as straightforward a way as possible, and the changes reflect that.

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[Ms Eagle]

I praise the Minister for his diplomacy. Having been a Treasury Minister myself, I know that diplomacy is extremely important when he sits in his bivouac. Has he made any assessment of the extra red tape that he is putting on our own financial services sector by insisting, for reasons of sovereignty, on a different but hopefully equivalent route? He and I both know that the minor differences between what is allowed and what is not can turn into weaknesses and reasons for arbitrage and rule breaking if those who regulate are not extremely careful.

[John Glen]

I acknowledge the hon. Lady’s deep experience in this matter and I am grateful for her empathy with the need to be diplomatic as a Treasury Minister. The measure is about extending limited supervisory powers to replicate EU powers. Her general point about the additional costs that can accrue to industry is something that we are very concerned about. We have always had within the UK a different approach to onshoring regulations, and that will continue.

FSMA 2000 gives us that outcome-based approach. When we downloaded the directives that we participated in creating in the EU and the Commission process, we always did it in our own way as per those principles. The hon. Lady’s main point is a key concern for the Government. That is why we are anxious to give assurance of continuity where it is plainly necessary and illustrate how we can do things as smoothly as possible, to minimise disruption to industry in a time of prolonged uncertainty, which I hope will come to an end soon.

Question put and agreed to.

Clause 27 accordingly ordered to stand part of the Bill.

Schedule 10

Amendments of the Markets in Financial Instruments Regulation

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[Mr McFadden]

I asked some questions about this matter in relation to clause 27, so I do not intend to speak again.

[Ms Eagle]

The powers are necessary to prevent not only exploitation that might pose some systemic risks to the financial system, but catastrophic loss to UK investors due to rogue investors or investments. Regulators are reluctant to use the more draconian end of their powers, and there is little evidence that they actually go there.

Is the Minister satisfied that the practical effect of the changes will be that the FCA is determined to use those powers, if need be? It seems to be reluctant to go to the stage of closing firms down. That would be a huge decision that may involve considerable disruption. Is he convinced that the FCA has the resources, the aptitude and the determination to do that if necessary?

[John Glen]

The hon. Lady makes a good point. This goes to the heart of the evolution in the FCA’s responsibilities in an environment where it is being asked to do things differently and to account to Parliament for its actions. The future regulatory framework discussions through the next six months will allow us to solidify what those responsibilities will be.

The hon. Lady is right to say that the FCA will be required to make significant judgments on regulatory and supervisory developments, enforcement practices and other relevant market developments in third countries. The Treasury will request reports from the FCA with regards to overseas jurisdictions. We will consider those reports and other sources of information and take appropriate action, which would involve reviewing and equivalence determination or withdrawing equivalence.

Resourcing is a matter for the FCA itself, which it reflects on and establishes a levy for. I have conversations every six weeks with the FCA’s chief executive and chairman, and such matters are under ongoing review. Clearly, in the light of these changes, the FCA will need to update its provision. The FCA has a new chief executive officer who is undertaking a significant transformation project. I welcome his appointment and his plans, but reviews will be ongoing, and I am confident that he and his organisation will rise to the occasion.

[Ms Eagle]

I am sorry to press the Minister again, but this area is crucial to ensuring that our financial services industry is properly and appropriately regulated. We will be discussing crime, money laundering, and market abuse later today, I think, but the powers arranged against a regulator wanting to take drastic action, particularly in the form of disruption, trouble, lawyers, threats and all that, can mitigate decisive action. With Action Fraud and the failures in some of these areas, we have seen that even when criminal liability and offences are in the mix, rather than just regulatory offences, we do not seem to have developed a system that is as effective as it needs to be.

To what extent does the Economic Secretary think that the FCA’s use of levies to finance that activity is good enough given their volume and the drastic effects of some decisions, especially considering the funding of other regulators? Across the pond—we will increasingly have to look across the Atlantic—regulators are much better resourced than our own. Is he convinced that he has got the balance right for capacity and resources?

[John Glen]

The hon. Lady is taking me further and further away from the Bill. Her core point is about the suitability and sufficiency of the FCA’s capability. The FCA has provision to take account of consumer and market conditions and intervene, and I am clear that it has the capacity and the experience to do that work. The broader economic crime challenges that she mentions are why the March Budget contained an additional £100 million economic crime levy to support existing public investment and levies.

These are an ongoing, challenging, evolving and changing set of risks across that market, with the application of new technology—I have mentioned cryptocurrencies—and new ways of doing business that mean that the nature of crime is also evolving. I would never be complacent about the capacity of the FCA, and I recognise that it needs constant review and refresh to ensure that it is aligned with the other agencies involved in monitoring and dealing with threats to market integrity.

Question put and agreed to.

Schedule 10, as amended, accordingly agreed to.

Clause 28

Part 4A permissions: variation or cancellation on initiative of FCA

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[Alison Thewliss]

I want to come in briefly, on the back of what the right hon. Member for Wolverhampton South East has said. What analysis have the Government done on whether the increase will be any more of a deterrent than the current seven-year maximum? I note that that is a maximum, and relatively speaking not a huge amount of time, given the severity of some of the crimes that may have been committed. What is the average sentence handed out at the moment? Is it closer to seven years, or is it closer to a couple of years and just a slap on the wrists?

As the right hon. Gentleman mentioned, few cases get to that stage anyway. To help increase the number of people who are prosecuted, what additional resourcing will be put into the policing of financial crime? It is clearly an area that needs significant expertise. If we are going to catch people who are looking to circumvent the system, we need to have people at least as good on the other side of the balance sheet to make sure that they are catching up with them. What recruitment schemes are being put in place to attract the kind of people who will be able to investigate, prosecute and see processes through to the end, to make sure that there is a proper deterrent and people feel that they are going to get caught, fined and locked away? There needs to be sufficient expertise to make sure that that really does happen.

[Ms Eagle]

My concerns mirror the comments that were made by my right hon. Friend the Member for Wolverhampton South East and by the SNP spokesperson, the hon. Member for Glasgow Central. Financial crime and fraud are areas of crime that have been under-played and under-resourced for enforcement in recent years. We know about the effects of Action Fraud and its almost minuscule levels of successful prosecutions over the years. It is one of the areas that I feel most worried about as a constituency MP. When constituents come to me with issues of fraud, they have often been given the run-around for many years and I know that, realistically, justice for them is often very far away.

Financial crime is somehow regarded as less worrisome than other forms of crime. It seems always to be at the back of the queue in terms of enforcement resources. It is almost as if some people think, “If you can get away with it, more power to your elbow.” That introduces attitudes and approaches to the rules, regulations and law that are, at the very least, unfortunate and, probably more accurately, dangerous. It is particularly worrisome given the size of our financial services sector and the number of jobs associated with that sector, and the impact if it were to be destabilised by that kind of attitude getting a grip. It is extremely important that, as a jurisdiction, we clamp down on these crimes.

Is the Minister as worried as I am? Is he satisfied that this form of levy approach is the right one? It makes it look like the state does not worry so much about financial crime—that it does not worry enough to finance the prosecution and policing of it, and that the industry has to somehow pay for its own policing and prosecution. That is an issue.

We would all welcome the increase in sentencing from seven to 10 years that clause 30 contains, but is not the real deterrence to be found in much more rigorous enforcement and financing of enforcement, rather than simply increasing the likely sentences if someone is caught? If people feel that there is not much of a chance that they are going to be caught, an increase in sentencing from seven to 10 years is not really much of a deterrent to bad behaviour. The other thing that worries me is that the risks to those individuals who might be tempted are quite small, when we consider the number of prosecutions, but the rewards, should they get away with it, can be huge. Such a risk-reward assessment does not exactly imply the sort of the deterrence that we all want to protect the integrity of our markets.

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[John Glen]

I thank Opposition Members for the last three speeches. I think that they expressed a broad understanding of and agreement with the measure, but more general concern about the capacity for implementation and the need to ensure that the issue is addressed more broadly. I am happy to try to respond to those points.

The right hon. Member for Wolverhampton South East started the conversation about enforcement and prosecution. The terms of the clause will help to ensure that market abuse is recognised as serious misconduct in the same way as fraud is currently judged, and that will send a clear message to individuals who break the law: they will be held to account.

The hon. Member for Glasgow Central spoke about the length of sentencing. Since 2009, there have been 36 successful prosecutions for market abuse offences—the average sentence is 1.7 years, and the longest sentence was 4.5 years. To date, no criminal market abuse case has been tried that resulted in a seven-year sentence. That does not preclude the possibility of convictions in future cases that require a longer sentence as a result of aggravating factors, such as a significant breach of trust by senior individuals or sophisticated criminality by organised criminal groups.

In the light of the comments of the hon. Member for Wallasey about the challenges faced, I also want to add that in last week’s spending review an additional £63 million was allocated to the Home Office to boost Action Fraud. I also mentioned the economic crime levy in an earlier response, although that is anti-money laundering specific, and will not cover fraud. But a number of other activities are relevant to the points raised by Opposition colleagues.

A significant amount of work is going into the reform of suspicious activity reporting, where banks highlight transactions that give reasons for concern. That reform will be integral to our response to economic crime, and it is vital in uncovering and combating wider criminal activity. The Home Office is leading on that work.

The hon. Member for Wallasey made a point about the £100 million levy and the outsourcing, essentially, of capacity. It is important that we have joint working between the Home Office, the Treasury and the private sector on this matter. Just last week, I had a conversation with the payments regulator and UK Finance about push payment scams and the need to increase the confidence in the way those matters are treated. They are complex and involve sophisticated fraud against many of our constituents. I completely empathise with the hon. Lady’s frustration regarding the apparent lower prioritisation of this area. Across my 12 broad areas of responsibility, it is this that I find most challenging to move forward on definitively because the nature of the challenge is evolving. However, the work going on there and the payments regulator’s imperative to act, which it will do following the consultation, is significant.

However, with respect to the questions on this particular clause, I hope that the value of that enhanced sentence, which reflects the 2015 report, is understood. We will not bring the broader measures to a conclusion now, but I hope that I have signalled some of the ongoing efforts to try to deal with what is a particularly challenging area.

[Ms Eagle]

To some extent, this is illustrated by the fact that the enhanced sentence was in a 2015 report but we are only just legislating for it now. Five years later, we are still only talking about a sentence that is highly unlikely ever to be used, based on the past record—the Minister just quoted it himself. I wonder whether he might increase the confidence that some of us have that this is being tackled in a coherent way—we will get on to some of this later—by talking about the fragmented supervisory system and what he is doing to help bring that together so that the fragmented regulation of this whole area can actually be done more coherently, so that we can get enforcement on abuse. We all know that, prior to the big bang in the City, this was all done informally anyway, by gentleman in their clubs. It seems to me that we never really got a grip, after the big bang, in dealing with that informal networking that goes on, where a lot of the gaps and a lot of the potential insider dealing actually lurks. Perhaps he could give me a little bit more confidence about that.

[Mr McFadden]

rose—

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[The Chair]

A couple of boring things: first, I have been told that I am being too generous with interventions—I do not think there are any at the moment. Secondly, that last oration was good on the generalities of money laundering, but I think clause 31 focuses tightly on overseas investors, so if it happens too often, knuckles will be rapped. However, it was interesting and I learned a lot, so thank you, Pat McFadden.

[Ms Eagle]

I suspect you have just wiped out most of my speech, Dr Huq. We want to hear from the Minister about the adequacy of having just this clause, and not a lot else, to deal with the issue in this portmanteau Bill. In the debate on clause 30, we heard that it had taken the Treasury five years to increase from seven to 10 years the potential sentence for market abuse. The Treasury Committee’s 2019 report—I am now a member of that Committee—was excoriating about the scale of the problem, with between tens of billions and potentially £100 billion lost. As we have discussed in relation to other parts of the Bill, we know that small weaknesses in the defences can be ruthlessly targeted and become much bigger if they are not closed off.

We are reassured about the point that the Minister is trying to make with clause 31, but given that our country has been described as a laundromat for money laundering, perhaps the Government could have used this Bill as a suitable legislative opportunity to make other changes to the money laundering legislation that this clause amends. Perhaps the Minister could explain why that action has not been taken and give us an idea of what will follow. He has already referred to a reform of the suspicious activity reports regime. Why is that not included in this Bill, given that an analysis of it has found that over 80% of the reports are from banks, and very few from other places where there might be suspicious activity, such as property ownership in the UK? As we know, that is how money can be laundered.

We seem to have got ourselves into a situation where the banking structures just produce suspicious activity reports in massive numbers—three quarters of a million of them in a year, I think. Among those, the real ones are perhaps hidden, but the regulators are trying to get through them all and do very little. At the same time, we know that when the FinCEN papers were actually leaked, that involved, between 2000 and 2017, the transfer of close to $2 trillion of transactions, which were included in these suspicious activity reports.

Many transactions laundered money through our systems—many from overseas, in terms of what we are dealing with in clause 4. HSBC allowed fraudsters to move millions of dollars of stolen money around the world even though they knew it was a scam. J.P. Morgan allowed a company to move more than one billion through a London account without knowing who owned it. I could go on.

It seems that clause 31 is a tiny little attempt to stop an abuse, given that the abuse going on is of that scale. There is also the husband of a woman who donated £1.7 million to the UK’s Conservative party, secretly funded by a Russian oligarch with close ties to President Putin. Again, I could go on. I hope that the Minister is going to at least give us some view about what is going on here and whether clause 31 is the be-all and end-all of what the Government intend to put in place to deal with this issue.

On victims of fraud, criminals have successfully stolen £1.2 billion from individuals through banking fraud; in an earlier debate, the Minister was talking about his own frustrations with trying to get a grip of that issue. That figure on scams comes from 2018. It is also estimated that £5.9 billion a year is defrauded from businesses in the public sector.

The issue is not just about oligarchs running their money around the world and laundering it into property and other things. It is not just about mafiosi or corrupt political leaders doing the same, although all that is happening. This involves your constituents, Dr Huq, and my constituents, who are losing money through banking scams. Our public sector is losing money through other scams, which bleeds away the resources available to us to do the other things we need to, especially when these resources are scarce.

This issue can sometimes look very technical—it is about overseas investors and is only little clause 31. But it is not only about corrupt laundromats, Russian reports and corruption on a scale we can only think about. It is also about some of our well-known high street banks indulging in such activity and covering it up somehow, because having the business is so profitable for them—and, again, the risks of being caught and fined are outweighed by the profits that can be made by turning a blind eye. It involves all of the major banking and investment institutions. It involves estate agents, lawyers and accountants who are facilitators—wittingly or unwittingly—to all these activities.

We had better get a grip: the more this kind of money is present, the worse and dirtier it makes our structures and systems and the more cynical it makes our constituents. It makes all of us less likely to follow the rule of law and agree that the right thing should be done. It changes the balance that people calculate between the risks of doing something wrong and the rewards of not being caught. None of that helps the rule of law; none of it helps honesty; and none of it helps those of our constituents who strive their whole lives to do the right thing and yet see others profit massively from scams and reprehensible behaviour—criminal behaviour, in a lot of cases.

Dr Huq, I have ranged a bit wider than the terms of clause 31, but I think that it is the start of a fightback on money laundering regulations. Even though it represents a tiny, tiny little step, the Government have yet to persuade me that they want to get a grip of the situation and intend to do so through the Bill.

[John Glen]

I thank Members for their contributions, although at times as I listened I thought that I was in the wrong place, given the wider conversation about economic crime. However, I greatly respect the sentiments and points expressed and I will try to address the questions put.

The right hon. Member for Wolverhampton South East spoke of a mental image of a cupboard being cleared out. I will not deny that in my three years as Economic Secretary I needed to legislate on a number of matters, and the Bill necessarily brings together a number of them. However, there will be more legislation if I can persuade the authorities in this place to grant me that opportunity. I assure him that the Bill does not represent the end point on a number of matters. The clause, however, merely ensures the continuation of, and ability to vary in future, existing powers and requirements with respect to overseas trusts.

New clause 30, proposed by the hon. Member for Glasgow Central, would impose a requirement on the Treasury to report on the impact of the provisions of clause 31 on the expected change in corporation tax and income tax paid, and the expected change in the difference between the amount of tax required and the amount tax paid in relation to overseas trusts and Scottish limited partnerships. I reiterate that the Government are committed to ensuring that the UK’s corporate structures are not exploited by those seeking to avoid or evade tax. For reasons that I will outline, however, the Government cannot support the proposed new clause.

As I have said, the Government have introduced changes through amendments to the money laundering regulations that directly aim to improve the transparency of the ownership of trusts. In particular, those changes significantly expand the requirement for non-UK trusts to register with the HMRC trust registration service. Trusts will have to provide evidence that they are registered before entering into business arrangements with regulated firms under the money laundering regulations. HMRC needs clear powers to take enforcement action against those who do not comply with registration requirements, and the Government need to maintain the ability to amend those requirements in future.

The powers in the Sanctions and Anti-money Laundering Act 2018 will ensure that the UK Government can continue to make and amend their regulations. The proposed new clause would require the Treasury to publish a report on the effects of clause 31 on the amount of taxes paid, but it is not in line with effects of that clause, which does not make changes to taxes. The provision is not expected to bring about any changes in the amount of corporation tax and income tax paid nor any change to the tax gap in relation to Scottish limited partnerships or otherwise. Neither is it envisioned that it would be possible to attribute any variation in taxes paid, nor the tax gap, to clause 31.

New clause 35 imposes a requirement on the Treasury to report on the impact of the provisions in clause 31 on money laundering volumes involving overseas trusts and Scottish limited partnerships. I understand that it seeks to measure the impact of our efforts to prevent money laundering through trusts, but may I remind hon. Members that the current Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020 and the 2017 regulations that they amended, namely, the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, already require the Treasury to carry out a review of its regulatory provisions and publish a report setting out the conclusions of its review by June 2022? That wider review will provide a more meaningful evaluation than simply reporting on the narrow provision of the clause, and provide continuity in the Government’s powers to make changes in the UK’s anti-money laundering regime.

I also remind colleagues that Scottish limited partnerships are not specifically within the scope of the trust register, and point them towards separate legislation that deals with transparency for those vehicles. In June 2017, Scottish limited partnerships were brought into scope with the public register of beneficial ownership maintained by Companies House. Since the Government introduced new reporting requirements for Scottish limited partnerships in 2017, new registrations of Scottish limited partnerships have greatly reduced, with registrations falling from 4,932 in 2016-17 to 2,689 in 2017-18, and falling further to 657 in 2019-20.

I want to take this opportunity to address some of the broader points on the alleged failures, and the work in progress, with respect to anti-money laundering and trusts. I think it reasonable to say that the UK is recognised as having some of the strongest controls internationally for tackling money laundering and terrorist financing. In recent years, we have taken a number of steps, including creating a new National Economic Crime Centre, passing the Criminal Finances Act 2017, and establishing the Office for Professional Body Anti-Money Laundering Supervision.

The hon. Member for Wallasey referred to the challenge of suspicious activity reports processing. The economic crime levy, in working with industry, is a direct attempt to invest in that reform. She asked specifically why legislation on that is not included in the Bill. That is continuing work that urgently needs to move forward, but provision for extra investment to process SARs more efficiently is being conducted at pace.

Last year, the Government published the landmark economic crime plan, which brought law enforcement and the private sector together in closer co-operation than ever before to deliver a whole-system response to economic crime. This year, we completed the transposition of the fifth anti-money laundering directive into domestic law. That remains comprehensive and responsive to emerging threats, in line with the evolving standards set out by the Financial Action Task Force—the international body that monitors such matters.

The expansion of the trusts registration service referenced today will bring millions more trusts in scope, including overseas trusts that purchase land or property in the UK. We will ensure that information on the register is made available in certain circumstances to those with a legitimate interest. We do recognise—I acknowledge the sentiments that have been expressed—that more needs to be done, and we are committed to making further progress, building on that made so far, to lead the global fight against illicit financial flows.

New clauses 30 and 35 make small amendments to clarify that the Government can enforce extraterritorial trust registration in relation to non-UK resident trustees and update those requirements in future. On why we are not doing more in the Bill, I have mentioned a number of the activities that the Government are undertaking, but I recognise that more needs to be done.

I should also mention the overseas entities Bill. In line with the ongoing commitment to combatting illicit finance, we intend to implement a register of beneficial owners of overseas entities that buy or own land in the UK as a measure of the economic crime plan 2019 to 2022. The register will be the first of its type in the world. The Government published a draft of that legislation, which accepted many of the subsequent recommendations by the Joint Committee that carried out that pre-legislative scrutiny. As the hon. Member for Glasgow Central knows, the Queen’s Speech last year committed to this Bill and to the continuing progress of that draft legislation. Lord Callanan’s written ministerial statement in July outlined the progress to date of that draft Bill.

On Companies House register reform—another matter mentioned by several colleagues—the Government are currently considering a broad package of reforms to Companies House to boost its potential as an enabler of business transactions and economic growth, but also giving it a bigger role in combatting economic crime. Following last year’s consultation, the Government issued our response to the corporate transparency and register reform on 18 September. The response summarises the views received and sets out how the Government will take forward those plans.

The Government will legislate when the parliamentary calendar allows and intend to deliver more reliable information on the companies register—reinforced by the verification of the identity of people who manage, control or set up companies, as has been referenced—and greater powers for those at Companies House to query and challenge information, so they are not just librarians, as I think they were described.

We will bring effective protection of personal information provided to Companies House and a more effective investigation and enforcement regime for non-disclosure and false-filing; the removal of technological and legal barriers to allow enhanced cross-checks on corporate data with other public and private sector bodies; continued investment in technology and in the skills of Companies House staff to make that register more efficient, effective and resilient; and broader reforms to clamp down on the misuse of entities I hope that my answers have done some justice to the questions asked, and I ask the hon. Member for Glasgow Central to withdraw the new clauses.