Financial Services and Markets Bill

Baroness Bowles of Berkhamsted Excerpts

Committee stage
Monday 30th January 2023 Grand Committee

Moved by

[Baroness Bowles of Berkhamsted]

38: After Clause 23, insert the following new Clause—
“FCA powers beyond designated activities
(1) This section applies to any person (P) conducting or purporting to conduct any financial services and markets activity, including advisory services, whether or not that activity is designated or regulated, provided that P—(a) occupies a position in which they are expected to safeguard, or not to act against, the financial interests of another person (CP), or in which there is significant asymmetry of information,(b) dishonestly abuses that position, and (c) intends, by means of the abuse of that position—(i) to make a gain for P or another, or(ii) to cause loss to another or to expose another to a risk of loss.(2) A person may be regarded as having abused their position even though their conduct consisted of an omission rather than an act.(3) If the conditions set out in subsections (1) and (2) are met, the FCA has the following powers in relation to P—(a) a power to require the supply of information;(b) a power to make investigations (including the making of reports);(c) a power of entry into premises controlled by P;(d) powers of inspection, search and seizure with respect to premises controlled by P;(e) a power to make a private or public statement of censure;(f) a power to impose monetary penalties.(4) The Treasury may by regulations make provision about enforcement in connection with the powers included in subsection (3), and may make such modifications to the provision in subsection (3) as the Treasury considers appropriate.(5) If the conditions set out in subsections (1) and (2) are met, P is liable—(a) to account to CP for any gain P has made directly or indirectly by the transaction, and(b) to indemnify CP for any loss or damage resulting from the transaction.(6) If the FCA is satisfied that the conditions set out in subsections (1) and (2) are met, it may order P to pay to the appropriate person or distribute among the appropriate persons such amount as appears to the FCA to be just, having regard to the profits appearing to the FCA to have accrued to P.(7) The FCA has the power to institute criminal proceedings, including under section 4 of the Fraud Act 2006, provided that the conditions set out in subsections (1) and (2) are satisfied.”

[Baroness Bowles of Berkhamsted (LD)]

My Lords, the amendments in this group address matters of fraud or misrepresentation that occur around and because of the regulatory perimeter and have been factors in various recent scandals. Amendment 38 establishes a regulatory offence for fraud by abuse of power and reaffirms FCA power to undertake criminal prosecutions for fraud. I thank the noble Lord, Lord Naseby, for his support on that amendment. Amendments 39 and 198 deal with instances where there are forms of deception or inadequate or lack of information that can mislead about regulated status but which are not caught by existing offences.

A central feature in various scandals has been the abuse of a position of power and/or a belief that an entity was regulated and therefore all its activities had some seal of approval. It has later been discovered that there is no regulatory, supervisory or any other cover and no redress via regulators. The list of examples is extensive, and includes Lloyds Bank’s business support unit, HBOS Reading, Blackmore Bond, London Capital & Finance and RBS’s Global Restructuring Group, but there are many more.

Smaller but nevertheless still substantial businesses have been particular targets: bankers taking advantage of business lending being outside the regulatory perimeter, seemingly not covered by the integrity objective or anything else, which I and other noble Lords have laid out in detail and has been covered by the APPG on Fair Business Banking and others.

The FCA explained in excruciating detail how the asset stripping in the GRG case fell outside its objectives and its own created interpretations, and Andrew Bailey, then CEO of the FCA, said that even if the SMCR had been active at the time, it would not have been covered by it. Later, he hedged and said that maybe it would have applied, but it would all depend.

In its final report, the FCA concluded that there was no case to rule senior RBS managers not fit and proper, because the bar was too high. The fact is that the relationship that businesses and individuals have with their bank is a special one: finance, loans, mortgages, outgoings and income, available capital and other assets, trading accounts, major clients, cash flows—all such things are known by the bank, indeed required to be known, to access finance. But little is known about the bank’s assessment criteria. The relationship is inherently asymmetric in both power and information, and can and has been abused repeatedly.

The relationship with your bank is the lifeblood of businesses, especially small businesses, the homes of which are often subject to a charge. It is known what you are good for and can be taken for. Consumers have had additional protections that businesses do not.

Amendment 38 is specific to abuse of power within financial services and it uses the same wording that appears in Section 4 of the Fraud Act 2006 for fraud by abuse of power. The Fraud Act conditions are that if a person is in a position in which they are expected to safeguard, or at least not act against, the interests of another person, or where there is asymmetry of information, and there is dishonest abuse of that position to make a gain or cause loss to another, it is a criminal offence. My amendment replicates those Fraud Act provisions and introduces a corresponding regulatory offence.

Subsection (7) of my amendment reaffirms the power of the FCA to institute criminal proceedings under Section 4 of the Fraud Act. I say “reaffirm” because the FCA has power to prosecute beyond offences explicitly listed in FSMA, as confirmed in Regina v Rollins [2010] UK Supreme Court 39, in which the court found that the FSA’s powers to prosecute criminal offences were not limited to the offences referred to in Financial Services and Markets Act. The FSA always had been able to bring any prosecution, subject to statutory restrictions and conditions, provided that it was permitted to do so by its memorandum and articles of association, which were so permissive. The FCA, in essence, has the same articles and legal position as the FSA did then, but seems to need both more tools and more encouragement.

Various particularly relevant offences continue to be singled out and put into FSMA. Adding an offence of fraud by abuse of power is therefore long overdue, given the power and asymmetry of information that I have already explained. We know that the bar is high for criminal prosecution—to the extent that some rely on that, a chain of command and shared responsibility to eliminate mens rea and the ability to obtain a conviction, hence my suggestion that there is also a regulatory offence.

Turning to the other amendments in the group, Amendment 39 is also about when a regulated person carries out unregulated activity, the boundary is not clearly understood, and a customer may not know when they have strayed into riskier waters. A common thing may be to see headed paper or a website displaying, as required, that a person is regulated for a given activity, but the limiting language is not always going to be meaningful to the ordinary person. As we discovered in the Gloster report, even the FCA got it wrong.

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With that, I ask the noble Baroness, Lady Bowles, to withdraw Amendment 38 and not to move Amendments 39 and 198 when they are reached.

[Baroness Bowles of Berkhamsted (LD)]

I thank the Minister and other noble Lords who have spoken and intervened in this debate. We have strayed a little from my amendments into the general issues of fraud, which will come up in later groups because I think the body of opinion is that not enough is yet being done to prevent fraud.

The Minister suffers to some extent from exactly the same tunnel vision as the FCA, in that it wants to deal only with those things that are convenient, and it is not looking for the enemy and the evil within—and within regulated entities. One would have thought that those banks that defrauded business customers were reputable institutions, and that deception is not addressed at all by anything that the FCA is doing or that the Minister has said. It is doubtful whether it can be addressed even by the senior managers regime, because again, that has been diluted and spread around in such a way that you have the same problem as trying to find mens rea with a board.

The FCA may have done all the things that the Gloster report required but most of those were to do with things that were operationally bad within the FCA; they were not necessarily going to do anything to address the kind of “enemy within” fraud in banks, on their customers, that I outlined in my first amendment.

There is an urgent need to do something about this. It is ridiculous to say that there is a role or any integrity in our financial markets when this kind of thing can go on and be unpunished. The FCA may indeed be able to take a criminal offence if it ever finds the guts to do so, but I was giving it a regulatory offence here, which would be much easier for it to do, and at least there would be punishment and maybe more awareness through reputational damage within the banks so that that they would do something about it. I am not convinced that it cannot happen again. This is special—the inherent asymmetry of power and information—and this appears to be totally disregarded both by the FCA and by the Minister.

The other two amendments also plug important gaps that, no matter much you tweak Section 24, are not covered by it; therefore they can be used and abused. So I am far from satisfied that the Minister or the FCA is in any way serious about trying to tackle the type of fraud that I am discussing here. We will come on later to other kinds of things—there are other ways to do it. However, to say it is caveat emptor everywhere does not leave us in a good state when the next scandal comes along and everybody says, “There’s the rotten UK banking system again. Don’t do business in the UK—your own bank might fleece you.”

Due to lack of enthusiasm, obviously I will withdraw this amendment for now. However, I will not leave this issue alone, because it is quite clear that the Government have not understood the seriousness of this for businesses—small businesses and profitable businesses—which are being scammed by their own banks. However, with the leave of the Committee, I beg leave to withdraw the amendment.

Amendment 38 withdrawn.

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[Baroness Penn (Con)]

The noble Baroness touches on one possible difference in documentation needing to be provided where something is regulated versus where it is voluntary. That comes back to the question of SME lending having increased costs for banks and alternative finance providers. This can be passed on to businesses in the form of higher fees and interest rates, and it can affect the availability of credit for small businesses. The noble Baroness, Lady Kramer, mentioned start-up banks and challenger banks. When we have discussions elsewhere on other issues related to financial services regulation, we also discuss how we create a more competitive environment in the banking sector, as smaller banks can struggle to deal with regulations. This is a general point about balance.

[Baroness Bowles of Berkhamsted (LD)]

I am sorry to intervene again, but I am also intrigued about what the extra cost is of this coming into regulation. We are not suggesting that there should be great big oversight mechanisms which mean that the FCA would have to do a lot more—until problems occur, when there must be a route to justice. Is the Minister saying that banks will make less profit when they cannot cheat their customers, and that is where the cost comes from? I do not understand it. The suggestion was that it might be documentation, but the cost of that is the same wherever the documents go. What is this extra cost other than banks having to behave responsibly?

[Baroness Penn (Con)]

In relation to Amendment 40, there are benefits—which we have heard about—and costs to any activity being brought within the regulatory perimeter. I think that point is fairly well accepted. The noble Lord, Lord Tunnicliffe, asked me for further details on that, and I will write to the Committee.

On my noble friend’s Amendment 219, there are costs related to bringing disputes through the courts system as opposed to other dispute resolution mechanisms. There can also be benefits to that mechanism, but it is not enormously contentious to say that there are both costs and benefits to these solutions, which need to be weighed up when we consider them.

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[Baroness Penn (Con)]

I understand my noble friend’s point, and of course the Government also consider that when we look at what to bring into the regulatory perimeter or the right of redress, both as a route of redress and as a point of deterrence. The Government take all those factors into account when considering this question.

[Baroness Bowles of Berkhamsted (LD)]

If I may ask one more question, one area that might be interesting for comparison, especially if we are looking at the Consumer Credit Act, is what the difference is between the loans of £25,000 to small businesses and bounce-back loans, where the conditions of the Consumer Credit Act were dispensed with. Can we have a comparison to see whether they have fared better or worse? That will perhaps show us where the true costs of regulation and lack of regulation lie.

[Baroness Penn (Con)]

The noble Baroness makes an interesting point. However, bounce-back loans were designed for a specific set of circumstances, and the aim of disapplying the Consumer Credit Act provisions was to do with the speed of being able to get bounce-back loans out to customers. The noble Baroness has indicated that there can then be some regulatory cost to having those protections in place. That is an interesting point, which I am sure people will want to think about in the consultation that is under way on the Consumer Credit Act and the direction of travel there.

[Baroness Bowles of Berkhamsted (LD)]

I must point out that I was fearing that the true cost was with the small businesses.

[Baroness Penn (Con)]

The true cost of the protections afforded under the Consumer Credit Act—

[Baroness Bowles of Berkhamsted (LD)]

It is about the lack of protection.

[Baroness Penn (Con)]

To be honest, I am not sure that I totally follow the noble Baroness’s point.

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[Baroness Young of Old Scone (Lab)]

My Lords, I very much enjoyed what was just said by my fellow countryman. I will talk to Amendment 69 in the name of the noble Baroness, Lady Sheehan, which I have also put my name to. The amendment adds nature to the new regulatory principle on net-zero emissions. I also recognise everything that the noble Baroness, Lady Hayman, said about needing an objective rather than a regulatory principle. However, if we are to be stuck with a regulatory principle, it needs to address the twin existential crises we are facing globally and as a nation: climate and nature decline.

I must confess that I was kind of taken aback by the two previous speakers. The fact that climate and nature are such major things and go hand in hand, with one not being able to be resolved without the other, is now so commonly recognised globally by the business and financial communities and by Governments that I felt there was a whiff of quill pen coming from the other side, which is most distressing. The reality is that our financial institutions have a key role in enabling the financing of decarbonisation of the economy but also in promoting nature-based solutions. It is partly about making sure that the natural environment is lending its full hand to solving the climate change crisis, because we need every lever in the kit—every tool in the toolbox—to step up to that challenge. The financial institutions have a key role in that.

However, we also already have government commitments on the natural environment in this country: the Environment Act targets. That was the first time we have had statutory nature conservation targets in this country, which the Environment Act introduced and which become binding on government at midnight tomorrow night. We have to recognise that, if we have big bucks that are directed by the financial institutions and by investment, they absolutely have to tackle both climate change and nature conservation.

We should not look at this as a sort of dead-weight cost on the regulatory process or the financial markets because these investments in nature and climate are vital for our future economic growth. They are the heartland of our future economic growth; the jobs of the future are green jobs. We are behind the curve at the moment; the director-general of the CBI and others are all commenting that we are falling behind and losing our international competitiveness because we are not being vigorous enough in getting investment streams into climate change and nature. So we need the regulators to drive green growth and green investment really hard, for both net zero and nature recovery, to give businesses the confidence to invest.

These are very big bucks: the director-general of the CBI was absolutely clear that, in the past two years, the UK has lost its market share in green tech, which is equivalent to a potential value of £4.3 billion by 2030. Globally, an estimated $32 trillion of investment is needed by 2030 just to tackle climate change. So we are talking about big bucks, big investment, big jobs, big economy and big growth, and we were on it until a very small number of years ago. We have to get back on it to be able to hold our heads up in the international economic community.

So I hope that some of the things I have heard tonight are not government policy and that the Government are still absolutely clear about their commitment to action on the twin crises to turn them into opportunities. So, if the amendment moved by the noble Baroness, Lady Hayman, on regulatory objectives is not adopted, I ask the Minister at least to ensure that the regulatory principles reflect that commitment.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I had not intended to speak on this subject, but I very much agree with everything that has been said, especially by the noble Baroness, Lady Young, just now, about the lost opportunity if we do not take climate change and embedding it in financial services seriously. ESG investing is the big growth area at the moment, and what message are we giving if we say, “Well, we’re not really that interested in the ‘E’”? I am not sure about the “S” and the “G” either. We will potentially lose out.

It is not as if this will be an environmental tax on every business, or as if it has to be woven into every last little bit of financial services, like some chain round their neck. I spend some time looking at the general duties of the regulators, and, if I were to say anything about the positioning of this, I would say that it is not necessarily high enough up in the hierarchy because it is entirely forgettable within the layering that we have. I object to the notion that we are still in an era where we can do damage and compensate; you cannot compensate for a ruined planet. That is very much old thinking. It is almost centuries old in my book.

The FCA’s general duties state:

“In discharging its general functions, the FCA must, so far as is reasonably possible, act in a way which … is compatible with its strategic objective and … advances one or more of its operational objectives.”


What we are talking about here is a secondary operational objective, but the whole thing could be forgotten. If you ask me, it should be in the strategic objective, which is the only thing that cannot be rubbed out, because that is where we are at. We can go through this lovely list. Integrity gets rubbed out when it comes to SMEs—we have been through that debate—so climate things will be rubbed out if you want to be one of the rough-and-tumble financial firms that wants to deal with gas and oil exploration. Money is needed for that to work it all through and make sure that there are no stranded assets.

What is the big problem with what I would call a measly secondary objective? I understand the competitiveness and growth objective, which seems to be liberally sprinkled throughout to try to give it some kind of priority, but you have to balance that with sustainability in its broadest sense. All these things are about balance. We cannot have a Climate Change Act that says we will do things and then just ignore it in our biggest industry. It is the biggest case out there and we need something on it here. I will look at this again on Report and the Minister jolly well knows where I will put it.

[Baroness Kramer (LD)]

My Lords, this has been such an enjoyable debate, although I fear that the Government may not be listening as much as they should. When I first looked at this Bill, I was absolutely shocked that the word “sustainable” was not in front of “economic growth”. That seemed quite extraordinary in the era in which we live. It is a very old-fashioned, limited kind of approach that does not recognise the significant intertwining between finance, economic growth, the future of the planet and meeting our targets on climate change and protecting nature. It is extraordinary that it was removed.

I want to pick up the comments of the noble Baroness, Lady Lawlor, in particular. I disagree with her purpose but in one thing she is exactly right: as this Bill is currently written, that international competitiveness objective will largely drive us to try to compete with Asian financial centres that, frankly, could not give a single hoot about climate change and nature. That is why, frankly, the way in which the Bill is currently structured is so weak. As my noble friend Lady Bowles, who knows about this even more than I do, said, we have seen how the FCA deals with secondary operating objectives—I forget the exact phrase—in the past. Occasionally, it might pay attention to them if it suits it but they are certainly not embedded in its culture and do not light the core of its thinking or drive most of the decisions it makes.

I very much support the amendments led by the noble Baroness, Lady Hayman, and joined by others, as well as Amendment 69 in the name of my noble friend Lady Sheehan. However, I will talk in particular to two of the other amendments: first, that from the noble Lord, Lord Tunnicliffe, which asks, as the noble Lord, Lord Vaux, said, that we get this green taxonomy in our sustainable disclosure requirements fast because we desperately need that structure and strategic update.

This is in the context that the European Union already has its sustainable financial disclosure regulations; noble Lords may notice that the initials are exactly the same, bar one letter, which is part of my general concern in all this. Financial investors based in the UK are now using that as their template. As far as they are concerned, having to run one regime if they fall under EU regulations and a different one if they fall under UK regulations would be a nightmare. They are now wondering whether they are being pushed to choose between the two.

In its consultation on sustainable disclosure requirements, the FCA very helpfully provides a chart of how you can cope if you are trying to be under what is contemplated for the UK regime while also dealing with the EU regime. I honestly think that that is in there because the FCA thought that it would be helpful, but I recommend that somebody go and look at it, because it is a nightmare. You can see that it will be incredibly difficult and very costly for companies that work in both arenas to deal with these different alignments.