Financial Services Bill

Baroness Kramer Excerpts

Committee stage & Lords Hansard
Wednesday 3rd March 2021 Grand Committee

Finally, I have listened carefully to the rationale for Amendments 81 and 82. I am doubtful about adding a new corporate offence of a failure to prevent an economic criminal offence. As a serial non-executive director of small and larger companies, I cannot see how I would guarantee compliance with what is proposed—in the UK or overseas. Many more cautious folk will feel the same, so corporate Britain would find it harder to find challenging and careful directors for its companies. That is the opposite of what I thought we wanted and is likely to lead to yet further loss of financial services firms to overseas. I hope the Law Commission will address this angle, and I would be happy to talk to it if that is appropriate. I also hope that it will talk to my noble friend Lord Hodgson, who has taken a different view today. Preventing economic crime is the job of the regulators and their enforcement and prosecuting arms backed by suitable public and moral support. That will improve the confidence that my noble friend Lady Altmann rightly seeks.

[Baroness Kramer (LD)]

My Lords, this is such a fascinating group of amendments. I think I have rarely seen a group that includes such powerful and important amendments one after the other ranging from the relatively narrow, such as Amendment 136, tabled by the right reverend Prelate the Bishop of St Albans, which would be a valuable extension of the senior managers certification regime, to the fundamental, in the form of the “failure to prevent” amendments in the names of the noble and learned Lord, Lord Garnier, and my noble friend Lady Bowles. Those amendments cover similar territory, and I notice that by splitting the amendments they have succeeded in garnering a wide range of signatures, thereby demonstrating that this is not a party-political issue but has extraordinary breadth across many political views in this House, so they have done that rather well.

I find these changes absolutely fundamental and, frankly, fail to understand why the Government resist them. I would argue that they are particularly important in the absence of a duty of care because of the way in which they change the locus of responsibility, if you like, or enhance it as it falls on a company in dealing with its customers and its products. I am cautious when an issue is sent to the Law Commission. I hold it in very high regard, but I notice that it is at its best when an issue is considered very narrow and limited. I am afraid that the Government may view “failure to prevent” as a narrow and limited concerned, whereas in fact it deals with the fundamental culture and sense of responsibility of major financial institutions for the behaviour of their staff and their various departments, and for the outcome for or impact on their customers.

I also support the various reviews sought by the noble Lords, Lord Tunnicliffe and Lord Eatwell. I smile at Amendment 50 in the name of the noble Lord, Lord Eatwell; he has had to craft it very carefully to make it fit into this Bill. Of course, he is absolutely right: we have a public register of beneficial ownership of companies in the UK, but it is not verified. I know how that rankles with the noble Lord, as we have discussed it in the past and I have a great deal of sympathy for his position. We rely on transparency to keep the register clean, but it is an imperfect system. Frankly, I would say to anybody that no one should rely fully on the information in the register; it is only a starting point. Making it verifiable would be a huge improvement. One of the things that bothers me the most is that many people who look at the register do not understand that it is unverified. That creates false impressions and leads people, particularly those who are less sophisticated, into making decisions that put them in financial danger.

I can see where the noble Lord, Lord Sikka, is going with Amendment 51A, but I am in the same camp as other noble Lords; I pick up the comments made by the noble Baroness, Lady Neville-Rolfe, which were also made by the noble Lord, Lord Eatwell, and others. We have absolutely inadequate resources for enforcement in the whole area of financial crime; that applies to the regulators and the Serious Fraud Office. Just a couple of weeks ago, I spoke to a former police commissioner and asked why, in a particular instance, he had not turned to the National Crime Agency’s Financial Intelligence Unit. The reply was, “It’s one man and a dog.” It is hideously underresourced. Also, our local police forces, which so often end up bearing the brunt of enforcement, are not resourced to deal with crime of this specialist nature and reach; neither are they sufficiently resourced when they come across companies with vast resources. The inequality of arms is exceedingly questionable.

On other days, we have spoken extensively of the HBOS Reading fraud—to the point where I think everyone is now familiar with it—but I wonder whether people realise that the case was pursued by Thames Valley Police only after the regulators, the Serious Fraud Office and two other police forces refused to pursue it. They did so not because they thought that there was insufficient evidence but because they did not have the resources to do it: it cost Thames Valley Police £7 million to prosecute. The fraud itself amounted to some £800 million, of which only £250 million was placed in evidence in court because that was sufficient to get the necessary convictions. It quickly became evident that this was a very serious fraud case. Many of us are concerned that similar fraud cases are simply ignored by police forces that cannot step up to the plate. I note that the entire financial penalty paid by HBOS was commuted for good behaviour so it was only £45 million, but every penny went to the Treasury and nothing went back into enforcement. We must tackle this issue, which will only get worse as we move into the era of cryptocurrencies and more digital financial transactions; for example, FATF identified crypto-thefts, hacks and frauds totalling $1.3 billion in the first five months of 2020.

I will focus most of my remarks on my amendment, which proposes to create an office of the financial services whistleblower. It is a probing amendment; noble Lords will understand why in a moment. Very many of the people who speak out to expose wrongdoing find that they become the target of retaliation and lose their livelihoods and careers. They are most often employees—that is not always true; they can be clients as well—and this is very much true in financial services.

When I was an MP and therefore a prescribed person, I assisted colleagues with two whistleblower cases. Both individuals had their lives shattered by retaliation from the financial institution that had misbehaved, despite their passing absolutely critical information to the financial regulators. Confidentiality was on paper only because, being good employees in one case and a good client in the other, they had raised the issues inside the organisation first. Their information also made it pretty obvious who had spoken out. I am no longer a prescribed person, but I work with the APPG for Whistleblowing and I have heard from numerous MPs about today’s cases, not cases that predate changes in rules, legislation and regulation. I have talked to regulators and civil society groups and they have all confirmed that there has been relatively little effective, real-world change.

If whistleblowers are employees they are typically fired—not for whistleblowing of course; there is always another coincidental reason—so they spend their savings in the long process of going to an employment tribunal, which can take years. Three years is nothing to go through an employment tribunal, given appeal processes. In the employment tribunal, the regulators to which they provided information refuse to give evidence in their support. My noble friend Lady Bowles raised this issue; it is a shocker and most people do not realise it. The regulator says that the tribunal is not about whistleblowing, so there is no reason for them to give evidence that the person happened coincidentally to be involved in these various cases. Frankly, I find it shocking that they do not believe that their responsibility to a whistleblower extends to that role.

Whistleblowers often face expert counsel paid by the employer. They know that if they lose the case they will have to pick up that legal counsel’s fees. That is a huge inequality of arms. In the end, most accept a modest settlement out of sheer fear and exhaustion. Whistleblowers desperately want wrongdoing stopped and put right. Where neither the regulator nor the law enforcement agency decides to act on their evidence they cannot turn to the public or the press because the settlement agreements invariably include draconian non-disclosure clauses.

The existing legislation, the Public Interest Disclosure Act 1998, was once ground-breaking. Now it is inadequate and out of date. Even the EU, which has never been a leader in this field, is about to overtake it with much more effective directives.

I am, among others, campaigning for an office of the whistleblower. One reason why I will not press the amendment is that we actually need an overarching office covering all sectors, public and private. Whistleblowers need one place to go to find out where they stand, get support and advice, source the financial means to fight retaliation and, if necessary, get appropriate compensation for their damaged careers—for most whistleblowers, whistleblowing is career ending. The amendment covers a wide range of needs. I also see an office as one that can work with regulators to design a much better system that means that whistleblowers come forward and are taken seriously, stopping bad behaviour in its tracks.

The US is extraordinarily effective in this area, and it aggressively protects and rewards whistleblowers because they both expose and deter abuse and crime. Since the Dodd-Frank Act—the key whistleblowing legislation—was passed in 2010 and set up their own Office of the Whistleblower inside the Securities and Exchange Commission, that commission has collected $2.7 billion in fines and penalties on wrongdoers in financial services whose conviction depended on whistleblowers. One federal prosecutor I spoke to just a couple of weeks ago described whistleblowers as “a citizens’ army” with a deterrent effect without which the regulators and law enforcement could not succeed. The United States takes this so seriously that the first conversation with a financial whistleblower or their legal representative is with an experienced investigator of at least five years standing versed in financial practice and law.

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I ask Peers to join me in supporting Amendment 136F, but this will have to be on Report. I hope the Minister will respond to Amendment 136F at the end of the group beginning with Amendment 79, where it is currently, wrongly, grouped. I beg to move.

[Baroness Kramer (LD)]

My Lords, I spoke at length on the previous group, so I am going to pay penance and try to be much briefer on this one, even though this is an issue that I also care about passionately. I do not think I can start without acknowledging all the incredible work done by the noble Lord, Lord Stevenson, in this arena. He has genuinely moved the issue on by sheer determination, a baton now picked up by the noble Baroness, Lady Coussins.

The statutory debt repayment plan element of the debt respite scheme needs to come into effect as soon as possible. I suspect that we all acknowledge that, but the impact of Covid makes it more important than ever. When we talk about a timetable—I am thinking of the speeches by the noble Baronesses, Lady Morgan and Lady Ritchie—we know that a group of people who will probably never have experienced financial difficulties will now be drawn into a system where they are overwhelmed by their debts. One can see that this is an opportunity for the less scrupulous to take advantage. Even those who regard themselves as perfectly professional and ethical will look for weaknesses in the system in order to get paid. There is pressure on both sides. I have therefore added my name to Amendments 52 and 67.

The noble Lord, Lord Lucas, raised a number of interesting issues but he can probably take comfort in the fact that there is a sort of Scottish template, if you like, in that experience in Scotland will help to make sure that the programmes in England—I assume this covers Wales as well—will benefit and learn any necessary lessons. That should remove a lot of the anxiety and some of the teething problems.

The amendment in the name of the noble Baroness, Lady Meacher, is completely new to me. It seems entirely logical that we should have a proper framework of oversight for bailiff enforcement.

I also strongly support Amendment 111, in the name of the noble Lord, Lord Holmes, to bring lead generators for debt advice and debt solution services under FCA regulation. I have worked on many financial services Bills over the years, particularly on the consumer side, and it is almost breathtaking how many people and groups are totally unscrupulous and use any opportunity to gouge people when they are anxious and worried. One can just see the exploitation that could happen here. I ask that the issue be taken more broadly, that the FCA go on the front foot and anticipate where unscrupulous individuals might try to exploit the situation, and that we see if we can to some extent head it off at the pass. We are quite good at doing something when thousands of people are complaining that they have been taken advantage of; it might be very useful if we turn that around and try to anticipate where trouble could come from and see whether we can deal with it.

The issues have been so well laid out by others that I will not repeat them, but I join in asking the Government to respond to these amendments, particularly those on the timetable, with some very strong assurances at the very least.

[Lord Tunnicliffe (Lab) [V]]

My Lords, we have spent an hour and a quarter debating a clause that is two thirds of a page long in a 182-page Bill. This, at first sight, might seem unreasonable, but when you look at the clause from the point of the view of the individual citizen, it is probably one of the most important in the Bill, so it is right that we have done so. There are an amazing 19 amendments to this clause, which would normally imply concerted opposition. In fact, that has not been the mood of the debate at all.

To sum the clause up, it has dealt well with one of the concepts, but we have too little detail. My noble friend Lord Stevenson of Balmacara seems in many ways to have been the father of this concept, and I congratulate him. We have adjacent desks, and I have seen him busily dealing with issues such as this. His two amendments seek to flesh out how the clause would bring in proper regulation, a degree of reasonableness and recognition of the role of bodies related to national and local government; they also address the importance of protection from bailiffs, and funding.

The noble Baroness, Lady Coussins, brought in the idea that we must have a hard deadline, and the noble Lord, Lord Holmes of Richmond, introduced the concept that we need advice for individuals. A timetable of December 2024 was gazumped by the noble Baroness, who suggested instead May 2024. It is important that the funding issues be addressed, especially if this fine concept is improved, because it could always go wrong if they are not faced up to. Again, this brings home the importance of regulation.

Finally, we have the 11 amendments from the noble Lord, Lord Lucas. I hope he will not mind me saying that they are very “Lord Lucas-like”, with each small detail adding value to this legislation. I say that in order to illustrate that most of the amendments are complementary.

I ask the Minister to recognise the degree of clear, cross-party consensus on this important clause. Many people have urged him to make concessions. My experience is that Ministers making concessions on the hoof is considered rather dangerous; hence, this is unlikely. But I do strongly urge him not to reject too many of these ideas. His brief probably says that the wording will not work. Wording never works when it is from the Back Benches, but the ideas work, and these ideas are powerful and need to be taken account of. I hope there will be a further round of conversations before Report, and that the Government will come back with a composite proposal that improves this important clause. I fear that if that does not happen, we will spend a lot of time on Report, and there will be a more muscular approach from those who tabled and who support these amendments.

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[Lord Stevenson of Balmacara (Lab) [V]]

My Lords, that was a very interesting intervention from the noble Baroness, Lady Noakes, which enhances her reputation as a banker of some repute. I am sure her figures are absolutely right; I was still writing them down as she finished. She has made the case that you need to be able to do these sorts of sums and mathematics if you are dealing with the sorts of debts we have been talking about for most of the afternoon.

I put my name down to speak on this debate, but not because I have a particular view on the merits of the amendment, which I thought was extremely well argued by the noble Baroness, Lady Bennett of Manor Castle. She raised issues on the wider context of how debts are managed in society, which I think the Committee will be very grateful for having on its mind as we focus on the issues. She gave us a tour d’horizon of the various ways in which those who run into unmanageable debt have to deal with the process of repaying, absent a debt respite scheme and absent a scheme under which statutory repayments are organised. They are extremely tough and, to go through an IVA, a debt relief order or full bankruptcy is not something that one would recommend to people if there was another way of doing it.

Indeed, part of the debates we have been having are about how wide we should take this discussion. As my noble friend Lord Davies of Brixton mentioned, the way debt impacts on society is something that is worthy of wider consideration in a more general sense rather than in relation to the particularity of the processes that we are involved in.

That said, it is good that we are having this debate about the wider context within which debt operates in society. It is not a debate that you hear very often, and it is an area of policy that could be afforded a lot more consideration. As such, I will join with the noble Baroness, Lady Noakes, in suggesting that the amendment should not progress at this stage, but for completely different reasons. I think there is a better way of dealing with this relating to the way debts are sold.

The argument that the noble Baroness, Lady Noakes, made, which is that this is how financial institutions obtain the liquidity necessary to maintain the cycle of lending on which we all depend, means that we need to have a better understanding of what happens when debts go wrong and when big institutions of the type that she talked about have to deal with the consequences. I do not mean to go through that in any real detail, but perhaps when the Minister responds he could take into account some of the thinking on this for when we look in detail at the regulations that he has promised us sight of on the statutory debt management plan, and in relation to what I think will be necessary at some point in the not-too-distant future: a reconsideration of the role of the debt relief order and the IVA’s structure, which is part and parcel of the process of dealing with this.

The essential point here is about how, and on what basis, those who have decisions to make about debt make them about individuals who have repayments to make. My understanding, picked up over the time that I was at StepChange, was that, by and large, we are not dealing with a very large proportion of society who are feckless about incurring debts. What tended to come across to me from looking at StepChange’s clients, listening in to the calls that were made to it and observing some of the emails and discussions around electronic systems was that most people—the huge majority—were appalled to be in unmanageable debt situations and were desperate to make a repayment. However, they did not have the financial knowledge and understanding of the system and the world in which they were operating to deal with it themselves. They needed help, which led to the debt advice and the subsequent process of repayment that we have been talking about.

However, at the heart of this is the same calculation that the noble Baroness, Lady Noakes, made: if someone in a credit card organisation or bank is lending money to someone and learns that that debt is going wrong, then there is an immediate calculation of the likely return from it. While we in this country stick to the idea that the creditor must always be repaid in full—or as close to it as possible—the reality is, as the noble Baroness, Lady Noakes, explained it, that a decision has to be reached about what proportion of that debt will be repaid and over what timescale.

My impression is that we are talking about a very large difference in perception. I return to the noble Baroness’s example of a £100 debt that goes bad—she says that one in five will not repay. In a sense, that is the start of the conversation that the person who made the loan has to have with their boss to assess what rate of recovery the loan will have. I believe that we need to have further understanding—not necessarily today or on this Bill—about how that process needs to work better for society. I agree with my noble friend Lord Davies of Brixton: a social issue needs to be addressed at some point, not necessarily today.

If it is true that a loan of £100 has a default rate of at least one in five—I suspect it is higher than that—then we should not be thinking in terms of trying to get a 100% return; we should set in our minds a figure that society could accept and which would be more reasonable in relation to the overall quantum of debt, better afforded by those who need to make repayments and more acceptable to those who do the lending. We are not yet there, and I do not have a solution to this; we are probably too early in the process of discussion and debate. I look forward to the Minister’s comments. This is a conversation that we should have more generally, away from a Bill, on a broader understanding of debt in society.

[Baroness Kramer (LD)]

My Lords, the noble Baroness, Lady Noakes, and I very rarely seem to agree on the types of issues covered in this amendment, but on this one we are totally of one mind. I am very grateful because I tried to write an explanation of how this process would work and it was so inferior. The noble Baroness, Lady Noakes, not only explained it very clearly, step by step, but included numbers, which makes it much more evident.

I think there must be some misunderstanding. As the noble Baroness, Lady Noakes, explained, it is perfectly normal for an originating company to sell off the loans it has, sometimes because it can sell them to someone who has a different funding profile or a different tolerance for the average duration of the book of loans being sold, or because somebody may take a different view on how many of the loans will pay in full, pay in part or default. It is a perfectly standard process and provides liquidity to the market. As the noble Baroness, Lady Noakes, said, if an organisation had to keep all the loans it generated on its books and could not sell them off, it would find very quickly that it was constrained in doing any new business. That would be hugely damaging to many of the people who go out and borrow. It tends to be a completely different business that will buy loans in the secondary market.

The question that underpins this is: is the Statutory Debt Repayment Plan right and fair when it is put in place? If that is true, it should not matter if the money is paid to the originating company or to the secondary buyer. Within the portfolio, there will be some people who can and do meet the full obligations of the Statutory Debt Repayment Plan, and surely that is appropriate. There will be others who fail and end up in bankruptcy, and whoever is holding the loan will lose out.

My question is whether there is any read-over from the kind of issues we have had with mortgage prisoners. It is important that where there are expectations about how the original lender will behave, they are carried over to the secondary lender. For example, if the original lender is quite likely to offer an alternative loan or new terms and conditions or whatever else, you would expect to see that reflected in the secondary lender. I would not want a situation where the secondary lender was able to levy additional charges or put additional costs on the borrower that would not have been expected by the original lender but perhaps are not covered in the minutiae of the contract.

Otherwise, the honest truth is that I just do not understand this amendment. I am absolutely certain that it completely seizes up any possibility of having a secondary market, and the people who will pay the greatest consequence for that are those who need to go out and borrow from time to time and are at the margins of being appropriate borrowers.

[Lord Tunnicliffe (Lab) [V]]

My Lords, I think this debate brings out the fact that we do not fully understand this area. There is obviously a case for a great debate. We are, sadly, going to see many more people in heavy, chronic debt and we will see people—to use a colloquial term—fall apart. When people have debt and cannot see how they are going to cope, they lose their equity in society.

Perhaps I am being unfair, but I see a conflict here between people—human beings—and loan books and technocrats. That is not a very useful comment. I cannot argue that this particular amendment should be pressed, but the debate about it brings out that we almost certainly do not have all the mechanisms, and the understanding of the human beings involved, to face the many more people who will be in chronic debt when we, who are not in that situation, are talking about the Covid crisis being over. Those people need society’s help, and for them to have that, we need a much better understanding of the impacts on those people and how we can make sure that the excesses of the people who hold the books are restrained.