Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill Debate
Full Debate: Read Full DebateBaroness Kramer
Main Page: Baroness Kramer (Liberal Democrat - Life peer)(3 years, 2 months ago)
Lords ChamberMy Lords, as the noble Lord, Lord Sikka, found out the hard way, this is a money Bill. That means that we cannot amend it, but it raises a series of questions, especially about the regulator’s responsibilities. I intend to focus my time on those issues.
First, as I have done before, I congratulate Dame Elizabeth Gloster on her report on LCF and the regulator, the FCA. It pulled no punches. She and her team did a service not just to the victims of LCF but to all those working to eliminate abusive behaviour from our financial services industry. Not only should her recommendations be enforced—I await a detailed update from the Minister on that process; he promised it so I assume that it will come in his summation—but, frankly, they have pushed to the length of her remit.
They recommend that LCF and the FCA are not adequate to deal with the situation that has been exposed not just by this scandal but by the many other scandals about which other noble Lords have spoken today. This needs to be a launch pad for deeper change than what Dame Elizabeth was, within her remit, able to examine. I regret that, in what was actually a very useful report, the Commons Treasury Committee did not in the end require the Government to tackle many of the fundamentals.
I will focus on only two of the fundamentals, or we will be here all day. The first absolutely fundamental issue that I want to pursue is the failure of the FCA to act on information provided to it early in the day, when much of the abuse could have been halted in its tracks. Dame Elizabeth notes in detail the anonymous letter that the FCA received and ignored at the time of the first VOP application. That letter
“raised allegations of fraud and other irregularities in respect of LCF”—
I am quoting from the Gloster report.
Dame Elizabeth’s report also detailed further calls to the contact centre at the FCA—that is the main route for passing on information on misbehaviour—in July of 2016 and of 2017. All those calls and contacts were ignored. Action was taken only when, in October 2018, the intelligence team in the FCA, which appears to be completely divorced from the various contact mechanisms through which individuals report concerns to the FCA, “stumbled across”—that is a quote from the intelligence team—a report on another firm that happened to mention LCF. If it had not been in that report, even at that late date the LCF fraud problem would not have been identified.
As your Lordships may know, I am quite involved with the issue of whistleblowing. This pattern of ignoring information is not an exception; it is the norm at the FCA. I fear that even better training, which is one of the primary recommendations, will do little to help. The FCA treats information it receives from individuals slightly differently if it believes that they are whistleblowers under the definition of PIDA—in other words, if they are employees making a protected disclosure—or from other sources, but that difference is only to the extent of taking care to protect the identity of a whistleblower; otherwise, the information follows an almost identical parallel route.
In both cases, the contacts are handled by staff trained, in effect, to manage a complaints line, where the goal is to pacify the caller, who is typically regarded—I have had many discussions with the relevant people at the FCA—as a troubled individual with emotional and mental health problems. They are very kind to those people, but none of the staff has the financial expertise to recognise when they are tripping across a serious financial issue and piece of misbehaviour. Frankly, a few weeks’ training will not change that.
If I were to bring before this House the equivalent US regulator, your Lordships would find that information from contacts is triaged by expert and senior financial investigators. I am told that a minimum of five years’ investigative experience is required to take up that role, because in the US such information is treasured as vital to keep clean an industry in which the abuse of customers is a constant temptation. To get that same approach in the UK would mean turning the culture in our regulators on its head and changing the staffing profile. Frankly, it would require a whole new way of defining and handling whistleblowers, regarding them as a much broader source of information. As your Lordships know, actual whistleblowers under the PIDA definition not only find that their information is often ignored but typically are left to career-destroying retaliation by powerful employers.
I have a Private Member’s Bill before the House to create an office of the whistleblower, which could lead to many of the needed changes, but it needs the Government to make the decision that they need to step in and change that whole culture and the structure, and to put in place an appropriate framework to make sure that we look at those who pass on information and those who blow the whistle as key players in keeping clean a system such as financial services, which has so much power and money. It is, as they say in the States, the civil army that enables the regulator to keep the industry clean.
My second fundamental issue is the regulatory perimeter. The LCF case illuminates how few financial transactions engaged in by small businesses, and often by ordinary people, are actually regulated activities. The Minister said that nothing LCF did was actually a regulated activity. Indeed, this case demonstrates how a company that acquires an authorisation, and therefore is presumed by the public, businesses and ordinary people to be regulated, uses that FCA imprimatur as a false cover for the mis-selling of services.
To illustrate how limited the regulatory perimeter was in the LCF case, if you apply that perimeter, the Financial Services Compensation Scheme covered only £57.6 million of the £237 million in losses that arose from the collapse of LCF.
In recent years we have endured one scandal after another that has fallen outside the regulatory perimeter, including asset stripping by the global restructuring group of RBS, the mis-selling of interest rate caps to SMEs—I could go on for the next half hour. All of these have left victims, because the FCA took the position that it could not act to stop abuse because it was beyond the perimeter. In the end, in these high-profile events the FCA typically gets forced by public pressure and Parliament to do something and some compensation occurs, but that is not a satisfactory system.
The FCA also constantly falls back on the new senior management regime, which it cites as a strength. If ever a scheme proved to be a busted flush, it is the senior management regime. As others have pointed out, it has not been effective; it has not even been used, as far as I can tell, in the LCF case. It has been used with such a light touch—so mildly and with such deference—that frankly, it no longer has any credibility within the financial services industry. No one fears it and no one respects it. We really need to move to a global standard whereby one regulates organisations, not just activities. Without that, the UK will continue to be seen as a natural home for financial rogues who can exploit that perimeter.
I will finish by raising a couple of quick questions about the Bill itself. I join others in saying to the Minister, why does he believe that, in a case where the regulator was so much at fault—Dame Elizabeth Gloster’s report does not say, “On the balance of this or on the balance of that”; it is totally damning—people should receive only 80% compensation capped at £68,000? The investors did not do wrong; indeed, they were not even greedy. They were not being offered extraordinary and exceptional returns; they all looked quite moderate. That was part of the inherent effectiveness of the mis-selling.
If I have read the Bill and the explanatory notes correctly—the Minister will correct me if I am wrong—members of defined benefit pension plans who invested in LCF will be compensated pretty much in full through the pension protection fund. However, the cost of that compensation will be picked up not by the Government but by levies, as the noble Lord, Lord Sikka, said, on the whole body of defined benefit pensioners. Why should the entire pension system be picking up the cost of maladministration by the regulator? I am completely confused.
I am even more confused when I look at pensioners who are in defined contribution arrangements who invested in LCF. They are not going to get all their money back; their compensation will be capped at the 80% limit and the £68,000 maximum. So, depending on whether you in a defined benefit scheme or defined contribution scheme, the outcome is completely different. People who had ISAs will get their compensation, but how can they reinvest it in ISAs when there is an annual ISA limit? These were ISAs they committed to five or more years previously. How on earth is that issue going to be handled? There may be a solution, but I could not work it out, and I apologise if it is my failure to read the detail sufficiently.
Lastly, why are LCF’s victims unable to challenge this Government’s compensation scheme through a full public consultation by the FCA? The Minister said that public consultations take time, but if people are going to get back only 80%, capped at £68,000, they may well have a case that they want to put to the FCA. I do not understand why people have been put in that position. Why do we have no impact assessment? These are always missing at critical points, and they are again with this Bill.
I have some sympathy for our financial regulators, which, frankly, are under resourced and understaffed, but I am alarmed that the Government seem intent on leaving essentially untouched a flawed system, rather than taking on the challenge of fundamental change to create a regulator that the rogues in the industry will genuinely fear. As many have said, LCF is not a one-off. Every time we turn around, it seems, we have a one-off exception. We need the Minister and the Government to take heed and to act.