Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill (Second sitting)

Gareth Thomas Excerpts

Tuesday 15th June 2021 Public Bill Committees

[Mr McFadden]

Thank you for your guidance, Ms Ghani. Later, I will move amendment 2 and, with your help, my hon. Friend the Member for Reading East will move amendments 3, 5 and 6, which stand in the Opposition’s name.

Amendment 1 relates to the first clause of the Bill, which deals with the compensation scheme relating to the collapse of London Capital & Finance and which is based on the report published by Dame Elizabeth Gloster, on which we took oral evidence this morning.

Clause 1 enables a very significant Government decision to step in and compensate people for the collapse of an investment firm. The estimated cost given by the Treasury for that decision is about £120 million. As the Minister pointed out on Second Reading, it is rare that the Government do that. He told us that there have been only two other cases in recent decades—Barlow Clowes and Equitable Life—and even those decisions did not always bring matters to a close. With Equitable Life, some investors around the country remain dissatisfied with the levels of compensation that have been paid out. There is an all-party parliamentary group in this House, and we have my indefatigable hon. Friend the Member for Harrow West, who has led at least one debate, if not more, on these issues, on the Committee. Such decisions do not always bring the matter to a close.

The focus of the amendment is to try to bring some clarity to Parliament and the public about when the taxpayer should be on the hook for an investment collapse, and when not. This issue was raised in oral evidence this morning by the hon. Member for North East Bedfordshire. He used the well-known phrase “caveat emptor”, or “buyer beware”, which applies those who may buy investment products. The trouble at the heart of this case is that the investors did not think they were making a particularly risky decision. LCF sold mini-bonds on the basis of a guaranteed investment return. When those who suspected something might be wrong phoned the FCA, time after time they were reassured that nothing was wrong. To quote one of the FCA’s call handlers, “This is not a scam”. While the hon. Gentleman was right to raise the principle of caveat emptor, how can we blame the investors if the very regulator looking after the thing was reassuring them that there was nothing to be concerned about?

The Government have judged the level of regulatory failure to be so exceptional and egregious that they have decided that the taxpayer has a responsibility to compensate, or as it is sometimes put, to socialise the losses. The level of compensation set by the Government is 80% of the maximum level allowed by the Financial Services Compensation Fund. That maximum is £85,000, so 80% leaves investors with a maximum pay-out of about £68,000.

There is debate about that 80%. Members of the Committee will have been sent written evidence from various LCF investors who think that level is too low. They do not understand why they have been asked to forfeit 20% of their investment because of what the Government acknowledge to be a particularly egregious regulatory failure. The Government will have to debate that. Their justification for any compensation at all is that LCF is a unique case. Both Ministers spelled that out on Second Reading last week. In his opening speech, the Pensions Minister said:

“While other mini-bond firms have failed, LCF is the only mini-bond firm that was authorised by the FCA and sold bonds in order to on-lend to other companies.”

He went on to say:

“It is…important to emphasise that the circumstances surrounding LCF are unique and exceptional, and the Government cannot and should not be expected to stand behind every failed investment firm.”—[Official Report, 8 June 2021; Vol. 696, c. 905.]

We agree, and that is precisely what the amendment is about: to try to get some clarity on the Government’s thinking when the degree of regulatory failure is so exceptional that it warrants the taxpayer picking up the bill. When that is not the case, whatever losses there may be should be regarded as normal investment market failings.

[Gareth Thomas (Harrow West) (Lab/Co-op)]

My right hon. Friend rightly sets out the scale of regulatory failure. Does he think that one of the other potentially unique circumstances of this case is the apparent legislative lacuna about who had the responsibility for regulating mini-bonds? Dame Elizabeth Gloster set out that, on the one hand, the FCA said it should be Her Majesty’s Revenue and Customs; HMRC was equally clear that it thought it should be the FCA. We do not know whether that legislative lacuna has yet been sorted. Does my right hon. Friend think that was also a factor in the Government’s decision to compensate to the scale they have?

[Mr McFadden]

My hon. Friend is right; the lacuna referred to in the report relates particularly to the allocation of ISA status. We asked Dame Elizabeth about that during the oral evidence session this morning. This is important because if there are two things that gave the mini-bonds the stamp of respectability, it would be that prominent in LCF’s advertising was the statement that it was regulated by the FCA, which at firm level was true but was not true of the mini-bonds being sold, and that they could be placed inside an ISA wrapper. Although it is, of course, true that people who invest in ISAs can lose money, for understandable reasons, the ISA wrapper has a certain cachet and a note of respectability.

Dame Elizabeth confirmed during oral evidence this morning that once the ISA wrapper status was allocated in 2017, the degree of investment in those mini-bonds rose markedly, because people would have thought they were investing in something safe. The adverts spoke, in fact, of a 100% record in paying out, when what we were really dealing with was a pyramid scheme where any pay-outs that did come came from other investors and not normal market returns. People thought they were investing in a safe bond. They did not think they were playing investment roulette.

The Economic Secretary also emphasised the uniqueness of the LCF case in his closing speech on Second Reading. He said:

“LCF is unique in that regard; indeed, it is the only mini-bond issuer that was authorised by the FCA and that sold bonds to on-lend to other companies.”—[Official Report, 8 June 2021; Vol. 696, c. 918.]

That is an exact replica, with both Ministers saying the same thing, and I suspect that that phrase has been very carefully honed inside the Treasury. A case had to be made for the uniqueness of this that could not be applied to other investment failures, so I think that form of words is very carefully chosen. However, the Minister may be able to tell us more when he responds.

The amendment is designed to tease out the following point, which I want to clarify with the Minister. Is it the case that even though a number of mini-bond issuers have collapsed in recent years, LCF is the only one that was authorised and regulated by the FCA? The Minister can intervene now or I am happy to wait. As I said to the Ministers on Second Reading, there must have been a discussion in the Treasury about developing a compensation scheme such as the one set out in clause 1. The question would have been asked: if we did this for LCF, what about investors in the Connaught fund or Blackmore Bond or any of the other investment schemes that were raised either on Second Reading or during the oral evidence session this morning? What was the nature of those discussions at the Treasury and what is it about LCF that makes the Government convinced that compensation is due in this case but not in the others? That is why our amendment calls for a report. Having taken the decision to compensate, we believe it would be in the public interest for the Treasury to set out the circumstances under which the taxpayer might be expected to pay when investors lose money. Is it about a firm being authorised by the FCA? Is it about commissioning a report by an eminent and independent figure such as Dame Elizabeth Gloster?

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The final point covered by the amendment is the question of any limitations on taxpayer exposure.

[Gareth Thomas]

My right hon. Friend is understandably concerned to protect the taxpayer’s interest. Is there not also another dimension as to why the report he seeks is worthwhile? If there is regulatory failure by the FCA in other ways, and not just in the handling of investors’ resources, and if there is no chance of the Government stepping in and offering compensation for that failure, then, for example, if a big financial services company that was not properly regulated by the FCA were to be demutualised, would there not be a reason to offer compensation? Or, if not, would that let the FCA off the hook?

[Mr McFadden]

My hon. Friend raises a very important point. There are many reasons why clarity about the limitations of Government responsibility and taxpayer responsibility, to put it another way, would be extremely helpful. The very fact of producing the Bill will mean that the Government have asked those questions anyway. As I said earlier, the cost in this case is expected to be about £120 million. The costs of clause 2, which we will come to later, are expected to be over £300 million. Over both clauses the cost will therefore be more than £400 million. That is a large sum of public money that will, in the case of clause 2, be recouped over a period of years from pension scheme members.

Of course, it is possible to have investment failings on an even greater scale. Is there any upper limit that the Treasury would see to such taxpayer exposure, or is it always to be on a case-by-case basis? In theory, investment failings could cost billions rather than hundreds of millions. Our amendment seeks to clarify the Government’s thinking on that, which would be beneficial to Parliament and the public.

Those are the reasons why we have tabled this amendment. We think that the compensation scheme and the whole story of the collapse of LCF demands such clarity and that reports such as the one we have called for would be beneficial.

[Peter Grant (Glenrothes) (SNP)]

It is a pleasure to serve under your chairship, Ms Ghani.

I shall speak to amendment 7, in my name, and in support of the official Opposition’s amendment 1.

Both amendments call for the Secretary of State to report back to Parliament on issues that collectively raise many still unanswered questions about the Bill, about the compensation scheme, and about why the scandal of London Capital & Finance was allowed to happen.

By far the biggest criticism of the Bill, which we again heard from witnesses today, is that it has been deliberately framed so narrowly that those questions are in danger of being ignored. I know that the Government will argue that framing it narrowly increases its chances of getting on to the statute book—I accept that argument—but there is a downside to doing that.

The biggest question that is still unanswered is: why do we expect compensation for the victims of one investment mis-selling scandal when so many people have lost so much—possibly a total of more than £1 billion —in other company collapses that share most, and sometimes all, of the key features of London Capital & Finance?

I should make it clear that I am not asking for the setting up of other schemes. We are not asking for approval at this stage, or for other failures to be included in the LCF scheme. All we are asking for is some clear indication that the Government are taking action to look at the wider issues.

The Government’s answer is that London Capital & Finance was regulated by the Financial Conduct Authority and that companies such as Blackmore Bond were not. That smacks of looking for an explanation to justify a decision that has been taken for a completely different reason.

Companies such as Blackmore Bond set out to make prospective investors believe that the FCA had a role in protecting their money. Investors in LCF were misled into believing that its own registration with the FCA would cover their investments. The only difference with other company failures is that investors in those companies were misled into believing that someone else’s registration would cover them—a fine point lost on investors themselves.

The Government’s explanation appear to assume that the only problem, or even the biggest problem, with London Capital & Finance was that it was a regulated company selling unregulated investments. That was certainly part of the problem, but, as the written submissions from a number of investors and as evidence this morning made clear, there were other failings and possibly deliberate malpractice within the company and some of its advisers. Other failings of regulation went well beyond those laid at the feet of the Financial Conduct Authority in relation purely to LCF. If the Government constantly remind us that the sale of mini-bonds was not regulated by the Financial Conduct Authority, surely the elephant in the room is: why on earth not?

The Government will, I know, refer to the principle of caveat emptor. It is correct that anyone making an investment has a responsibility to ensure that the investment meets their needs, but there are hundreds—possibly thousands—of examples in UK regulation where we regulate the market but it is not realistic or fair to expect the emptor to caveat.

We do not expect people to do their own personal survey of a house to make sure it is safe before they buy it. We do not expect people to check the brakes on the bus before buying a ticket. We have regulation to protect public safety, on food standards, on product safety and on a number of financial transactions. It is perfectly possible for the Government to start to look at regulating these investments in future and compensating ordinary men, women and sometimes children who have lost sums that, individually, are not significant to the FCA but are massively significant to their plans for retirement, for paying to support their children at university or for ever.

We must make it clear that we are not asking the Government to approve compensation for every company failure. We are not asking them even to consider the implications of doing that. We are asking them to look specifically at cases where there is clear evidence of the mis-selling of investments, usually to people who the seller knew perfectly well were not suited to that investment. That has been a characteristic of all the cases we have looked at today.

[Gareth Thomas]

I am particularly drawn to proposed subsection 5(b) of amendment 7. I wonder whether the hon. Gentleman shares my view that one measure the Government need to require of the FCA in the future, to prevent further such regulatory failures, is for it to take a more hands-on approach when customers get in contact to raise concerns about particular businesses; and to make it a point of principle that, when a significant number of customers raise concerns about the activities of a firm, the FCA might actually try to meet some of those customers, rather than, as appears to be the case at the moment, only bothering to meet representatives of the board and management of said firm.

[Peter Grant]

The hon. Gentleman makes a valid point. A lot of the issues he raises are covered in Dame Elizabeth Gloster’s report and recommendations. She even pointed out today that possibly the single biggest failing—certainly one of the biggest failings—was that the Financial Conduct Authority had too restrictive a view of its purpose in regulating the market.

I have to say that it is not only the Financial Conduct Authority that has failed to regulate. What was the registrar of companies at Companies House doing when they got a copy of the audited accounts of Blackmore Bond—the only copy that was ever submitted by that entire group—in which it said, in so many words, that in order to pay the guaranteed interest on money it had already received from investors, it had to keep on getting more and more new investors? It was effectively a Ponzi scheme in all but name. The auditors made similar comments on the accounts but did not seem to be under any obligation or duty to do anything else. Nobody at Companies House, or the registrar of companies, appears to have been under any responsibility to look at the documents submitted to spot the danger signs; nobody anywhere seems to have been responsible for that. Although the Financial Conduct Authority has been rightly and severely criticised for its failure to regulate London Capital & Finance, we are talking about a much wider failure of the regulatory regime. Maybe one of the biggest difficulties is that there are so many people who might be involved and they are quite happy to point fingers at one another, saying that they should be responsible.

I realise I am in danger of wandering off the narrow scope of the Bill. We cannot amend the Bill to set up a more comprehensive compensation scheme just now because of the way it is framed; we cannot even amend it to set up a framework so that the Secretary of State, through statutory instrument, could extend it in the future. However, we can ask the Secretary of State to explain to Parliament not only what the Government are doing to help the victims of this one scandal but what lessons they have learned and what they are doing to make sure these scandals cannot be repeated. I hope the words of the witnesses from the Transparency Task Force this morning are ringing in all our ears. They believe they have evidence that there are other scandals like LCF happening right now and that it is just a matter of time before they collapse and leave yet more investors out of pocket.

Finally, why is it that the Government need to be called to account and asked to explain to Parliament why it is that, while they are supporting the victims of LCF, they are doing nothing to help the thousands of other victims of other scandals that have already come home to roost? For those victims, improvement in regulation alone is far too late.

[Gareth Thomas]

I do not intend to detain the Committee long, because my right hon. Friend the Member for Wolverhampton South East made an excellent speech on this issue; I merely want to underline the point that I made in when intervening on him. There seems to be a degree of risk in the Government’s approach. Again, it would be good to hear from the Minister to better understand why the level of regulatory failure in this particular case should merit Government compensation, whereas if there were to be regulatory failure in, say, the case of the FCA’s handling of the demutualisation of Liverpool Victoria, that would not merit compensation for the 1 million-plus customers and owners of that financial services business.

I also underline the point that I made when intervening on the hon. Member for Glenrothes, who speaks for the Scottish National party, on the need of the FCA to perhaps rethink its approach to consumers more generally. At least one of the regulators in the financial services business case that I have particularly been following—that of Liverpool Victoria—has met representatives of that organisation some 35-plus times but has not met consumers at all. That seems to be an example of the FCA continuing not to have properly thought through where it might need to change its practices going forward. I know the Minister will be looking at this issue, and I gently encourage him to focus particularly on that aspect of the regulatory failure.

My right hon. Friend the Member for Wolverhampton South East underlined the point in Dame Elizabeth Gloster’s report that there have been 600 phone calls from customers about LCF’s poor performance, yet that still did not seem to spur on the FCA to take action quickly. There are almost 10 times as many consumers who are members of Liverpool Victoria as those who invested in LCF, which surely further underlines the need to get right how the FCA handles the consumer interests going forward. I look forward to the Minister’s answers.

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[Mr McFadden]

I beg to move amendment 2, in clause 1, page 1, line 15, at end insert—

“(3A) Within six months of this Act receiving Royal Assent, the Secretary of State shall lay before Parliament a report setting out progress on the implementation of the recommendations in pages 47 to 49 of the Gloster Report.”

This amendment would require the Secretary of State to lay before Parliament a report setting out progress on the implementations of the thirteen recommendations in the Gloster Report.

Amendment 2 concerns the recommendations made in Dame Elizabeth’s report. It is a long report, but I am specifically referring to the series of conclusions and recommendations made on pages 47 to 49. As the Minister said a few moments ago, some of those recommendations are for the FCA and others are for the Government. We heard Dame Elizabeth say this morning that if she reached one overall conclusion that she wanted us to understand, it would be about the degree of culture change necessary for the FCA to fulfil its statutory duties. The fact that she judged that the culture that existed was so inappropriate that it stopped the FCA from doing its statutory job effectively is a serious charge. It is, after all, the body that we depend on to uphold the consumer interest and charged with ensuring proper conduct in the sale and provision of financial services. I do not need to tell anybody on the Committee how important those are, either to everyday life or to the UK economy.

One of the most telling parts of Dame Elizabeth’s report is when she discusses the loss of a letter sent to the FCA by a financial adviser called Neil Liversidge in November 2015, fully three years before the collapse of LCF. The letter warned in fairly graphic language, some of which I read out on Second Reading, what was going on at LCF and the financial adviser’s concern. Dame Elizabeth’s damning conclusion is that even if the letter had not been lost in the FCA, which appears to be what happened, so dysfunctional was the FCA that it would not have done anything about it anyway. She says on page 78 of the report:

“it is unlikely that it would have resulted in any”

action by the FCA. She found that degree of dysfunctionality to be deep and in need of urgent attention, as set out in the recommendations.

Every time there is a public failing, we hear some familiar things being said. In fact, we could almost play word bingo with them. People talk about lessons learned and new systems being put in place, and sometimes there is change of leadership or a change of the management team—all those things. In the report, there was a very well publicised disagreement about the nature of accountability and responsibility involving Dame Elizabeth and the now Governor of the Bank of England, who led the FCA at the time. That was all played out in front of the Treasury Committee over several hearings early this year. I want to focus on the 13 specific recommendations on pages 47 to 49. I am not going to go through them in huge detail, but I will mention a few.

The first recommendation is the desire to treat the regulation of companies holistically; that is, to deal with the halo effect of regulated companies selling unregulated products. That was at the very heart of the regulatory failures over LCF. It was a big part of why the many phone calls to the FCA alerting staff to investor fears about what was going on went unheeded. Indeed, Dame Elizabeth’s report records many instances where calls were not acted on because the mini-bonds concerned were not regulated. There is a whole annex containing the transcripts and I will not delay the Committee with them at the moment, but they are all set out in the report.

The failure to act exposed a major weakness in the FCA’s approach. Even if staff could tick a box that said that a phone call was about something that it did not regulate, the FCA was still on the hook at the end of the day if the firm failed, as the Bill now shows. The recommendation therefore requires a major change in how the FCA thinks about unregulated products.

The next two recommendations are about how the FCA deals with information passed on to it and how it is shared. Again, they highlight a failing in how the LCF information was handled. As we have said, the financial promotions team intervened several times to warn the company about the misleading nature of its promotions as it kept saying that it was regulated by the FCA. However, the financial promotions team did not escalate this information to other parts of the organisation that could have taken action.

The fifth recommendation deals with the financial promotion rules and what to do about breaches when red flags should be raised. Page 49 highlights recommendations more for the Treasury than the FCA. As we discussed a moment ago, the first of those deals with what Dame Elizabeth calls a lacuna in the allocation of the ISA-related responsibilities between the FCA and HMRC. The Minister referred to a working group—I think that is the phrase that he used—and I hope it reaches a conclusion quickly. Such a response is common in the catastrophe word bingo that we often hear. A working group is okay, but it has to deal with the lacuna that has been identified.

Just saying that something is regulated by the FCA gives it an aura of safety and respectability and so does saying that about investments in an ISA wrapper. As the report says, once ISA status was granted to these mini-bonds, investment in them grew markedly. Putting money into an ISA is thought to be a responsible thing to do. People believe that those operating ISAs are respectable companies and not those engaged in what are, in effect, pyramid selling schemes like the one that LCF was operating. That is why this issue is particularly important.

Recommendation 12 is about the optimal remit of the FCA. That matters because the failure of LCF sits so squarely on the boundary of regulated companies selling unregulated products. The FCA’s remit is known in the parlance as the perimeter. The Minister gave evidence to the Treasury Committee a few months ago and he said it was not an issue about the perimeter, but about the failure to use the enforcement and supervision powers that the FCA already had. I understand what he means by that. He is saying that if the FCA had acted on the reports that it had received, a great deal less damage would have been done and the taxpayer would not be faced with the compensation bill set out in the Bill. Even though I understand the point he made, the perimeter is still relevant because it informed attitudes inside the FCA on how alarmed it should be about calls reporting concerns about LCF and whether it should act. That behaviour was influenced by the fact that the calls were about products that were not regulated.

How should the Government and the FCA respond to the issue of regulated companies and unregulated products? In theory, one response could be to say that regulated companies can only sell regulated products, but that would involve a major extension of regulation. That is not to say that that is necessarily wrong, but it would be a big step. For example, foreign exchange trading is not regulated but it is carried out by every high street bank in the country and they are, of course, regulated entities.

If the answer is not a major extension of regulatory responsibilities, what is it? Is it the Government’s position that there is no need to look at this because this was such a one-off event that cannot be repeated? How can we be sure of that? We asked the FCA this morning whether this could happen again and, understandably, the witness from the FCA said that he could not tell us for sure that it could not.

[Gareth Thomas]

My right hon. Friend is rightly dwelling on the issue of the perimeter. May I give him another scenario that suggests that there might still be reasons to be concerned about whether the FCA has got the perimeter point in Dame Elizabeth Gloster’s report? Let us imagine that the FCA had investigated a financial services business that was recommending one thing to its customers but only 12 months later was doing the complete reverse. The FCA, having looked at it initially, says, “We’ve looked at it already. We’re putting a perimeter around that. We’re not going to consider what happened 12 months before in the context of this decision.” Were that to be a live situation, would it not suggest that the FCA had not grasped the perimeter point that Dame Elizabeth Gloster was making?

[Mr McFadden]

My hon. Friend makes a very strong point. The question of the perimeter is inescapable. One of Dame Elizabeth’s recommendations is that the Government consider the FCA’s remit, and the Government have said that they accept all her recommendations. The Minister said in his evidence to the Select Committee that this cannot be pinned on the perimeter, as it were, but as a conclusion of what has happened the perimeter must be considered. The Government have accepted that.

One way to deal with this is to say that regulated firms and regulated products must be brought together—I shall be grateful for the Minister’s response on that—but if that is not deemed to be the right response how will the question of the remit and the perimeter be responded to? At the heart of this failure is the halo effect of a regulated firm selling unregulated products.

Recommendation 13 is about ensuring that the legislative framework keeps pace with the sale of products through technology platforms. This field of activity is growing daily. It is driven by technological innovation—the movement of more and more activity online—and perhaps by the increased time people have had during the lockdowns to invest online. I do not want to try your patience, Ms Ghani, by delving too deeply into that today, but I think that this issue will occupy the House and this Minister in particular over the next couple of years. We will have to return to it again and again in the House, but recommendation 13 is precisely about legislation on selling things through technological platforms, and the Government and the FCA will have to adapt to it or they will fall behind the reality of the market and of financial crime.

Most of these issues have been put in the hands of the new chief executive, Nikhil Rathi, and the trans-formation programme to which the Minister referred on Second Reading. How are we to know that the 13 recommendations have been implemented? It is easy when a report is published to say, “We accept the findings.” The key is: are they followed through and properly implemented?

Dame Elizabeth’s report should be more than a series of individual recommendations. As she said this morning, it should result in a culture change. Much more communication needs to take place between different parts of the FCA while, crucially, not dropping the ball on regulated firms and unregulated products.

It is unfair of any of us, in government or in opposition, to load more responsibilities on to the FCA if it does not have the resources to fulfil them. We are clear in our amendment that the resources of the FCA have to be covered. Does the FCA have the resources to meet the ever-expanding list of responsibilities, including those on-shored as a result of our departure from the EU? It is funded through a levy on the sectors for which it is responsible. Is the levy giving it enough resources?

The failure of LCF exposed such a degree of dysfunctionality that it prompted the question: can the FCA really do its job? If not, the Government have to act because the public need the protection of a powerful regulator. The imbalance of information between the sellers of financial services products and the buyers absolutely demands that. This amendment is aimed at our receiving a report on the 13 recommendations and on their implementation by both the FCA and the Treasury. Its acceptance would provide Parliament and the public with a mechanism to ensure that statements saying that the recommendations had been accepted had actually been followed through and action taken.

[Peter Grant]

I am pleased to speak in support of the amendment. There are two questions if the Government wish to reject it. Assuming that no one has any objection to the idea that somebody should keep an eye on what the Government are doing in response to the Gloster report—that would be a good idea—the questions are who should they report back to and when should they report back. Their response to those questions might provide the only grounds on which they could object to the amendment.

There can be no doubt that the Government must report back to the House of Commons and to Parliament. I know I might not look it—perhaps I do—but I am old enough to remember cases like Polly Peck, one of the great corporate scandals of earlier generations. In response to that, we had the Cadbury report that, in effect, invented the concept of corporate governance. It seems obvious now, but one of the key principles that came out of the report is that once the directors who are supposed to be in charge of a company have taken a decision for something to happen, they cannot just walk away. They have to put a process in place by which they, as the directors, individually and personally, can be satisfied that what they say should happen does happen.

The House of Commons in the UK Parliament is not a board of directors as such, but we still have to take responsibility—all 650 of us, individually and collectively—for making sure that, having had assurances from the Government that they will act either directly or indirectly through agencies such as the FCA, they will do things to sort out a £1 billion scandal. We are the ones who ultimately have to hold them to account for that.

I am not saying that a report or a statement to Parliament is the best possible way of holding the Government to account. Frankly, it is a joke of a holding to account, but it is the best that we are allowed in this place. That is why it is included in many of our amendments. Any argument from the Government that any way of reporting back on such vital recommendations that is anything less than regular statements to the full House of Commons and making themselves available to take questions from, if we are lucky, just 5% of all elected MPs, is just not acceptable.

Secondly, when should the Government report back? That is why I made a point of asking Dame Elizabeth whether six months from now—12 months from the original recommendations—is a reasonable time in which to expect significant progress. Dame Elizabeth made it clear that she cannot tell us about parliamentary procedure and all the rest of it, and I accept that. However, her view was clear that, in six months from now, it would be reasonable to expect there to be significant progress on a significant number of the recommendations. At that point, the House of Commons should get a report back from the Minister to explain what has happened and if it has not happened yet, when it will happen. Most importantly, he will explain why what has not happened has not happened. We have had far too many examples of Ministers giving assurances in good faith but of things not happening or, if they did happen, of their taking far longer than they should have done.

Time matters. None of us knows whether there is another London Capital & Finance already happening, and we heard from witnesses who are convinced that it is. There could be another Blackmore Bond, Basset & Gold or you name the corporate investment mis-selling scandal. It could be happening again right now. We do not know how many of them are on the go just now already swallowing up people’s pensions and savings. If the Minister is not prepared to commit to giving an update within six months, will he tell us what timescale he thinks is reasonable for us to expect real change? “In due course” is just not good enough for people who might be losing their investments now even while we dither and dally about what to do next.

[Gareth Thomas]

I rise to support amendment 2, in the name of my right hon. Friend the Member for Wolverhampton South East. I share some of the frustration that the hon. Member for Glenrothes aired: this is the only route available to the Opposition to signal to the Government and the FCA the need to provide a continuing update on their progress in implementing the lessons that have been learned from the LCF scandal. My right hon. Friend the Member for Wolverhampton South East went through some of the many issues and recommendations that Dame Elizabeth Gloster’s report highlighted, but let me pick out five in particular.

First, the FCA failed to consider LCF holistically. Indeed, as my right hon. Friend pointed out, we got Dame Elizabeth to emphasise again in the evidence session today that the most significant issue was a very restricted approach to the regulatory perimeter. I will come back to that point.

Secondly, the FCA’s policy documents were unclear on the handling of key questions. Thirdly, its staff had not been trained sufficiently in various key and crucial matters. Fourthly, there was a series of gaps in the law that needed fixing in order to enable proper regulation. Fifthly, the issue that my right hon. Friend touched on last was the FCA’s scope and capacity to intervene effectively on consumers’ behalf—did it have sufficient powers?

Let me turn to the first of those concerns—the restricted approach to the regulatory perimeter and whether the FCA has learned to consider issues to do with consumers holistically. The example that I gave when I intervened on my right hon. Friend was that of a financial service business that has recommended to its customers something that the FCA has approved, only for it to come down the line, 12 months later, and suggest the reverse approach. That is effectively what is happening in the case of Liverpool Victoria. I do not want to test your patience too much, Ms Ghani, but let me clarify that example very briefly.

Liverpool Victoria converted to a company limited by guarantee from a friendly society two years ago. The FCA looked at it—

[The Chair]

I am curious as to how the hon. Gentleman will keep this in scope, but I am listening attentively.

[Gareth Thomas]

I am grateful for your patience, Ms Ghani, and I will not test it much more.

The FCA looked at that two years ago and approved it. Crucially, at the time, the chair and the leadership of LV said, “This has got nothing to do with demutualisation.” Where the regulatory perimeter issue comes in is that the FCA will not look at what happened two years ago in the context of what Liverpool Victoria is now trying to do. It is surely legitimate to be concerned about Dame Elizabeth Gloster’s crucial finding that the FCA had not worked out a way to handle decisions being taken by businesses holistically. That has not been properly grasped, and I gently suggest that Liverpool Victoria is the key evidence in that respect.

On the question of the FCA’s policy documents, the way they were used by staff, and whether they were appropriate to LCF’s challenges, they clearly were not up to the job, but at least there was a policy document. In the case of Liverpool Victoria, there does not appear to be any policy document on the FCA’s handling of the demutualisation. That raises a bunch of serious questions, albeit not within the scope of our conversations today.

Clearly, there is a question as to whether staff have been trained appropriately to handle the 600-plus phone calls that customers of LCF made to the FCA, raising their concerns about the products that were on offer, and that they had invested in and were buying. Again, one would have thought that the FCA would have grasped that concern and made sure that staff were trained properly on the big issues of the day affecting the FCA.

Again, I am surprised. I use the example of Liverpool Victoria again. There has been no looking back at previous demutualisations and at how the consumers’ interest was protected in that respect. So even if the FCA has highly capable staff, as I am sure it has, given that they have not looked back, one wonders how they can possibly be trained to think through properly all the key questions.

One of the issues that I raised in an intervention on the hon. Member for Glenrothes was about the extent to which the FCA has learned from the LCF scandal that perhaps it needs not to be quite so close to the boards and management of financial services businesses. Perhaps it needs to move just a little bit more towards having a little more scepticism on behalf of the consumer.

So imagine my concern when I discovered that one of the regulators involved in handling the consumer interest in the Liverpool Victoria case has met the management of LV 35 times and not once with any consumers of the company. That would seem to suggest that they have not learned the lessons.

Lastly, I just want to suggest that there is a series of gaps in the law that need fixing. My right hon. Friend the Member for Wolverhampton South East rightly drew attention to the concern in the LCF case about who regulates mini-bonds. It is gratifying to hear that there is a working group looking at the relationship between HMRC and the FCA in this regard. However, the Minister will not be surprised to learn that I think there is a series of legislative gaps regarding how consumers are handled during the demutualisation of a major financial services business, but I would tempt your patience, Ms Ghani, were I to go down that route. Fortunately, as the all-party parliamentary group for mutuals is meeting the Minister, it will have an opportunity to go through those issues and I very much look forward to that occasion.

[The Chair]

Beautifully put, Mr Thomas. I now call the Minister to respond.

--- Later in debate ---

Finally, another court judgment could change things again, if it were to rule differently and the lawyers then pointed to a number of additional issues related to the ruling that had not yet been clarified. As a result, the pensions sector is still having to work under a degree of uncertainty, and obviously it is a central principle of any wise policy to try to reduce uncertainty. I hope that a report could to some extent alleviate that uncertainty. I appreciate that it would not completely resolve it, but it might be of assistance to businesses in the sector that are providing the services that we value so much, so I hope that the Minister will consider our amendment.

[Gareth Thomas]

On a point of order, Ms Ghani. You were very good at the end of the evidence session with the FCA to point out that the director, who was present, agreed to provide two pieces of written correspondence to me and to the whole Committee. As I understand it, that has not yet arrived. I have some sympathy for the FCA, given the timetable on which we were asking it to provide that information, but I wonder whether the Clerk might gently press the FCA for that information at some point this week.

[The Chair]

Thank you, Mr Thomas; your point of order is duly noted. I believe that the Clerk will indeed be pressing for that data as soon as possible.