Financial Conduct Authority

James Cartlidge Excerpts

Monday 1st February 2016 Commons Chamber

[Mr Rees-Mogg]

I do not agree with my hon. Friend on this occasion. Inevitably, some employees remained the same. It would have been extraordinary if all the regulators at the FSA had been fired and sent off to the great regulatory house in the sky. The powers and the responsibilities of the FCA were changed and, indeed, it has carried out an investigation.

The FCA has to be judicious and bear in mind that some people took out swaps knowing full well what they were doing. Not every swap that was sold was mis-sold. Interest rate swaps are a very important safeguard for people who are uncertain of the direction of interest rates. Indeed, with interest rates at their current lows, many people may feel that it is prudent to protect themselves by taking out an interest rate swap. It would be wrong to so overtighten regulation or to be so sensitive to what happened in the past to make beneficial financial instruments unavailable because of historical mis-selling. Each case needs to be looked at on its merits.

When I first took out a mortgage, I did so at a fixed rate because I knew I could afford to pay that rate but was uncertain about whether I could pay a higher rate. That is a prudent and sensible thing for people to do when engaging with the financial sector. The FCA had a big job of work to do in a quasi-judicial role. It could not just arbitrarily decide that all cases were mis-sellings and therefore they all had to be compensated for.

This House, too, needs to be judicious. The motion is really serious. It says that we have no confidence in an arm’s length independent regulator that this House established just three years ago. If we really mean that, we ought to be legislating to create a new one. We should not simply pass a motion; we should say that the body has failed, that it will be abolished as of 1 April and that a new one will be created.

This motion represents an intermediate step whereby the House faces one of two risks. One is that it is passed this evening and, like many other Backbench Business motions, absolutely nothing follows from it. This House would then look foolish. It would look as if whatever we say makes no difference and we would have no future power to bring our authority to bear on independent regulators when things may be more serious.

The other risk is that the chairman of the FCA feels that he has to resign and take responsibility, because there is no chief executive of the moment, which makes this a very strange time to be holding this debate. If the chairman falls on his sword, what would we achieve? One person would go, but the organisation would remain intact because we have not legislated to replace it.

This House should be proud of its constitutional standing and recognise the extraordinary power it has. We can summon people to the Bar of the House if we are sufficiently annoyed with the way they conduct themselves. We can make them answer to Select Committees, and indeed we do. However, if we use that power without due consideration, without being certain and without having every fact at our fingertips that this body, not its predecessors, is the one in which we have no confidence, we undermine the standing of the House of Commons and its ability to do that in future when our case may be better founded.

[James Cartlidge (South Suffolk) (Con)]

My hon. Friend is making a typically powerful speech and I agree with much of his argument, but does he not accept that we are here primarily to represent our constituents and that the reason so many Members are upset with the FCA is that it is not giving redress? The time it is taking is so frustrating and the motion puts pressure on it to provide redress.

[Mr Rees-Mogg]

I am grateful to my hon. Friend for that intervention, because I think there is a difficulty with time. Reference has been made to the HBOS report, which took a long time to come forward. Again, it started under the FSA, and the failures were of the FSA, not of the FCA. For a body that has been going for only three years, such a timespan is perhaps not that unreasonable, given that for two of those years it was making a specific investigation.

We have made huge progress, thanks to my hon. Friend the Member for Aberconwy, in achieving redress of grievance. That is enormously important, and it is right to do that. However, a vote of no confidence is the nuclear weapon of Parliament. It is something that brings Governments down. If we pass the motion, it ought to lead to fundamental change at the FCA and resignations, but I fear that we are trying to fire this gun before we have loaded it with gunpowder, and that therefore it will misfire. In that respect, I hope that my hon. Friend will withdraw the motion, because I think it has had its effect through the debate.

--- Later in debate ---

[James Cartlidge (South Suffolk) (Con)]

I add my congratulations to my hon. Friend the Member for Aberconwy (Guto Bebb). He is a doughty fighter for financial justice not only for his constituents, but for all our constituents, and we owe him a great debt.

Like my hon. Friend the Member for North East Somerset (Mr Rees-Mogg), I wish to declare an interest in that I am the director of a small business regulated by the Financial Conduct Authority. Like him, I was also regulated by the Financial Services Authority, but unlike him, I do not go back as far as IMRO. I will come on to some of his points. Whereas most Members have focused on constituents’ cases, he, uniquely, has pushed the debate wider—to the overall role of the FCA. If I have the time, I will come on to that.

I, too, want to mention my constituents’ cases. The first case is that of Terence and Jean Gray of Holbrook in South Suffolk. They lost the £50,000 they invested in Connaught income fund series 3 plus the interest, as well as the interest on a further £50,000 in Connaught income fund series 1. Mr and Mrs Gray, who are now in their 70s, saved that money throughout their lives and planned to live off it following their retirement, but they fear they will never see the money again. Their primary concern is that the FCA is unable to provide a timeframe for when its investigations will be concluded. Several hon. Members have made that point, and I hope that the Minister, who I presume will speak soon, can give us an update on the timescale they face.

I have received correspondence not just from consumers, but from firms. In particular, I have heard from Steven Farrall of Chattisham in my constituency, who owns the Ipswich-based firm Williams Farrall Woodward, a financial planning and portfolio management business. His concern is about the retail distribution review and the new way in which we regulate commission and fee-charging on investments, although I do not want to go into the detail of it. He encapsulates the anger felt by many smaller businesses about the regulator. He specifically blames those rules for the loss of about 13,500 independent financial advisers. He says:

“My own opinion of the RDR is that at heart it is an assault on the property and employment rights of thousands of law abiding tax paying private citizens, effectively the employers of the FCA bureaucrats… It is an absolute disgrace in a free democratic society the bunch of self regarding and utterly unaccountable functionaries should have such power.”

That is perhaps a tad harsh, but it brings me to my own experience.

I started a mortgage brokerage in 2004. Of course, that did not come under the FCA, but my experience was that the FSA was always box-ticking, rather than looking at potential problems and doing something about them. I could give many examples of that. Every six months, we had to submit something called a capital adequacy return, despite being a relatively small business. We had a famous document called MCOB—the mortgage conduct of business rules—which was the size of a doorstep, and none of which made sense to anybody. I think it is the assumption of the regulator that small practitioners have armies of compliance officers, just like the banks. Of course, nothing could be further from the truth.

The most extreme example of the FSA being focused on bureaucracy, rather than dealing with the problems in the industry, came in 2010 at the height of the euro crisis, when many people doubted from day to day whether it would survive. On a day when the euro’s survival was the top item on the news, I received an email for the directors of regulated firms. I opened it, expecting advice about the possible calamity we faced, only to find that it was a diversity survey. It was an extraordinary diversity survey that wanted to know, across all levels of management in my business, which was a very small business employing a handful of people, not only what percentage of staff were from each ethnicity, but what percentage were transsexual and even intersexual—a word I had never even heard before. The regulator, on that day of financial crisis, wanted to know how many of my staff were intersexual. A bit like the word poppers, I suspect that word will be new to many people—possibly even to people who are in the Chamber today.

I use that example to illustrate how the FSA was a tick-box regulator. That is why, despite all its work, it never noticed the basic thing, which was that our financial system was heading for an almighty crash and crisis. What we can say in favour of the FCA is that we have not had a credit crunch under it. We have had the successes that my hon. Friend the Member for Wyre Forest (Mark Garnier) talked about. There is one in particular that I will finish on.

What the FCA has done on mortgage rules and on the property market has been for the good. We need prudential borrowing. I am a conservative on financial services and think that we were far too reckless in the build-up to the crunch. If we want fairness, we must recognise that asking first-time buyers to be so heavily regulated, while a buy-to-let applicant for a mortgage faces no regulation and can take out an interest-only mortgage for a huge amount of money, without a key facts illustration that has to be advised, regulated and so on, is deeply unfair.

In conclusion, I agree with my hon. Friend the Member for North East Somerset that it is too early to pass judgment on the substantive work of the FCA, but we all feel that it needs to do greater work on the basic injustices that our constituents face in cases such as Connaught. I hope that the Minister will have some news on when people who have been affected by such cases can expect to hear substantive news about their rights.