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

John Glen Excerpts

Tuesday 15th June 2021 Public Bill Committees

[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?

[The Economic Secretary to the Treasury (John Glen)]

I am very happy to respond at length in my remarks at the end. The distinction we make is that LCF is the only FCA-authorised firm that was on-lending. That is the distinction; not so much the mini-bond issuance but the on-lending nature of it.

[Mr McFadden]

I am grateful to the Minister. I am just going through this series of things to try to clarify exactly what might place the taxpayer on the hook. Does it require the kind of report carried out by Dame Elizabeth Gloster and commissioned by the FCA into the collapse of LCF? Is there a clear threshold of regulatory failure to be passed? There was obviously regulatory failure in this case, but, as we saw from the witnesses this morning, people will argue that other regulatory failures have applied to other firms.

In this case, the regulatory failures were multiple. I do not want to go through them in detail because we will come on to other amendments in which they can be discussed, but I will mention a few of them briefly: misleading promotions by LCF using the halo effect have been regulated by the FCA yet not adequately dealt with by the financial promotions team at the FCA; a failure by the same financial promotions team to join the dots and alert other parts of the FCA, such as the supervisory team, on the implications of those misleading promotions; and multiple attempts to alert the FCA—more than 600 phone calls, according to annex 6 of Dame Elizabeth’s report. Yet, in the vast majority of cases nothing was passed up the line of pursuit, in large part because the mini-bonds were not regulated by the FCA, so the call-handlers’ instincts were, “You’re phoning us about something that we do not regulate, so we don’t have to pass it up the line”—even though the firm as a whole was regulated by the FCA.

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[John Glen]

It is a pleasure to serve under your chairmanship, Ms Ghani, and I thank all Committee members for their consideration of this important legislation.

As I set out on Second Reading, the Bill is a vital step in compensating LCF bondholders, and I will now turn directly to the consideration of amendments 1 and 7. As the right hon. Member for Wolverhampton South East set out, amendment 1 seeks to add a requirement for the Secretary of State to lay before Parliament a set of criteria for when the taxpayer should compensate investors for investment failures. In essence, it brings some clarity about when the mechanism that we are adopting, and hopefully funding, through the passage of the Bill would be used. Amendment 7 seeks to require the Secretary of State to lay before Parliament a report that assesses the impact of the Government’s compensating the customers of London Capital & Finance plc, as well as broader issues relevant to the mis-selling scandal.

I have listened very carefully to the speeches made during the passage of the Bill, on Second Reading and today, and to the evidence that we received this morning. I am particularly drawn to the remarks of my hon. Friend the Member for North East Bedfordshire, who acknowledged that a degree of risk is involved with any investment. With the right set of regulations and requirements, however, investors can be equipped with the right information to understand their risks and to make informed choices. The Government’s scheme appropriately balances the interests of both bondholders and the taxpayer, and it will ensure that all LCF bondholders receive a fair level of compensation for the financial loss they have suffered.

I turn now to compensation. I must reiterate that LCF’s failure was unique and exceptional. It is the only failed mini-bond issuer that was FCA-authorised and was selling bonds in order to on-lend to other companies. In conjunction with the FCA, the Treasury has looked at eight mini-bond firms that have failed in recent years, and LCF is unique in that respect. It is important to emphasise that the Government cannot and should not stand behind every investment loss. As I have probably said previously, LCF’s business model was highly unusual in both its scale and structure, and the extraordinary circumstances surrounding its collapse are unique.

[Peter Grant]

Has the Economic Secretary or any of his advisers actually read the promotional material that companies such as Blackmore Bond were giving out, to assess the number of times that words such as “guarantee” and “secure” were included in those documents? Does he not accept that something needs to be looked at there—maybe not for compensation this time, but certainly for tighter regulation in the future?

[John Glen]

I am grateful to the hon. Gentleman for his intervention because it takes me to the question of what the Government are doing to improve the efficacy of the financial promotions regime that he mentioned in respect of a different failure. We continue to keep the legislative framework underpinning the regulation of financial promotions under review, including whether it is suitable for the digital age. Many of the promotions are obviously online. We will publish a response in the early summer to the consultation on a regulatory gateway for authorised firms approving the promotion of unauthorised firms. It is not an issue that we take lightly. Change, once in place, is designed to strengthen the regime by ensuring that firms able to approve financial promotions are limited to those with the relevant expertise to do so. The FCA will be better able to identify when a financial promotion has breached the restrictions and take action accordingly, but that does not mean that the LCF failure is not unique and of a different scale and quality from some of the other failures.

[Mr McFadden]

I want to ask the Minister about the point he made about on-lending. What is the relationship between on-lending and the degree of regulatory failure? He is probably right that this was the only firm doing on-lending, but Dame Elizabeth’s report focuses on an egregious regulatory failure and she sets out all the different things that we will discuss. I suspect that the Government have found something about this case that is unique in order to insulate themselves from claims from other investment failures. I do not see the relationship between that uniqueness and the regulatory failures outlined in Dame Elizabeth’s report.

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[John Glen]

As the right hon. Gentleman set out, Dame Elizabeth’s report showed enormous failure in the way that the FCA discharged its responsibility for a regulated firm carrying out unauthorised activities. The point that he is making specifically is about the distinctiveness of the on-lending. There is a distinction between a firm, such as BrewDog or Hotel Chocolat, that raises funds for its own business activities and a firm that, although authorised, has not carried out regulated activities. Through the failure of the FCA’s oversight to look at the broader activities of the firm, it is impossible to verify whether those activities on lending bore any relationship to the raising of funds for that business. That is the distinctive difference. It is that failure of the FCA to execute its broader responsibility for an authorised firm carrying out an unauthorised activity in this distinct area that gives us licence to intervene.

On the specific issue of non-transferable debt securities, which are commonly known as mini-bonds, the Government are consulting on proposals to bring their issuance into FCA regulation. After listening to the evidence this morning, I would just make the point that Dame Elizabeth Gloster made 13 recommendations in her report. In the written ministerial statement of 17 December 2020 that was issued in my name all those recommendations were accepted—nine pertaining to the FCA and four to the Treasury. There has also been a subsequent undertaking by the FCA to report on progress against those actions and recommendations. The FCA is conducting a detailed piece of work to look at the issue of high-risk investments holistically, and that includes a discussion paper to get views on changes that can strengthen the FCA’s financial promotion rules for high-risk investments. This work follows the FCA’s ban on the mass marketing of speculative illiquid securities.

As the right hon. Gentleman rightly said, only three Government compensation schemes have been established in the past three decades: Barlow Clowes, Equitable Life and LCF. I acknowledge that, for some, they have not been complete and satisfactory. Despite many investment firms failing over that period, the fact that there have only been those three interventions on the scale that we are seeking to secure today demonstrates that this type of intervention is the exception and not the rule. Moreover, the particular circumstances of these three cases are quite different. For example, compensation was provided to Equitable Life investors, in most cases not because they had lost their original capital but because the firm had not met the expected returns on which many investors had based their future retirement plans. That contrasts starkly with LCF, where investors stood to lose their principal sum.

The common feature in each case is a degree of maladministration or misregulation—a major factor that the Government considered in deciding to launch the LCF compensation scheme—but the circumstances are idiosyncratic. It therefore would not be possible in any meaningful sense to set out the precise framework for Government to consider when establishing such schemes in future or to stipulate the threshold of misregulation ex ante.

That does not mean to say that as a Minister, and in my frequent engagement with the FCA, I do not look closely at all these matters. Indeed, I have done so throughout the process in getting to this point today. I believe that such a framework could create an unrealistic expectation among investors about the possibility of future Government compensation schemes and the misconception that Government will stand behind bad investments. That would create a moral hazard for investors and potentially lead individuals to choose unsuitable investments, thinking that the Government will provide compensation if things go wrong.

I want to address some of the points that the right hon. Gentleman made. He mentioned ISAs. As we announced in response to Dame Elizabeth’s report, HMRC and the FCA have now established an ISA intelligence working group to strengthen communication and information sharing between the two organisations. The group has met and agreed the structure and objectives, which is already resulting in information sharing between the two organisations.

In parallel, from this autumn, once recruitment of personnel is complete, HMRC will reinforce its ISA compliance regime with a programme of ISA manager audits. This will not focus on consumer protection, which does not fall within HMRC’s remit, but could detect technical breaches of the ISA regulations.

We are exploring steps to increase consumer understanding of the ISA wrapper. As the right hon. Gentleman rightly said, this has a large degree of consumer confidence vested in it. We need to tackle the misplaced perception that ISAs benefit from greater Government or regulatory assistance.

I have deep engagement with the FCA. I will speak later this week to the chief executive as part of my routine, regular engagement and I will relay the detailed comments of, in particular, the hon. Member for Harrow West on the degree of engagement of consumer groups versus the regulated firm’s representatives, and especially the case he is on at the moment.

We heard evidence this morning about the retention of one named individual. The chief executive has brought in five new people from outside the organisation in taking a balanced view on how to deliver a successful transformation programme. I urge him to continue successfully to implement the programme.

There are considerable principled and practical drawbacks to the amendment, which is why I ask that it be withdrawn.

[Mr McFadden]

I am grateful for the Minister’s response.

I am not entirely convinced about the relationship between on-lending and the decision to compensate. I am sure that the Minister is correct in the literal sense that this was the only regulated firm that was selling unregulated mini-bonds. I am not saying that the Minister is wrong, but from reading the report I believe that Dame Elizabeth would have made the same findings. The mini-bonds were not doing what it said on the tin: they were not on-lending but pyramid selling.

The degree of failure, the degree of investment loss and the degree of regulatory failure are not directly related to the point about on-lending: it is more substantial than that. I am not convinced that all the elements of the Government’s case add up. It looks to me as though they have had to find a unique element to insulate themselves from court action or other claims.

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[The Chair]

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

[John Glen]

I will obviously now move to consideration of amendment 2. I am grateful to the right hon. Member for Wolverhampton South East, who is an experienced and distinguished former Minister himself. He referred to the catastrophe word bingo. I do not want to address that particularly, but I will address the amendment, which seeks to add a requirement for the Secretary of State to publish a report setting out progress on the implementation of the 13 recommendations in the report by Dame Elizabeth Gloster.

I will also tell the right hon. Gentleman precisely what we have done, what I think the FCA has done, and where I think that takes us, and I will address his concerns, raised throughout this debate, on the perimeter, on the halo effect and some of the points that Dame Elizabeth Gloster made.

The Treasury accepted Dame Elizabeth’s four recommendations regarding the Treasury and we welcome the FCA’s commitment to implement all nine of her recommendations that apply to it. We are committed as a Government to act on Dame Elizabeth’s recommendations, to ensure that the regulatory system maintains the trust of consumers. I submit that progress has already been made in implementing the recommendations and I set that out during my evidence session for the Treasury Committee’s inquiry into the FCA’s regulation of London Capital & Finance on 21 April.

Regarding Dame Elizabeth’s recommendations for the FCA, I obviously welcome the FCA’s acceptance of them, and I am sure that the Committee will have noted its commitment to report publicly on its progress in implementing these recommendations and indeed on its wider transformation programme. I am sensitive to the criticism that this is an empty exercise where there is nothing specific that Parliament and Members can address. I would therefore draw attention to the fact that Charles Randell, the current chair of the FCA, provided a detailed update in his letter to me on 16 April.

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[Mr McFadden]

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

[John Glen]

London Capital & Finance was an FCA-authorised firm that primarily offered an unregulated investment product, commonly known as mini-bonds, to retail consumers. It entered administration in January 2019, impacting 11,625 people who invested around £237 million. The Serious Fraud Office and FCA enforcement have launched an investigation into individuals associated with LCF. The Financial Reporting Council has also launched investigations into the audits of LCF. As the Committee will know, Dame Elizabeth Gloster led that independent investigation, which also revealed shortcomings in the FCA’s supervision of LCF. A complex range of interconnected factors contributed to the scale of losses for LCF bondholders, creating a situation that is unique and exceptional. While other mini-bond firms have failed, LCF is the only one that was authorised by the FCA and sold bonds in order to “on-lend” to other companies. As I have said before, LCF’s business model was highly unusual both in its scale and structure. In particular, it was authorised by the FCA despite generating no income from regulated activities. Bondholders were badly let down by LCF and the regulatory system designed to protect them, and I announced that the Treasury had set up a compensation scheme for bondholders who suffered losses after investing in LCF. The scheme will be available to all LCF bondholders who have not already received compensation from the FSCS and will provide 80% of the compensation that they would have received had they been eligible for FSCS protection up to the maximum cap of £68,000. The LCF scheme is expected to pay out £120 million in compensation to around 8,800 bondholders in total. Where bondholders have received interest payments from LCF or distributions from the administrators, Smith & Williamson, these will be deducted from the amount of compensation paid.

There are two main aspects of clause 1, which I shall explain in turn. First, legislation is required to establish the financial authority to enable the Treasury to incur expenditure in relation to the scheme. That will ensure that the Treasury complies with the 1932 Baldwin concordat and the principles of managing public money. Clause 1 provides the Treasury with the spending authority that will enable payments to be made to eligible bondholders. We are working on the details of that scheme but I hope that it will be possible to reimburse them within six months of Royal Assent.

Secondly, the Treasury intends to use the process set out in part 15A of the Financial Services and Markets Act 2000 to require the Financial Services Compensation Scheme to administer the scheme on behalf of the Treasury. Clause 1 disapplies the FCA’s rule-making requirement so that existing rules relating to the FSCS can be applied to the scheme without the need to undertake a lengthy consultation. That reflects the fact that existing rules have already been consulted on and avoids any further unnecessary delays to compensation payments. In addition, as the Treasury will pay for the scheme, there is not the same obligation to consult FSCS levy payers as there would be for rules that sought to make use of FSCS funds raised by the levy.

I submit that clause 1 is an essential step in the introduction of the LCF compensation scheme without which compensation payments cannot be made. I therefore recommend that the clause stand part of the Bill.

[The Chair]

I understand that the right hon. Member for Wolverhampton South East wishes to make a short contribution.

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[Peter Grant]

The Minister referred to the fact that there are ongoing investigations in relation to LCF. Does he recognise that some of the individuals and intermediary businesses that are now under criminal investigation for their part in LCF also played a major part in other mini-bond scandals that I have written to him about separately? Although he made the point about the uniqueness of LCF, the aftershock of LCF is very definitely being felt in other mini-bond scandals that have happened since then.

[John Glen]

Out of courtesy, I am very happy to respond to my colleagues. The right hon. Member for Wolverhampton South East asked why the 80% figure was not 100%. As I have tried to explain through the submissions that I have made, the Government have been trying throughout to balance the interests of bondholders and the taxpayer to ensure that we have a fair level of compensation in respect of the financial losses incurred. The scheme is based on the FSCS level of compensation but, as he knows, it is 80% up to that cap of £68,000 to reflect the unregulated nature of the LCF product.

I emphasise that it is imperative to avoid creating the misconception that Government will stand behind bad investments in future, even where the FSCS does not apply. That would create a moral hazard for investors and potentially lead individuals to choose unsuitable investments thinking that the Government will provide compensation when things go wrong. To avoid creating that misconception, and to take into account the wide range of factors that contributed to the losses that the Government would not ordinarily compensate for, the Government will establish the scheme at the level of 80% of LCF bondholders’ initial investment up to the maximum of £68,000. With any investment, there is clearly a risk that sometimes investors will lose money, and the Government and taxpayer cannot and should not be expected to step in and compensate for every failure and every loss. It would not be right or fair for investors in non-regulated products to receive fuller compensation than those who have invested in regulated products, for which the maximum amount is capped at £85,000 under the FSCS.

On the remarks of the hon. Member for Glenrothes about the individuals involved in an ongoing serious fraud inquiry, I am not familiar with the detail, but obviously I am happy to receive any representations. I hope that brings satisfaction to the Committee.

Question put and agreed to.

Clause 1 accordingly ordered to stand part of the Bill.

Clause 2

Loans to the Board of the Pension Protection Fund

[Matt Rodda (Reading East) (Lab)]

I beg to move amendment 3, in clause 2, page 2, line 7, at end insert—

“(3) No loan shall be made under this section until the Secretary of State has laid before Parliament an impact assessment of the means of repaying the loan, including specifically the impact on pension schemes from the Fraud Compensation Fund levy.”

This amendment would prevent the Secretary of State from making a loan to the Board of the Pension Protection Fund for the purpose of compensating eligible pension schemes until he or she has laid before Parliament an impact assessment of the Fraud Compensation Fund levy on different pension sectors.

United Kingdom Debt Management Office: Business Plan

John Glen Excerpts

Tuesday 15th June 2021 Written Statements

[The Economic Secretary to the Treasury (John Glen)]

The United Kingdom Debt Management Office (DMO) has today published its business plan for the financial year 2021-22. Copies have been deposited in the Libraries of both Houses and are available on the DMO’s website, www.dmo.gov.uk.

[HCWS91]

Draft Payment and Electronic Money Institution Insolvency Regulations 2021

John Glen Excerpts

Wednesday 9th June 2021 General Committees

[The Chair]

Before we begin I would like to remind Members to observe social distancing, which is not a problem today. I remind Members that Mr Speaker has asked that masks should be worn in Committee except when speaking. Hansard colleagues would be most grateful if Members could send their speaking notes to [e-mail]. As people may have noticed, eagle-eyed, if Members wish to remove their jackets, given the inclement weather from a Yorkshireman’s point of view, they are very free to do so.

[The Economic Secretary to the Treasury (John Glen)]

I beg to move,

That the Committee has considered the draft Payment and Electronic Money Institution Insolvency Regulations 2021.

A copy of the regulations was laid before the House on 26 April.

It is a pleasure to serve again under your chairmanship, Mr Davies.

The payments sector in the United Kingdom has seen rapid change over recent years, with people increasingly using card, mobile and electronic wallets to make payments. Firms today range from small remittance firms on the high street to FinTech giants with millions of customers. The growth of the payments sector has offered opportunities for UK businesses and consumers, with many using payment and electronic money institutions not only to make payments, but as their transactional banking provider to access their salaries and savings. Customers are now able to make payments that are faster, cheaper and more secure. However, as that sector has grown, so has the number of customers exposed to risk if those firms were to fail and enter insolvency.

There is evidence that existing insolvency processes for payment and electronic money institutions are not working effectively for customers. It is challenging for an administrator to start returning relevant funds until they have complete information on all claims to those funds. Gathering that information, potentially without key outsourced staff or access to the firms IT systems, can make insolvency a long and expensive task, during which time customers do not have access to their funds. They also face an increased chance of receiving a reduced claim at the end of the process as a result of high administration fees.

Recent administration cases have taken years to resolve, with customers left without access to their money for prolonged periods and receiving reduced monies as a result of high distribution costs. The regulations therefore propose to introduce a new special administration regime for payment and electronic money institutions and an extension of provisions under the Financial Services and Markets Act 2000 to those firms. The new regime is modelled on the 2011 special administration regime for investment banks.

The changes will help to make managing the insolvency of a firm a quicker and clearer process, ultimately leading to customers receiving their funds quicker and giving continuity and confidence to consumers and businesses in the event of a payments or electronic money firm being put into insolvency. The legislation also corrects a minor defect in recent legislation, which transposed and on-shored the bank recovery and resolution directive II.

The special administration regime for payment and electronic money firms is a new insolvency process that provides consumer protection objectives and a toolkit for insolvency practitioners to aid them in efficiently managing an insolvent payment or electronic money institution. The new regime includes bespoke objectives placed upon the administrator to ensure the return of customer funds as soon as reasonably practicable, to engage with relevant authorities and either to rescue or wind-up the institution in the best interests of creditors. It also contains useful provisions on matters such as continuity of supply, to ensure that key functions, such as the provision of IT services, are maintained and not lost at the point of insolvency, and provisions to ease transfers of business which would allow the administrator to move customers to a new provider. Importantly, it also provides bar date provisions, which, with appropriate consumer protections, set deadlines for customers to claim their money back. Once those deadlines have passed, administrators are able to begin making distribution of funds, rather than having to wait for everyone to claim in their own time.

I would like to note to the Committee that additional work is required in order to apply the special administration regime to firms located in Northern Ireland, and partnerships or limited liability partnerships located in Scotland. Around 1% of the 1,300 UK payments and electronic money firms are located in Northern Ireland, and there are no firms that are partnerships or LLPs based in Scotland. I have written to Ministers in the Northern Ireland Executive and Scottish Government and committed to rectify that as soon as is practicable in future legislation. In the interim, consumers will still benefit from the changes to the Financial Services and Markets Act 2000, and from the protections offered to the 99% of eligible firms, as it does not matter where in the UK the customer is located.

The instrument also provides for part 24 of the Financial Services and Markets Act to be applied to payment and electronic money institution insolvencies. The extension of those provisions will provide the Financial Conduct Authority with the same powers to participate and protect consumers in an insolvency process for those sectors as it does for other FCA-supervised firms. That includes the right for the FCA to speak at court hearings regarding the insolvency and a requirement for the administrator to work with the FCA during the insolvency process, ensuring that the FCA can work on behalf of consumers to get them their money back.

The regulations will protect consumers and inspire confidence in a modern and world-leading British financial services sub-sector, and I commend them to the Committee.

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[John Glen]

I thank the right hon. Gentleman for his characteristically forensic but clear questions, and I am happy to try to respond. He raised a number of reasonable points about the nature of the provision for reimbursing customers who find themselves dealing with an insolvent provider. He also picked up on the fact that the institutions in question do not form part of the FSCS levy and the compensation scheme from that. However, they are subject to the Payment Services Regulations 2017, PSRs, and the Electronic Money Regulations 2011, EMRs. They impose a different regime, which is a safeguarding requirement to protect customer funds received for the provision of a payment service or e-money. That means that the firms dealt with under today’s SI must put a certain amount of capital aside or have an insurance provision for safeguarding. They are not completely without some provision, but it is just different from the levy pool that comes out of the FSCS, levy payment and membership of that pool.

The right hon. Gentleman asked about the cut-off process, the bar, and how reasonable that would be. Of course, that is underpinned by a court process and one of the provisions in the regulations is for the FCA to be a participant in that, to verify the exhaustive nature of steps taken to identify customers who will be subject to some of the pay-outs.

The right hon. Gentleman also asked about foreign exchange and the transfer of assets abroad. Those matters would ordinarily come under the provisions of the FCA, but I will look into those issues further and write to him on those two specific points. My instinct is that there is no distinction in terms of different treatment for different customers.

I am confident that the legislation will produce better outcomes for UK businesses and consumers in the payments and e-money sectors. The right hon. Gentleman rightly acknowledged the fast-evolving nature of the industry, and it is vital that we in the UK ensure that our financial services sub-sectors have appropriate consumer protection measures. I look forward to the full implementation of the regime. I think that it will provide greater assurance to consumers and a clearer pathway to resolution when firms go under. I commend the SI to the Committee.

Question put and agreed to.

PrivatBank (Recognition of Third-Country Resolution Action) Instrument 2021

John Glen Excerpts

Wednesday 19th May 2021 Written Statements

[The Economic Secretary to the Treasury (John Glen)]

I wish to update the House on the steps that HM Treasury has taken in regard to public joint stock company commercial bank PrivatBank.

On 14 May 2021, I approved the Bank of England’s decision to recognise the bail-in by the National Bank of Ukraine and the Ukrainian authorities between 18 and 20 December 2016 of four English law governed loans made by UK SPV Credit Finance plc to PrivatBank, in accordance with section 89H of the Banking Act 2009. The Bank of England instrument which gave effect to the recognition decision will be laid before Parliament today and has been published on the Bank of England website.

The Bank of England and HM Treasury have independently reached the determination that the bail-in of the four loans was broadly comparable in anticipated results and objectives to an equivalent UK resolution, and that none of the conditions for refusal to recognise within section 89H(4) of the Banking Act 2009 was satisfied.

Decisions over whether to recognise a third-country resolution action are regarded by the Financial Stability Board as a key aspect of an effective cross-border resolution regime. Under UK law, the Bank of England is required to make a decision on whether or not to recognise resolution actions when requested to do so by a third-country resolution authority. That decision can only be made with the approval of HM Treasury.

[HCWS39]

Sale of Government-owned NWG Shares

John Glen Excerpts

Wednesday 12th May 2021 Written Statements

[The Economic Secretary to the Treasury (John Glen)]

I can today inform the House of the disposal of £1.1 billion worth of Government-owned NatWest Group plc—NWG, formerly Royal Bank of Scotland, RBS—shares, representing 5% of the company, by way of an overnight sale via a competitive accelerated book build—ABB—to institutional investors. The Government’s remaining shareholding represents 54.8% of the company.

Rationale

It is Government policy that where a Government asset no longer serves a public policy purpose, the Government may choose to sell that asset, subject to being able to achieve value for money. This frees up public resource which can be deployed to achieve other public policy objectives.

The Government are committed to returning NWG to full private ownership, given that the original policy objective for the intervention in NWG—to preserve financial and economic stability at a time of crisis—has long been achieved. The Government only conducts sales of NWG shares when it represents value for money to do so and market conditions allow. This sale represents a further step forward for Government in exiting the assets acquired as a result of the 2007 to 2008 financial crisis.

Format and Timing

The Government, supported by advice from UK Government Investments (UKGI), concluded that selling shares by way of a competitive ABB process to institutional investors represented value for money for the taxpayer. The sale involved wall-crossing, an established market procedure designed to improve the chances of reaching the widest possible range of investors, executing successfully and achieving the best price for the taxpayer. Wall-crossing is commonly used in transactions of this sort and involves contacting a number of institutional investors hours before the transaction launch on a confidential basis to give them more time to consider participating in the sale and to provide UKGI with feedback which can be used to optimise the offering. The institutions were selected on the basis of objective criteria and do not receive preferential treatment in the allocation. UKGI intends to keep disposal options under review and will continue to consider further transaction options that achieve value for money for the taxpayer.

ABBs are a well-established method of returning Government-owned shares to private ownership, while protecting value for the taxpayer. The first two sales of NWG shares were completed by way of ABBs—in August 2015 and June 2018, and this method was also used in the sell-down of the Government’s stake in Lloyds Banking Group.

This is the fourth sale of NWG shares undertaken by the Government, following previous disposals in August 2015, June 2018 and March 2021.

The sale concluded on 11 May 2021, with institutional investors purchasing a limited number of Government owned shares. A total of 580 million shares—5% of the bank—were sold at the price of 190p per share. This represented a 3.6% discount to the 10 May 2021 closing price of 197.05p. A small discount to market price is necessary and expected in a market facing the sale of such a large volume of shares overnight. UKGI’s view, having taken advice from their privatisation adviser, Goldman Sachs, and their capital markets adviser, Rothschild & Co, is that the final price achieved in the transaction represents fair value, based on the current and future prospects of NWG, and that the transaction achieved value for money for the taxpayer. Following this transaction, the Government’s shareholding will stand at 54.8%.

Details of the sale are summarised below:

Oral Answers to Questions

John Glen Excerpts

Tuesday 27th April 2021 Commons Chamber

[Kevin Hollinrake (Thirsk and Malton) (Con)]

What steps his Department is taking to support businesses affected by the covid-19 outbreak.

[The Economic Secretary to the Treasury (John Glen)]

Throughout the pandemic, the Government have sought to support businesses across the UK. To do this, we have put in place a package of economic support for businesses and individuals worth £352 billion since the start of the pandemic. The Office for Budget Responsibility and the Bank of England have highlighted that without this intervention the UK economy would be significantly worse than it is today.

[Mrs Murray [V]]

What additional financial assistance can my hon. Friend give the all-important tourism sector in Cornwall to ensure that it is fully ready to greet the G7 in June?

[John Glen]

Cornwall hosting the G7 is a fantastic opportunity. I know that my hon. Friend has welcomed this chance to showcase all that Cornwall has to offer. Many organisations in the broader tourism sector have benefited from business grants of over £34 million provided to her constituency of South East Cornwall, as well as business rates holidays and a temporary reduction in the rate of VAT. The Ministry of Housing, Communities and Local Government has recently announced the £56 million welcome back fund to support safe local trade and tourism as economies reopen.

[David Simmonds [V]]

I thank my hon. Friend for that answer and particularly welcome the support being offered in the form of extended business rates relief. Looking to the future and with reform of business rates in the pipeline, what discussions have taken place with Department for Business, Energy and Industrial Strategy colleagues about the potential to balance the need to secure the correct revenue to support vital local government services and boosting high streets like mine in Ruislip, Northwood and Pinner through the reform of business rates?

[John Glen]

My hon. Friend brings a great deal of expertise and experience to this matter. The Government have committed to over £16 billion in business rates support for eligible retail, hospitality and leisure property since April last year. When combined with small business rates relief, this means that three quarters of a million retail, hospitality and leisure properties in England will pay no business rates for the 15 months from 1 April last year. The Government are, however, undertaking a fundamental review of the business rates system and have invited stakeholders to contribute their views and ideas for reform. I know that my hon. Friend will also be very pleased to see the £16.9 million of business grants that his constituents have received.

[Kevin Hollinrake]

Warren Buffett once said:

“What we learn from history is that people don’t learn from history.”

With a 50% rise in the number of companies in significant financial distress, to prevent repeating the historical mistakes of post the last financial crisis, inflicting all that scandalous treatment on SMEs, will my hon. Friend consider working with the banks to extend the very fair and sensible provisions of the pay as you grow scheme and bounce bank loans, and also transfer that into CBILS—coronavirus business interruption loan scheme—loans?

[John Glen]

The Treasury has, as my hon. Friend will know, amended the CBILS rules to allow lenders to extend loan terms from six to a maximum of 10 years, and that would assist borrowers in that repayment. CBILS term extension will be offered at the discretion of lenders, unlike pay as you grow options for bounce back loans, because they are different in terms of the guarantees that the Government have offered. Extensions are limited to those borrowers that lenders assess are in difficulty and will benefit from that extension, and only for the duration required. That customised approach, as I am sure he would understand given his vast business experience, is appropriate given the nature and scale of that different intervention.

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

When Lex Greensill was given his No. 10 business card, he had no contract and no job description, and there have now been reports that during the pandemic, the financial empire that he built may have lent Government-backed money based on invoices to companies that had never done business with his client, GFG, some of which say they had no intention of doing so. Will the Minister look into the issue of how this financing was structured and ensure that hard-working British steelworkers do not pay the price for Greensill’s collapse?

[John Glen]

I thank the right hon. Gentleman for his question. I can assure him that this Government are fully committed to examining all those matters through the review process and complying with all requests for information in order to get to the bottom of this matter.

[Dr Rupa Huq (Ealing Central and Acton) (Lab)]

What fiscal steps he is taking to support self-employed people as covid-19 restrictions are lifted.

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[Mrs Emma Lewell-Buck (South Shields) (Lab)]

What steps he is taking with the Secretary of State for Business, Energy and Industrial Strategy to ensure the equitable distribution of coronavirus business support schemes.

[The Economic Secretary to the Treasury (John Glen)]

The Government have provided £25 billion in cash grants for businesses, and that includes the £5 billion of funding allocated at the March Budget for restart grants and the discretionary additional restrictions grant fund. My right hon. Friend the Business Secretary has been working closely with local authorities to ensure that these grants are delivered as swiftly as possible and directed towards the businesses that have been most impacted by the pandemic.

[Mrs Lewell-Buck [V]]

It is clear that equitable distribution of covid business schemes is not a priority. Only those on this Treasury Bench would have the gall to claim fairness when the Chancellor and his Ministers were consumed with pulling out all the stops to support their friend the former Prime Minister on behalf of Greensill, while 3 million people were excluded from support schemes, some so distraught that they took their own lives. So to clear this up once and for all, can the Minister explain what news did Treasury officials report at a meeting on 24 April that made Greensill representatives “very pleased”?

[John Glen]

As I have said previously, the Government are committed to co-operating fully with all reviews on these matters. I do not accept what the hon. Lady has said with respect to the schemes that the Government have put forward over the past 14 months. Her constituency has had £16.7 million in business grants and 1,206 bounce-back loans totalling £30 million. In addition, 12,700 of her constituents have benefited from the furlough scheme, and 2,000 have benefited from the self-employed income support scheme. That is a significant contribution to help her constituents.

[Dr Julian Lewis (New Forest East) (Con)]

How many promoters and operators of schemes subject to the loan charge have been prosecuted for promoting and operating those schemes.

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[Bob Blackman (Harrow East) (Con) [V]]

On 31 January, in answer to the debate on justice for Equitable Life policyholders, this House was assured that all records were being retained and would be available in the event of their being needed. Equally, we were assured that there were no plans to destroy those records. I was therefore shocked that the Public Accounts Committee, in its hearing last week, was informed by Treasury officials that the records had been destroyed and would not be available. That makes getting justice for Equitable Life policyholders more expensive, so will my right hon. Friend agree to meet me and a small delegation of the all-party parliamentary group for justice for Equitable Life policyholders, so that we can get to the bottom of how we can move this long-running saga forward?

[The Economic Secretary to the Treasury (John Glen)]

There has been no change in the Treasury’s position since I updated the House in January 2019. The relevant records—the data relating to all payments made under the scheme—are retained, and will continue to be so for as long as that is legal. Contrary to the press reports, there are no plans to destroy records. There is a complaints process provided by the scheme, and those who are not satisfied may take their case to the independent review panel which resolved such cases before closure. Further to the oral evidence session to which my hon. Friend referred, the permanent secretary to the Treasury will be writing to the PAC to provide similar reassurance and clarification. Since the scheme has now closed, there will be no further funding on this matter.

[Sarah Olney (Richmond Park) (LD) [V]]

The Association of Accounting Technicians has published its response to the consultation opened by the Treasury on its plans to reduce air passenger duty, in which it argues that a reduction would be wrong, as it “contradicts and greatly weakens government policy on seeking to reach ‘net zero’ by 2050”. Why does the Government’s tax policy not support their net zero goals?

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[Gareth Davies (Grantham and Stamford) (Con)]

The Government’s commitment to the Task Force on Climate-related Financial Disclosures highlights the importance of transparency in investment portfolios. Does my hon. Friend agree that more can be done to improve transparency and prevent the exposure of investments by financial services companies to modern slavery?

[John Glen]

Yes, I agree with my hon. Friend. On modern slavery, the landmark provision in section 54 of the Modern Slavery Act 2015 includes institutional investors that fall within the scope of the requirement and meet the criteria requiring them to publish an annual statement.

[Patricia Gibson (North Ayrshire and Arran) (SNP) [V]]

With the Prime Minister apparently determined to keep the VIP tax-break hotline open, and as questions remain over the No. 10 refurbishment and concerns over Government procurement are still not addressed, will the Chancellor explain whether he thinks it is time for an independent inquiry into the misuse of public funds?

Financial Services

John Glen Excerpts

Consideration of Lords amendments
Monday 26th April 2021 Commons Chamber

[The Economic Secretary to the Treasury (John Glen)]

I beg to move,

That the Money Laundering and Terrorist Financing (Amendment) (High-Risk Countries) Regulations 2021 (S.I., 2021, No. 392), dated 24 March 2021, a copy of which was laid before this House on 25 March, be approved.

This Government are committed to combating money laundering and terrorist financing and recognise the threat of economic crime to our financial system. Illicit finance risks damaging not only our national security, but our reputation as a global financial centre by undermining the integrity and stability of our markets and institutions.

While it is right that we stamp out the scourge of illicit finance for the benefit of the United Kingdom, it is also right that we do so because of our responsibilities to the wider world. When illicit finance flourishes, so does serious and organised crime, such as people and drug trafficking and terrorism. These are acts that have huge social and economic costs and, of course, cause unimaginable suffering. That is why the Government are focused on making the UK a hostile environment for illicit finance. As part of this work, we have taken significant action to tackle money laundering while strengthening the response of the whole financial system to economic crime.

The bedrock of these efforts is the money laundering regulations. This is the legislative framework that sets out a number of requirements that businesses falling under its scope must take to combat money laundering and the financing of terrorism. These requirements include the need for firms to implement measures to identify and verify the people and organisations with whom they have a business relationship or for whom they facilitate transactions.

In addition, the regulations require financial institutions and other regulated sector businesses to carry out greater scrutiny or enhanced due diligence in respect of business relationships and transactions involving so-called high-risk third countries. These are nations that have been identified as having strategic deficiencies in their anti-money laundering and counter-terrorism financing regimes, and that pose a significant threat to the UK’s financial system. The statutory instrument under discussion this evening amends the definition of a high-risk third country in the money laundering regulations.

Allow me to explain the background to some of these changes. At present, the definition of a “high-risk third country” in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 is linked to retained EU law and references the list of countries identified by the European Commission as high risk. This list was previously operated via EU law, which no longer has an effect in the UK. If our legislation is not amended, the list will become outdated and could leave the United Kingdom at risk from those operating in nations with poor money laundering and terrorist financing controls.

Furthermore, the United Kingdom will risk falling behind international standards set by the Financial Action Task Force or FATF. This instrument will therefore amend the money laundering regulations to remove references to the EU’s high-risk third countries list and insert a new list of countries identified in schedule 3ZA. This will be the UK’s new autonomous high-risk third countries list. It will mirror exactly the list of countries identified by the Financial Action Task Force as having strategic deficiencies in their anti-money laundering and counter-terrorist financing regimes, and it will keep the UK in line with international standards.

The change that I have outlined will allow us to continue to protect businesses and the financial system from those who pose a significant threat, while ensuring that the United Kingdom remains at the forefront of global standards in combating money laundering and terrorist financing. I thank Members for their examination of this important piece of legislation, and hope that colleagues will join me in supporting it this evening.

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[John Glen]

I thank the right hon. Member for Wolverhampton South East (Mr McFadden) and the hon. Member for Glenrothes (Peter Grant) for the points they raised. I shall try to address some of them. As I outlined earlier, the Money Laundering and Terrorist Financing (Amendment) (High-Risk Countries) Regulations introduce a new autonomous high-risk third countries list, which will ensure that UK legislation to protect the financial system from money laundering and terrorist financing remains up to date.

The right hon. Gentleman raised a number of points. He first mentioned the FinCEN files, which are largely historic, but I will write to him about anything further I can on that. I met Spotlight on Corruption recently to be challenged on a number of aspects. He mentioned Companies House reform, on which work is ongoing, and there will be further announcements in due course.

The regulations represent the UK’s new approach to high-risk third countries. It will allow the UK to take its own view on which countries are high risk without referencing EU legislation and to remain in line with international standards in the fight against money laundering and terrorist financing. The UK is internationally recognised as having some of the strongest controls worldwide for tackling money laundering and terrorist financing.

[Sir Geoffrey Clifton-Brown (The Cotswolds) (Con)]

Who will be responsible for maintaining the list? Will it be Her Majesty’s Treasury? What will be the procedure to review it so that countries may come on to it and existing countries may come off it if they no longer meet the criteria?

[John Glen]

I thank my hon. Friend for his reasonable question about the updating of the list. The Financial Action Task Force meets three times a year to determine the countries identified on its public lists. As such, the UK’s new autonomous high-risk third countries list could be updated up to three times a year to mirror the decisions made by FATF. We will look at that carefully. FATF monitors the UK—indeed, it did a mutual evaluation of the UK in December 2018 and gave us one of the highest ever rankings—and constantly updates countries who are high risk around the world.

I will make a few points in response to the right hon. Member for Wolverhampton South East. In recent years, the Government have taken a number of actions to combat economic crime, including creating a new National Economic Crime Centre to co-ordinate the law enforcement response to economic crime, and passing the Criminal Finances Act 2017, which introduced new powers, including unexplained wealth orders and account freezing orders, and established the Office for Professional Body Anti-Money Laundering Supervision to improve the oversight of anti-money laundering compliance in the legal and accountancy sectors. In 2019, the Government and the private sector jointly published a landmark economic crime plan that outlines a comprehensive national response to economic crime such as fraud and money laundering, as mentioned by the right hon. Gentleman. It provides a collective articulation of 52 actions being taken in both the public and private sectors in the next three years to ensure that UK cannot be abused for economic crime.

The hon. Member for Glenrothes mentioned the Cayman Islands. As of the FATF plenary in February 2021, FATF collectively agreed to include the Cayman Islands in its list of jurisdictions under increased monitoring. As that is one of the FATF public lists that the UK autonomous list mirrors, the Cayman Islands will be included in the UK’s list of high-risk third countries. The outstanding issues that the Cayman Islands must address are outlined in FATF’s publicly available statement.

I hope that the House has found the debate informative and will join me in supporting this important step to ensure that we have an up-to-date framework to protect the financial system from money laundering and terrorist financing.

Question put and agreed to.

Business of the House (Today)

Ordered,

That, at this day’s sitting, the Speaker shall put the Question on the Motion in the name of Keir Starmer relating to the Health Protection (Coronavirus, International Travel) (England) (Amendment) (No.7) Regulations (SI, 2021, No. 150) not later than 90 minutes after the commencement of proceedings on the motion for this Order; the business on that Motion may be proceeded with at any hour, though opposed; and Standing Order No. 41A (Deferred divisions) shall not apply.—(David Duguid.)

[Madam Deputy Speaker (Dame Rosie Winterton)]

We will now have a two-minute suspension for cleaning.

Financial Services Bill

John Glen Excerpts

Monday 26th April 2021 Commons Chamber

[The Economic Secretary to the Treasury (John Glen)]

I beg to move, That this House disagrees with Lords amendment 1.

[Mr Deputy Speaker (Mr Nigel Evans)]

With this it will be convenient to consider the following:

Government amendment (a) in lieu.

Lords amendments 2 to 7.

Lords amendment 8, and Government motion to disagree.

Lords amendments 9 to 21.

[John Glen]

I am delighted to speak again on the Financial Services Bill following its passage through the other place, where it has been well looked after by my colleagues Earl Howe, Lord True and Baroness Penn. As our first major piece of financial services legislation since leaving the EU, the Bill will enhance the UK’s world-leading prudential standards, protect financial stability, promote openness between the UK and international markets and maintain an effective financial services regulatory framework and sound capital markets.

The Bill was thoroughly scrutinised in the other place, with more than 200 amendments tabled across Committee and Report. In total, the Lords made 21 amendments to the Bill. During the passage of the Bill, there has been a lengthy discussion about how best to address issues of consumer harm in the financial sector. Lords amendment 1 before us today proposes that this should be addressed through a requirement on the Financial Conduct Authority to bring forward rules that would place a duty of care on financial services firms in relation to their customers.

The Government are committed to ensuring that financial services consumers are protected and that steps are taken quickly to address new issues when they are identified. However, the Government believe that the FCA already has the necessary powers and is acting to ensure that sufficient protections are in place for consumers. The Government therefore cannot accept this amendment, but recognise that Parliament wants to be assured that the FCA’s ongoing work will lead to meaningful change.

I will today set out the standards that firms must already adhere to when providing financial services to their customers. These are governed by the FCA’s “Principles for Business”, as well as specific requirements in the handbook. These principles set out how specific requirements on firms work, and they include:

“A firm must pay due regard to the interests of its customers and treat them fairly.”

The FCA’s enforcement powers allow it to ensure that these standards are met, although the FCA recognises that the level of harm in markets is still too high and is committed to taking further actions.

The Government agree with the concerns that were raised in the other place that this harm may in part stem from an asymmetry of information between financial services firms and their customers. The risk is that many firms may seek to exploit this asymmetry. The FCA is well aware of how informational asymmetries and behavioural biases can influence consumer behaviour, and is committed to ensuring that these issues are addressed where it considers that they may result in harm. The Government therefore support the FCA’s ongoing programme of work in this area and believe that it will deliver meaningful change for the benefit of consumers.

The FCA has considered its existing framework of principles, and whether the way in which firms have responded to the principles is sufficient to ensure that consumers have the right protections and get the right outcomes. Building on this, the FCA will consult in May on clear proposals to raise and clarify its expectations of firms’ actions and behaviours, and on any necessary changes to its principles to deliver this. These proposals will consider how to raise the level of care firms must provide to consumers through a duty of care or other provisions. Ultimately, the proposals in this consultation will seek to ensure that consumers benefit from a better level of care from financial services firms.

I have therefore tabled amendment (a) in lieu of Lords amendment 1. This amendment will require the FCA to consult on whether it should make rules providing that authorised persons owe a duty of care to consumers. It ensures that the FCA will publish its analysis of the responses to this consultation by the end of this year. It also ensures that the FCA will make final rules following that consultation before 1 August 2022.

I hope that the establishment of these clear milestones demonstrates the commitment of both the Government and the FCA to delivering better outcomes for financial services consumers. In line with commitments made in the other place regarding Parliament’s scrutiny of the financial services regulators, I can confirm that the FCA will bring its conclusions to the attention of the relevant parliamentary Committees, giving them an opportunity to consider the proposals and, if they choose, to express a view or raise any issues. The FCA will respond to any issues that are raised by parliamentary Committees.

I now turn to Lords amendment 8 on mortgage prisoners. It is an issue I take extremely seriously, but I am afraid that the Government cannot accept this amendment. We must continue to be guided by the facts and the evidence. The FCA’s analysis shows that half the 250,000 borrowers with inactive firms meet the normal risk appetite of lenders and could therefore switch if they chose to without any Government intervention.

[Jim Shannon (Strangford) (DUP)]

I have been contacted by many constituents who are in a precarious position and do not have such options. My hon. Friends the Members for North Antrim (Ian Paisley) and for South Antrim (Paul Girvan) have conveyed to me that some of their constituents are also in that position. I respect the Minister greatly, but is it not possible to reconsider given the precarious position that my constituents and others find themselves in?

[John Glen]

I thank the hon. Gentleman, as ever, for his contribution. I will go on to explain the situation of the remaining 125,000 individuals who could be categorised in that way, the actions that we have taken to date and what we will continue to look for. If that category can move without Government intervention, they are not “prisoners”.

Of the remaining 125,000 who cannot switch, 70,000 are in arrears and therefore could not secure a new deal even if they were in the active market. Those borrowers need to work with their lender to agree an appropriate repayment plan. The remaining 55,000 who are with inactive lenders and are up to date with their payments but who cannot switch are paying on average only 0.4 percentage points more than similar borrowers on reversion rates with active lenders—those with similar characteristics. The reason these borrowers are unable to switch is not that their mortgage is with an inactive firm but that they do not meet the risk appetite of lenders. They may, for example, have a combination of high loan-to-values, be on interest-only mortgages with no plan for repayment, or have higher levels of unsecured debts, non-standard sources of income or poor credit history. Similar borrowers in the active market are also typically unlikely to be offered deals with new lenders.

As I have set out previously, the Government and FCA have undertaken significant work in this area to create additional options that make switching into the active market easier for some borrowers. In particular, the modified affordability assessment allows active mortgage lenders to waive the normal affordability checks for borrowers with inactive lenders who meet certain criteria—for example, not being in arrears and not wishing to borrow more.

[Kevin Hollinrake (Thirsk and Malton) (Con)]

I know that the problem the Minister is trying to solve is not of his making. The problem originated when the affordability rules were changed pursuant to the financial crisis. The affordability rules were waived for people with their existing lenders who wanted to move from one fixed-rate deal, when it terminated, to the next one. Those with inactive lenders who are in the same situation cannot do that because those products are simply not available. That is one of the key problems that we have not solved yet. I would appreciate his continued efforts to work with us on this particular issue.

[John Glen]

I thank my hon. Friend, who, without equal in this House, has done so much to champion mortgage prisoners. I hope he will carry on working with us as we continue to improve our understanding and the quality of the data that could underpin further interventions.

I can reaffirm to the House today that my own, and this Government’s, commitment is as strong as it ever has been to finding further solutions that do not provide false hope to borrowers, but I am afraid that amendment 8 represents neither a proportionate nor practical response on this complex issue. I will address the two sections of the amendment in turn. First, the amendment seeks to cap the standard variable rate, or SVR, that inactive firms charge borrowers. This would be an unprecedented intervention in the mortgage market and is a completely disproportionate approach when the data shows that the 55,000 borrowers to which I referred pay on average 0.4 percentage points more than similar borrowers in the active market. Such drastic Government intervention should not be undertaken lightly, as it could have significant impacts above and beyond the effect that the amendment seeks.

That cap would be deeply unfair to borrowers in the active market who are in arrears or unable to secure a new fixed-rate deal, because the cap would not include them. Let us consider two hypothetical borrowers. The first borrower took out their mortgage prior to the financial crisis when, as my hon. Friend said, there were looser affordability requirements. They borrowed, in some cases, 125% of the property’s value, avoiding the need to save a deposit. Shortly after, their lender failed and had to be nationalised. The second borrower took out their mortgage following the financial crisis, when there were stricter affordability requirements. They saved a deposit of 5% or perhaps even 10%, and then were able to buy their home. Let us say that both those borrowers lost their jobs and now work in lower-paid jobs. They live in an area where property prices have not grown as much as they would have liked. Both try to keep up with their repayments, but ultimately fall into arrears, with the result that neither can easily access new deals. Neither of those borrowers has done anything wrong, and both deserve support from their lender and the wider financial system, but the Government cannot possibly agree with the idea that one should be supported by an unprecedented market intervention of this kind, and the other not. Both adhered to the prevailing conditions at the time.

I am also concerned that any cap on standard variable rates, including one only applicable to inactive lenders, would have unintended consequences for financial stability. The London School of Economics agreed and did not recommend a cap, noting that it could cause market harm. It would restrict lenders’ ability to vary rates in line with market conditions—the ability to vary SVRs allows lenders to re-price products to reflect changes to the cost of doing business—and could therefore create risks with significant implications for financial stability.

The second part of the amendment would require new fixed-rate deals to be offered to borrowers with inactive lenders, although it is unclear how that is to be achieved. Lending remains a commercial decision based on a variety of factors and it would not be right for the Government to compel lenders to provideproducts for specific groups. If the amendment is intended to require the current holders of these mortgages to offer new products, that would require firms that do not currently have the lending expertise, systems or regulatory permissions necessary to offer new mortgage products to do so. However, in opposing the amendment, I reiterate once again my commitment to continue to find further practical and proportionate options for affected borrowers, supported by facts and evidence, as I have over the past three years. Equally, I do not want to give false assurances, or false hope, for the sake of political expediency, especially when it is likely that there is a limit to what further action the Government can take to support such borrowers.

[Kevin Hollinrake]

Could we agree a basic principle that identical borrowers—the Minister uses the example of two similar borrowers in similar situations—should be treated exactly the same? One should not be treated better than the other. Will he agree to a principle that, if a person is a UK borrower and is in the same financial situation as others, whether they are with an active lender or an inactive lender, the treatment of those individuals should be the same: the options should be the same; the deals should be the same.

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[John Glen]

I would be happy to seek solutions for those mortgage holders of active and inactive lenders, but my hon. Friend must recognise that different individuals have different characteristics: different loan-to-valuation ratios; different credit histories; different income flows; and different histories in their financial situation. Those characteristics cannot be factored out. None the less, I am absolutely committed to this issue and it is in that spirit that I announce today that the Treasury will work with the FCA—that means work with it on a review to its existing data on mortgage prisoners—to ensure that we have further detail on the characteristics of those borrowers who have mortgages with inactive firms and are unable to switch despite being up to date with their mortgage payments.

The FCA will also review the effect of its recent interventions to remove regulatory barriers to switching for mortgage prisoners and will report on this by the end of November, and I will lay a copy of that review before Parliament. I know that my hon. Friend the Member for Thirsk and Malton, who has done so much excellent work in this area and who champions the cause of mortgage prisoners, may wish to bring proposals sooner than that, and, of course, I have always made myself available to Members across the House to look constructively at any solution that has merit.

The Treasury will use the results of the review that I have set out to establish whether further solutions can be found for such borrowers that are practical and proportionate. Recognising the significant constraints that I have noted, I assure the House and the other place that the Government will continue urgently to seek any further solutions that may provide support to borrowers with inactive lenders who are unable to switch, but, as I have said, those solutions must be practical and proportionate.

In addition, I am grateful to the active lenders who have come forward to offer options to these borrowers. I am also committing today to write to active lenders to urge them and the wider industry to go even further and look at what more they can do to ensure that as many borrowers as possible benefit from these options.

I hope that I have convinced the House that this amendment, in this form, is not the right solution to such a complex issue. I also hope that I have demonstrated my personal commitment, and the Government’s commitment, to continuing to seek sensible and workable solutions.

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[Jim Shannon]

It is a pleasure to speak on this issue, Madam Deputy Speaker, and I thank you for giving me the opportunity to speak in the debate this evening.

As other Members have, I will speak to Lords amendment 8 on mortgage prisoners. In an intervention on the Minister earlier, I expressed concern about the issue. I do so having been asked by numerous constituents to highlight the dreadfully precarious position in which many have found themselves. I will give one example. The hon. Member for Thirsk and Malton (Kevin Hollinrake) also gave an example, and such examples are real-life ones of people on the frontline.

I have spoken on a number of occasions—I believe this to be the fifth time since 2017—on the subject of mortgage prisoners and, from the outset, I make it clear that my colleagues and I will vote in favour of Lords amendment 8. I have the deepest respect for the Minister, but there has to be more than cake tomorrow to assure my colleagues and me on behalf of my constituents. We hope that he and Her Majesty’s Government will do what is right for those people.

As we have all heard, the Lords amendment coined the phrase, “mortgage prisoners”. That is what my constituent has highlighted—she believes her family to be prisoners of their mortgage. She writes:

“My husband and I, like many others in Northern Ireland are classed as mortgage prisoners, through no fault of our own. Like many others in Northern Ireland, our mortgage was taken out with Northern Rock, which subsequently collapsed. Our mortgage was then sold to a vulture fund without our consent. As these vulture funds are not an active lender, they do not offer mortgages, hence are unable to offer alternative mortgage products.

We are penalised on very high interest rates, which at the moment is currently well over 4% above the BOE base rate. This is crippling us, never mind the detrimental effect that it is having on our mental health.”

Sometimes it is not just about the finances; it is the effect on mental health as well.

Her email was not the only one to use such terminology. My belief is that the Lords amendment would take strides to free those who have thus far been all but imprisoned through no fault of their own, unable to do anything but scrape by, not entitled to Government help or aid, as their wages are sufficient on paper, but not in reality. I agree that a cap on the standard variable rate of interest for mortgage prisoners on closed books would address the issue.

I do not propose to spend much time rehearsing the specific arguments, which others have done already. Instead, I wish to make two points that are self-explanatory. Last Monday, the Minister came to the House to tell us that a compensation fund for London & Capital bondholders—with a sum of £120 million of UK taxpayers’ money—would be necessary following the excellent forensic investigation and analysis report by Dame Elizabeth Gloster. I understand the rationale behind that decision, and yet it leads me to my second point : why not a solution for the mortgage prisoners tonight? As I said, and have been reiterating for years, there continues to be what I can only term a failure to regulate in any way vulture funds such as Cerberus, but at the same time Her Majesty’s Treasury rightly made the decisions on Northern Rock. Despite limited efforts by the FCA, due to the restrictions placed in legislation by Her Majesty’s Government on the regulatory perimeter, little or nothing has been done for those mortgage prisoners in more than a decade. It is time for that to stop and for Her Majesty’s Government to start finding credible solutions.

A constituent contacted me to tell me that there is a rumour that the Conservatives will impose a three-line Whip against Lords amendment 8. If that is true, it is very sad. I also believe, with respect, that it is disgraceful. Many of my constituents are worried. They have talked to me personally. My hon. Friends the Members for North Antrim (Ian Paisley) and for South Antrim (Paul Girvan), and my other colleagues have all expressed the same concern. We have to make a decision tonight on behalf of our constituents that ensures that their viewpoints are heard, and we have to do it in the best way that we can in this House, which is by how we cast our vote.

After seeing at first hand the impact of no action on the lives of mortgage prisoners in my constituency and beyond, I can do nothing but agree. If this is the line of the Government against these 250,000—or the half a million, as one hon. Member has said—struggling families, I will be supporting Lords amendment 8. I have no difficulty in that and I shall ask all other right-thinking MPs to do the same.

A decade of struggle has passed. We have it in our hands, right now, in this Chamber, to make a change. It is, I believe, right to do so. I shamelessly ask Members to do what is right on this occasion for those families in the middle section who have been squeezed beyond belief, physically, financially and mentally. Let us give relief to them, as today, right now, it is in our gift to be able to do so.

[John Glen]

I am extremely grateful to all Members who have contributed to this debate. I will not to rehearse the arguments that I made at the outset, but will respond in the right spirit, in the right way, to the constructive and careful analysis that we have had from many Members across the House this evening.

Let me start by addressing the right hon. Member for Wolverhampton South East (Mr McFadden). I said to him during the Committee stage that I was always listening. I think that I have proved that to be the case in the way that the Government have responded on the climate change amendment and on “buy now, pay later”. I listened very carefully to the hon. Member for Walthamstow (Stella Creasy) who spoke with characteristic deep knowledge of the sector. It is absolutely clear that we need to get the legislation and the intervention right when it comes to “buy now, pay later”. She rightly asserted the massive growth in that sector and the unfortunate consequences that will certainly befall, and that does befall, a number of consumers. We will work quickly to examine that market and what interventions will meet the need.

I am very tempted to address a whole number of points around Lords amendment 8. It is a real priority of mine to find a response that meets the unfortunate situation where people are trapped in very difficult circumstances. I pay tribute once again to my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake) who made a passionate speech, identifying Louise, a mortgage prisoner, whose personal story was one to which the whole House was sympathetic. A number of other colleagues raised similar stories. None the less, I do need to have a proportionate response—a response that can take account of data. I appreciate the excellent work carried out by the all-party group and I recognise its dataset—449 people. None the less, when I am faced with data from the FCA, looking comprehensively at 23,000 cases, I cannot deny that asymmetry. I will commit to continued dialogue to try to find a way forward. Those are not empty words; they reflect the complexity of this matter—a matter that is underpinned by half a generation of different rules and regulations. Before the crisis, people could borrow in ways that today we would think totally unacceptable, and that are indeed unacceptable. The market must provide better solutions than it can provide at the moment, and I will look carefully at what we can do to ensure that that happens.

The hon. Member for Glasgow Central (Alison Thewliss) made a number of points on Lords amendment 1 about the duty of care, and I have set out at length my approach to that, which is again to examine and listen carefully to what the FCA is saying. It will then be obliged to come forward with rule changes. So these are not empty words; they recognise all the work of the charities and organisations that are highlighting this case. Of course, in financial services there is a strong dynamic of change, and the Government and regulators must be ready to step in and make appropriate interventions as that market changes.

I believe that this Bill is a key component of a new, broader regulatory strategy that will underpin the UK financial services sector as a genuine world leader now that we have left the European Union. I welcome the speeches from my hon. Friends the Members for Grantham and Stamford (Gareth Davies) and for South Cambridgeshire (Anthony Browne), which exhibited a deep knowledge and a constructive approach to this very sophisticated industry, underpinned with a lot of personal experience. I will take from this debate many points of detail. I do not agree with every point that has been made on Lords amendment 8, but I stand ready to engage with Members across the House to seek to find solutions. I am proud to have been able to lead this Bill through the House.

Lords amendment 1 disagreed to.

Government amendment (a) made in lieu of Lords amendment 1.

Lords amendments 2 to 7 agreed to.

Motion made, and Question put, That this House disagrees with Lords amendment 8.—(John Glen.)

London Capital & Finance

John Glen Excerpts

Monday 19th April 2021 Written Statements

[The Economic Secretary to the Treasury (John Glen)]

On 17 December 2020, I announced that the Treasury would set up a compensation scheme for bondholders who suffered losses after investing in London Capital & Finance (LCF) (HCWS678)^[1]. This statement provides an update on the Government’s approach, including the details of the scheme and the next steps for bondholders.

LCF was a Financial Conduct Authority (FCA) authorised firm which issued unregulated non-transferable debt securities, commonly known as “mini-bonds”, to investors and then speculatively invested the funds received in a number of underlying businesses. LCF went into administration in January 2019 and at the point of failure 11,625 bondholders had invested around £237 million.

This has been a very difficult time for LCF bondholders, many of whom are elderly and have lost their hard-earned savings. As I noted in my last statement, for some, this will have formed part of an investment portfolio, but for others, it will have represented a significant portion of their savings.

One of the key purposes of regulation is to ensure that investors have the right information to understand their risk. Within this system even a regulator doing everything right will not be able to, and should not be expected to, ensure a zero-failure regime. That is why statute has established the Financial Services Compensation Scheme (FSCS), which is the compensation scheme for customers of failed financial services firms in the UK. Its scope is strictly limited and it is only able to pay out when a relevant regulated activity has been undertaken. The FSCS has considered LCF claims in detail and has been able to protect around 2,800 bondholders, paying out over £57 million in compensation.

It is an important point of principle that Government do not step in to pay compensation in respect of failed financial services firms that fall outside the FSCS. Doing so would create the wrong set of incentives for individuals and an unnecessary burden on the taxpayer. However, the situation regarding LCF is unique and exceptional. After considering the issues in detail, the Government have decided to establish a compensation scheme for LCF bondholders. The scheme I am announcing today appropriately balances the interests of both bondholders and the taxpayer and will ensure that all LCF bondholders receive a fair level of compensation in respect of the financial loss they have suffered.

LCF’s business model was highly unusual, both in its scale and structure. In particular, it was authorised by the FCA despite generating no income from regulated activities. This allowed LCF’s unregulated activity of selling mini-bonds to benefit from the “halo effect” of being issued by an authorised firm, helping LCF gain respectability and grow to an unprecedented scale before it failed, resulting in losses for thousands of bondholders.

A complex range of interconnected factors contributed to the scale of losses for LCF bondholders. Clearly individuals have responsibility for choosing investments that are suitable for their risk profile. The high interest rates on offer from LCF, particularly when compared with deposit accounts, should have prompted questions from potential bondholders about the risks. While some may have understood those risks and invested anyway, LCF’s disclosure materials and marketing strategy may have led others to believe they were investing in a product that was far safer than it was.

Bondholders have reported LCF using a range of dishonest tactics to persuade them to invest. For example, some novice investors have said they were encouraged to declare themselves to be sophisticated and experienced, thereby enabling them to access products that should have been out of reach. Furthermore, LCF appears to have adopted flawed investment and marketing strategies and paid high commissions of up to 25% to the sales agent.

Bondholders have been badly let down by LCF, but they have also been let down by the regulatory system that is designed to protect them. The independent investigation led by Dame Elizabeth Gloster^[2], which the Government published at the end of last year, concluded that the FCA did not discharge its functions in respect of LCF in a manner which enabled it to effectively fulfil its statutory objectives during the relevant period.

While I have not seen evidence that would indicate that the regulatory failings at the FCA were the primary cause of the losses incurred by LCF bondholders, they are a significant factor that the Government have taken into account when deciding to establish this scheme. Indeed, the Government do not ordinarily step in to pay compensation to consumers in relation to allegations of fraud, investment losses, mis-selling or mis-buying of investments. I would, however, like to make it clear that neither the Government nor the FCA accept any legal liability for the failure of LCF or the losses incurred by its bondholders.

In these extraordinary circumstances, the Government have decided to establish a compensation scheme. However, it is imperative to avoid creating the misconception that Government will stand behind bad investments in future, even where FSCS protection does not apply. That would create a moral hazard for investors and potentially lead individuals to choose unsuitable investments, thinking the Government will provide compensation if things go wrong. The ultimate responsibility for choosing suitable investments must remain with individuals.

To avoid creating this misconception, and to take into account the wide range of factors that contributed to the losses that Government would not ordinarily compensate for, the Government will establish a scheme that provides 80% of LCF bondholders’ initial investment up to a maximum of £68,000. Where bondholders have received interest payments from LCF or distributions from the administrators, Smith & Williamson, these will be deducted from the amount of compensation payable. The scheme will be available to all LCF bondholders who have not already received compensation from the FSCS and represents 80% of the compensation they would have received had they been eligible for FSCS protection.

Around 97% of all LCF bondholders invested less than £85,000 and therefore will not reach the compensation cap under either the Government scheme or the FSCS. The Government expect to pay out around £120 million in compensation in total and the scheme to have paid all bondholders within six months of securing the necessary primary legislation, which the Government will bring forward as soon as parliamentary time allows.

Bondholders do not need to do anything at this stage and Government will provide further details on how the scheme will operate in due course. The scheme will be simple and straightforward to navigate. Bondholders will not need to use a claims management company, solicitor or any other organisation to help them claim.

I am mindful that some individuals may be anxious to receive their compensation and I urge bondholders to be vigilant to the risk of scammers posing as services to help them claim. To reiterate, the scheme has not opened yet and bondholders should await further announcements from the Government on next steps.

One of the challenges highlighted by Dame Elizabeth Gloster’s report is that, despite exhibiting many of the characteristics of other regulated financial services activities, the issuance of mini-bonds is not currently a regulated activity. The Government are committed to ensuring the financial services sector is well regulated and consumers are adequately protected, and the Treasury is therefore today launching a consultation on proposals to bring the issuance of mini-bonds into FCA regulation. This consultation is the culmination of a review into the regulation of mini-bonds that I announced in May 2019 and delivers on one of the recommendations made in Dame Elizabeth Gloster’s report.

In addition, the FCA is continuing its work to address the recommendations in Dame Elizabeth Gloster’s report, including through its ongoing transformation programme. A number of important steps have already been taken and I welcome the FCA’s commitment to report publicly on the progress of these vital reforms.

Finally, I wish to reiterate my sympathy for LCF bondholders. I hope the compensation offered by the Government scheme will offer some relief to the distress and hardship suffered and provide closure on this difficult matter.

^[1] A link to the previous WMS can be found via: https://www.parliament.uk/written-statements/detail/2020-12-17/HCWS678.

^[2] The full report can be found at:

https://www.gov.uk/assets.publishing.service/government/uploads/system/attachmentdata/file/945247/GlosterReportFinal.pdf.

[HCWS922]

Mortgage Guarantee Scheme: Notification of Contingent Liability

John Glen Excerpts

Wednesday 14th April 2021 Written Statements

[The Economic Secretary to the Treasury (John Glen)]

It is normal practice when a Government Department proposes to undertake a contingent liability in excess of £300,000 and for which there is no statutory authority, for the Minister concerned:

to present a departmental minute to Parliament, giving particulars of the liability created and explaining the circumstances; and

to refrain from incurring the liability until 14 parliamentary sitting days after the issue of the minute, except in cases of special urgency.

I am writing to notify Parliament of a contingent liability that has been created by the Government from the introduction of the new mortgage guarantee scheme. The scheme will be open to new mortgages submitted by participating lenders from 19 April 2021, but the liability will not be incurred until lenders start to submit mortgages to the scheme, which is not expected until May at the earliest.

By way of background, the mortgage guarantee scheme was announced at the Budget on 3 March 2021. The scheme will provide a guarantee to lenders across the UK who offer mortgages to people with a deposit of 5% on homes with a value of up to £600,000. Under the scheme all buyers will have the opportunity to fix their initial mortgage rate for at least five years should they wish to. The scheme, which will be available for new mortgages up to 31 December 2022, will increase the availability of mortgages on new or existing properties for those with small deposits. The guarantee will be valid for up to seven years after the mortgage is originated.

Exposure against this contingent liability would take place in the event that the sum of commercial fees paid by lenders would not be sufficient to cover calls on the guarantee. There will be a cap on the size of the Government’s contingent liability under the scheme of £3.9 billion.

Authority for any expenditure required under this liability will be sought through the normal procedure. HM Treasury has approved this proposal.

I will also lay a minute today on this matter.

[HCWS915]