Financial Services Bill

Kevin Hollinrake Excerpts

2nd reading & 2nd reading: House of Commons & Programme motion & Programme motion: House of Commons & Ways and Means resolution & Ways and Means resolution: House of Commons
Monday 9th November 2020 Commons Chamber

[John Glen]

I am grateful to the hon. Gentleman for his intervention. The driving principle guiding the Government in bringing forward the Bill is to maintain the highest possible standards; indeed, our reputation globally relies on the maintenance of such standards. However, it will be in the role of our regulators, with their technical expertise, to determine how those standards are implemented.

Let me move on to the next part of the Bill.

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

My hon. Friend mentioned the word “banks”, which obviously stimulated my interest as the co-chair of the all-parliamentary parliamentary group on fair business banking. He mentioned prudential risk around banks. Currently, the capital adequacy requirements for banks are all pretty much treated the same, which can deter competition from new entrants, such as regional mutual banks. Is he interested in looking at that issue in this legislation or in a future piece of legislation?

[John Glen]

My hon. Friend has unrivalled expertise and tenacity in bringing these matters before the House. He is right that there is a challenge to examine the relative regimes for different sized banks and institutions. That is something that regulators, subsequent to this Bill, will need to look at—indeed, they are keen to look at it—and I would welcome my hon. Friend’s further interventions in discussions in this place as we move forward on that legitimate question.

Eight years ago, the world was shocked by the LIBOR scandal. As the House will recall, traders at multiple banks attempted to manipulate that crucial benchmark, which contributes to interest rates for everything from complex derivatives to mortgages. Since then, significant improvements have been made to the benchmark’s administration. However, the Financial Stability Board, an international body that monitors and makes recommendations about the global financial system, has stated that continued use of LIBOR and other major interest rate benchmarks poses a serious source of systemic risk. That is because the decline in the inter-bank lending market has meant that such benchmarks depend increasingly on the judgments of panel banks rather than actual transactions. UK regulators have been encouraging firms to gradually shift away from LIBOR and are at the forefront of the global response to the transition, so to ensure that that transition was orderly, the FCA agreed with the LIBOR panel banks that they would continue to contribute to the benchmark for a temporary period. However, that temporary period will expire at the end of 2021, and after that point there is a risk that the benchmark will become unrepresentative of the market that it measures, potentially leading to disruption.

While we want firms to take the initiative in migrating from LIBOR, we recognise that there are some contracts that cannot be realistically amended to achieve that goal, so clauses 8 to 19, along with schedule 5, will give the FCA the powers that it needs to oversee the orderly wind-down of critical benchmarks, including LIBOR, and clause 20 will extend the transitional period for benchmarks with non-UK administrators from the end of 2022 until the end of 2025. This will avoid difficulties for our firms while the Government consider any changes required to our third country benchmarks regime to ensure that it is appropriate for the United Kingdom.

I will move on to the second objective of the Bill: to promote openness to overseas markets. I am delighted that clauses 22 and 23, along with schedules 6 to 8, establish a framework to provide long-term market access between the UK and Gibraltar for financial services firms. As many will know, Gibraltar boasts an array of thriving businesses in the sector, many of which are UK household names, including Admiral and Hastings, to name just two. The new Gibraltar authorisation regime in this Bill delivers on an earlier ministerial commitment and recognises our long-standing special relationship.

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[John Glen]

This is a portfolio Bill of 17 measures, some of which I have been wanting to introduce for some while. It is the first step on a journey, and there will, if the authorities allow me, be further financial services legislation that we will need to make following the consultation on the future regulatory framework. We need to be ambitious for financial services. We live in a dynamic world where financial services are evolving all the time, and we need to have regulators that are nimble in developing world-class regulation that allows us to continue to grow, and that is reflected in our appetite for FinTechs, stablecoins, digital currencies and the right regulatory framework for firms of different sizes, as my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake) referred to earlier.

The third objective of the Bill is to maintain the effectiveness of the financial services regulatory framework and ensure sound capital markets. Clause 28 introduces a streamlined process for the FCA to remove an inactive firm’s authorisation and position on the public register. That will improve accuracy, while reducing opportunities for fraudsters.

Clause 29 makes small changes to the market abuse regulation, making the regime more effective, while reducing some of the administrative burden facing firms. I draw attention to clause 30, which raises the maximum sentence for two kinds of financial market abuse from seven to 10 years in prison, bringing the penalties for those offences in line with other forms of economic crime, such as fraud. Clause 31 will ensure we can enforce the rules that apply to trusts. The Government are also taking proportionate and effective action elsewhere to prevent the misuse of these trusts, collecting a range of ownership information on those that have a connection to the UK.

[Kevin Hollinrake]

My hon. Friend mentions economic crime, the prevention of fraud and the penalties for fraud, but one of the things the Government are committed to doing is bringing forward a corporate offence for the failure to prevent economic crime. It is not within this Bill. Is there any reason why not? What timescale might we see around that kind of legislation?

[John Glen]

As my hon. Friend mentioned to me a few days ago, he is aware that the Ministry of Justice is conducting a consultation on that matter, and that will drive the Government’s response overall, but it is a matter we take seriously. Following the Financial Action Task Force review at the end of 2018, we needed to move forward a number of measures to improve and tighten our regime. It is critical for the integrity of the United Kingdom’s financial services industry to have in place the appropriate sanctions and the important regulations on reporting standards across the whole of financial services.

Let me turn to clause 32, which will strengthen our breathing space scheme that supports people with problem debt. That has long been a priority of mine as City Minister, and I put on record my gratitude to my hon. Friend the Member for Rochester and Strood (Kelly Tolhurst), who introduced a private Member’s Bill on this issue, for all her efforts, and to Members across the House for the consensus on that legislation’s introduction. The Bill contains crucial amendments that are required to implement fully and effectively statutory debt repayment plans, which will help people facing problem debt to pay back what they owe within a manageable timeframe. The Bill’s measures will allow us to compel creditors to accept these new repayment terms, providing greater peace of mind to consumers, many of whom will be vulnerable.

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

It is a pleasure to follow the hon. Member for Edinburgh West (Christine Jardine). I agree with many of the things she said; one thing I disagree with is her apparent belief that leaving the European Union brings only disadvantages. She does not see some of the economic opportunities we may have after we leave. I was pleased to hear my hon. Friend the Economic Secretary talk about opportunities, including the opportunity to do things differently and better. I will focus my remarks not on what the Bill does, but on the different and perhaps better things that might be done by the Bill in its later form or by another piece of legislation.

I am not a great fan of too much regulation. We should avoid regulating more than is absolutely necessary, but we need to make sure that we regulate better—that we think not about regulations but about effective regulation. Sadly, that is missing from some of our current financial services framework.

My first suggestion for the Minister, which I have talked about before, is that small and medium-sized enterprises should be allowed rights of action for breaches of the FCA handbook. At the moment, those are allowed only to private persons, not to SMEs, partnerships or corporates. As not all businesses know, that leads to SME commercial lending not being regulated above £25,000—here I speak in my capacity as co-chair of the all-party group on fair business banking; I also draw the House’s attention to my entry in the Register of Members’ Financial Interests. As a result, if an SME is mistreated by a bank, for example, its ability to go to court relies purely on the letter of the contract or agreement it signed with the bank.

We have seen disgraceful scandals, some of which have been mentioned already, such as the LIBOR rigging, the swaps scandal, the RBS Global Restructuring Group SME banking scandal and the Lloyds HBOS Reading scandal. In those situations, SMEs cannot challenge the banks in any significant way, first, because it is almost impossible to take a bank to court due to the costs involved, and secondly, because when they get to court they only have the letter of the agreement to work with.

My hon. Friend the Economic Secretary has introduced some important new provisions—an expansion of the remit of the Financial Ombudsman Service to deal with larger businesses with turnover of up to £6 million, and an organisation he got me involved with called the Business Banking Resolution Service, which will deal with businesses with turnover between £6.5 million and £10 million. Businesses with turnover of up to £10 million will be able to take their case to an alternative dispute resolution service at no cost to themselves, and the case will be judged on a fair and reasonable basis. It will mean, effectively, that SMEs have a place to go, but will the Minister consider another alternative that would involve the key principles, including principle 6 of the PRIN rules, which is about treating customers fairly?

Another area that was mentioned in an earlier intervention was the Government’s commitment to make the failure to prevent economic crime a corporate offence. It is great that they have said they will do that, and that will start with a Law Commission review to see how best it can be done. As the Law Commission rightly said, if we do not change the rules on that, the UK risks falling behind international standards, which I am sure we would not want. That is clearly something to bring forward, but it could be done more hastily in the Bill, with a framework added on later, which would expedite the process. That would make a huge difference.

The Serious Fraud Office has tried to take forward many cases—those involving Serco, Barclays and Olympus, for example—but it could not do that because it had to establish a directing mind principle for the people at the top of those organisations before it could proceed with the offence of corporate fraud. The proposed measure would make that much easier. It is great that the Government are willing to take it forward, but they could do so more quickly.

Regulation is tight in the UK on personal and mortgage lending, and in the past—most famously in the case of Northern Rock—we have allowed regulated entities and the owners of mortgage books to sell those books to unregulated entities outside the country, including inactive lenders. There is no doubt that there is a regulatory gap around that. For example, some of the books from Northern Rock were sold into the clutches of Cerberus, an international private equity firm, and the rates charged to individuals, who were often mortgage prisoners, climbed significantly from below 2% to often in excess of 5%. The Financial Conduct Authority has confirmed that, as did the Financial Ombudsman Service in an email, which stated that there is a regulatory gap. I know there is a debate between the Treasury and the FCA about whether there is a regulatory gap between a mortgage book that is owned by an unregulated entity overseas, and one that is regulated in the UK, but the FOS is clear:

“While our standards have some reach into unregulated activity by regulated lenders, since the loan is now owned by an unregulated entity our rules and guidance on lender conduct, including treatment of vulnerable customers do not apply.”

We are allowing a regulatory gap by permitting mortgage loan books to be sold to unregulated entities, and it is my feeling, and that of many others, that that should be stopped, so that a regulated entity can sell a loan book only to another regulated entity.

As I said in an another intervention, we need to be more flexible on prudential risk. These provisions are reducing the opportunity for new entrants to the banking market, particularly regional mutuals, which in other countries have been successful in extending SME finance, particularly through difficult times. Many other jurisdictions, including the US, Germany and Japan, have a high number of regional mutual banks as part of their banking system, and they tend to be far more patient in their provision of capital through difficult times. For example, in the UK, SME lending between 2008 and 2013 reduced by 25%, whereas in Germany it increased during that period by 20%.

There is a real opportunity to use regional mutual banks with a much more long-term approach based on financial inclusion for businesses and individuals, but there are issues about the adequacy of requirements that make the need to raise capital far too high. It would be good to look at this, and to reduce the requirements on that to make it easier for regional mutuals to be established, and also perhaps to use some dormant assets to provide some seed capital for some of these regional mutual banks to make it easier for them to start, get up and get going.

Finally, one that has been discussed before is country-by-country reporting. Again, there is perhaps a place in this legislation for that. We know, despite the best efforts of the Treasury—with the digital services tax, for example, to try to clamp down on the likes of Amazon and others—that companies are bypassing those rules and passing such a levy on to sellers in their marketplace and not applying it to their own sales. We do need to make sure that the large multinationals pay a fair share of their tax. If we look at Google’s accounts, we see that internationally it turns over £137 billion. It had net income on its accounts in the last year of £31 billion, which is a 22% profit margin. The UK turnover is about £10 billion, and with a 22% profit margin, its profits should be about £2.2 billion, so it should pay tax of about £420 million in the UK on 19% corporation tax, but it actually pays about £67 million. So the provisions we have currently, although we have gone further than most countries in trying to make sure that companies pay a fair share of tax, are working to some extent, but not to the extent that we would like. Country-by-country reporting could make a big difference.

I will leave it there, Madam Deputy Speaker. I appreciate the opportunity to discuss those ideas with the House, and I look forward to discussing them at later stages of the Bill.