Financial Conduct Authority

Kirsten Oswald Excerpts

Monday 1st February 2016 Commons Chamber

[Kirsten Oswald (East Renfrewshire) (SNP)]

I, too, congratulate the hon. Member for Aberconwy (Guto Bebb) on securing the debate and on the work he has done on this subject over a lengthy period.

Hon. Members have come to this place with a range of concerns. My engagement with this issue was prompted by the lack of protection and compensation available to investors in the Connaught Income Fund, including some in my constituency. The Connaught case demonstrates how dysfunctional the regulation of investment services in the UK still is. The FCA line appears to be, “We’ve closed the loophole exposed by Connaught. These things can’t happen again,” but that misses the point: the rewards available from financial services will simply make people look for another loophole.

Members will be familiar with what might be termed the Ronseal test. What happens if we apply that test to the situation faced by ordinary investors—those who are neither high net worth individuals nor sophisticated investors under the Financial Services and Markets Act 2000—caught out by the next loophole?

The Treasury paper on access to financial services describes the Government’s aim as

“to ensure the financial system enables people to access and manage their financial products with confidence and ease.”

The Government’s approach is to encourage people to prepare for their retirement and to manage their own finances, just as my constituent George Devon did. When looking for a secure investment for his funds, Mr Devon did as the Government suggest and approached an independent financial adviser for advice on investments that reflected his need to obtain an income with a low capacity for risk. He was advised to invest in the Connaught Income Fund, which was described as

“The Guaranteed Low Risk Income Fund”.

Helpfully, the information memorandum defined the risk level clearly. It also said that the document itself was not aimed at people such as Mr Devon, but at experienced or professional investors or at intermediaries such as Mr Devon’s adviser, who should have been able to provide sound advice on the investment’s suitability. However, in common with approximately 1,500 other investors, Mr Devon saw his funds disappear.

[James Berry (Kingston and Surbiton) (Con)]

One of my constituents, who is a financial adviser, and a number of his clients have lost significant amounts from investing in the Connaught Income Fund. Is the hon. Lady aware that an investigation has not even been commenced into one of the main parties, even though key information was provided to the FCA as long ago as 2011?

[Kirsten Oswald]

The hon. Gentleman makes a valid point. The delays inherent in this case are making it difficult for people in all kinds of situations to have justice and clarity.

[Joanna Cherry (Edinburgh South West) (SNP)]

The hon. Member for Kingston and Surbiton (James Berry) raised the case of an independent financial adviser. Does my hon. Friend share my concern that independent financial advisers, many of whom were also investors in the fund, risk continuing to be blamed for losses relating to it because of the FCA’s continuing failure to investigate within a reasonable timescale?

[Kirsten Oswald]

I agree with my hon. and learned Friend. The system regulated by the FCA, which the Chancellor wants people to rely on, continues to fail to provide all these investors with compensation, or even an explanation, for their loss.

Mr Devon and many others have been, and are being, misled. Even if an ordinary investor approaches the UK’s financial services sector through an independent financial adviser and asks for a secure, low-risk investment, their money can disappear, and their financial plans and their life can be turned upside down, while agencies that cost millions of pounds to run fail to deliver.

Mr Devon’s investment was in an unregulated collective investment scheme. That might sound highly technical, but it may not be so complicated. In workplaces all across the country, one or two people voluntarily run savings groups, or ménages, where colleagues regularly save money and take turns to receive a lump sum. Depending on the size of the workplace, the sums involved can be significant. That is such a simple operation that the phrase “couldn’t run a ménage” is a common description for someone who is a serial failure at even basic tasks.

Surely, in relation to the Connaught fund, a group such as Capita must be able to do a better job of running a collective financial operation than workmates who have run workplace ménages for years. On the contrary, Connaught became a warning that when players in the UK financial services sector go rogue, the systems for regulation, enforcement and restitution fail to protect our investors. When problems with Connaught emerged, Capita turned tail and ran. It has been allowed to continue evading its responsibility to investors through years of regulatory inertia and confusion.

The financial services sector in the UK has run foul of the law and lost millions—indeed, billions—of pounds too many times. The phrase “couldn't run a ménage” seems an apt description of too many of the organisations and individuals who provide the sector with its leadership. Just like the regulators that oversaw the crash of 2008, the FCA, Financial Ombudsman Service and the Financial Services Compensation Scheme seem to be part of the problem, rather than part of the solution. Even fighting a case all the way through the system may well leave an investor significantly out of pocket. This is definitely a system that does not do what it says on the tin.

I was not shocked to find that the Treasury grabs the regulatory fines, but should they really be grabbed from an industry where the cost of regulation, enforcement and compensation are borne by those in the industry and its customers? We need to look seriously at how we provide more effective regulation, enforcement and compensation, and we should also review the levies and fines. One of the gaps could be filled by giving the FOS a role in enforcing payment of compensation, removing the need for an additional set of fees and ensuring more consistency in investors’ ability to secure the compensation awarded. I have particular concerns about the operation of professional indemnity insurance in the IFA sector. When insurers exempt schemes known to be causing concerns, that undermines the reality of IFA protection and causes significant problems for them. The FCA needs to look at making significant changes to the insurance rules. It could perhaps examine the operation of the Scottish solicitors’ “master policy” and the highly successful Association of British Travel Agents and ATOL—air travel organisers’ licence—industry-wide indemnity schemes.

I want to conclude by commenting on the relationship between the Government and the FCA. It is interesting that in the week before this debate the FCA announced the appointment of a new chief executive, Andrew Bailey. It is widely reported that Mr Bailey was hand-picked for the post from the Bank of England by the Chancellor of the Exchequer. I find this surprising in the light of an exchange I had with the Economic Secretary during a recent debate on the Connaught fund. When I queried the fact that neither the Chancellor nor any other Treasury Minister held a single bilateral meeting with the FCA over a two-year period, she did not contradict me, and I have heard nothing to suggest that it is incorrect. I understand that the absence of such meetings may be intended to give an appearance that the FCA acts as an independent agency, but if the chief executive is hand-picked by the Chancellor, having not even applied for the post, what does that say about the FCA’s independence? Of course there is regular correspondence and interaction between the Government and the FCA, so during a time of such pressure on the financial services sector, why was there not a single bilateral ministerial engagement with the FCA over such a long period? The absence of such meetings perhaps has more to do with protecting Ministers than protecting the independence of a body whose principal officers are headhunted at the Chancellor’s bidding.

As someone steeped in the issues of banking governance and the recovery of the banking sector from the low points of recent years, Mr Bailey could demonstrate his independence very easily by signalling his desire to have the FCA reinstate the inquiry into banking culture. Failure to do so may be interpreted as the inquiry having been ditched to clear the way for him taking up his post. If that is the case, his tenure will not get off to a positive start, and questions over the independence and integrity of the FCA will continue to grow.

--- Later in debate ---

[The Economic Secretary to the Treasury (Harriett Baldwin)]

I am left with very little time to cover such a wide-ranging debate. I congratulate the Backbench Business Committee and my hon. Friend the Member for Aberconwy (Guto Bebb) on securing this debate.

I think we can all agree that it is important that in the Financial Conduct Authority we have an organisation to keep financial markets honest for our constituents and for markets, which play a crucial role in our economy. We all want financial services to be on the side of our constituents—the people who want to work hard, do the right thing and get on in life. It is therefore vital that financial services display and uphold the highest standards of behaviour and treat their customers fairly.

The House will no doubt be aware that most small business lending is not regulated. Obviously, when an independent regulator is involved, we need to ensure that the right people are doing the job. Last week the Chancellor announced a number of new appointments to the FCA board, including an excellent new chief executive. As the Chancellor said, Andrew Bailey was the outstanding candidate to be the next chief executive. He brings with him a wealth of experience of financial services regulation in the United Kingdom. He is simply the most respected, most experienced and most qualified person in the world to do the job. However, I want to put on record the Government’s gratitude to Tracey McDermott, the acting chief executive, for all her hard work over the past four months.

Last week we also appointed four new non-executive directors: Bradley Fried, Baroness Hogg, Ruth Kelly and Tom Wright. The new directors provide a balanced mix, on the gender front and in terms of their public and private sector experience and their experience of politics, as well as a wealth of knowledge of consumer issues and the financial services sector more generally, adding an invaluable independent challenge to the board. We believe that the new appointments will strengthen the organisation, and, by ensuring that it has the best possible leadership, will help the FCA to remain a strong, tough regulator that protects consumers and ensures that financial markets work for the benefit of the whole economy.

There are clearly still challenges ahead for the FCA, but it is worth remembering the positive steps that it has already taken. It is in the process of implementing the new senior managers and certification regime, which includes applying enforceable conduct rules to anyone who is involved in the financial services activity of a bank. It has introduced improved whistleblowing requirements, and a new remuneration code that will ensure that individuals are not rewarded for taking excessive risks. It has taken action to protect consumers, such as the regulation of consumer credit, which has included capping the cost of payday lending to protect consumers from unfair costs.

FCA regulation is already having a dramatic impact on the payday market. Indeed, the FCA found that the volume of payday loans had fallen by 35% in the first six months since it took over regulation in April 2014. There has been a new focus on competition in banking and other markets, such as excellent work on Fintech and the innovation hub. Last year the Treasury and the FCA jointly launched a financial advice market review, which is designed to make financial help more accessible and affordable for all our constituents. It is also worth highlighting the role of the Financial Ombudsman Service, to which Members may wish to refer their constituents when they have problems with financial services firms.

The Government are as keen as those who are present tonight to resolve the matters that have been raised by a range of Members. We heard from not only my hon. Friend the Member for Aberconwy, but from the hon. Member for Bassetlaw (John Mann), my hon. Friend the Member for Wyre Forest (Mark Garnier), the hon. Member for Motherwell and Wishaw (Marion Fellows), my hon. Friend the Member for North Warwickshire (Craig Tracey), the hon. Member for Ceredigion (Mr Williams), my hon. Friend the Member for South West Devon (Mr Streeter), the hon. Member for Brentford and Isleworth (Ruth Cadbury), my hon. Friend the Member for Hazel Grove (William Wragg), the hon. Member for East Renfrewshire (Kirsten Oswald), my hon. Friend the Member for North East Somerset (Mr Rees-Mogg), the hon. Member for Edinburgh West (Michelle Thomson), my hon. Friend the Member for South Suffolk (James Cartlidge) and the hon. Member for Ross, Skye and Lochaber (Ian Blackford), as well as the hon. Member for Salford and Eccles (Rebecca Long Bailey).

A number of points have been raised, and I shall deal with them in turn. The issue of the banking culture review was raised by the hon. Member for Salford and Eccles, my hon. Friend the Member for Aberconwy, and the hon. Member for Bassetlaw. The first time I personally heard about the FCA’s decision to discontinue the review was when the story broke in the media on new year’s eve. We have made it abundantly clear to the House that no Treasury Minister or official was involved in the FCA’s decision, and the FCA has made it clear that it did not inform the Treasury before the decision was made public.

[Kirsten Oswald]

Will the Minister give way?

[Harriett Baldwin]

I would love to, but I do not have time.