Financial Services and Markets Bill

Lord Hunt of Kings Heath Excerpts

Committee stage
Monday 6th February 2023 Grand Committee

It is acknowledged that one of the greatest effects of failure to prevent offences is on culture, through the review of adequacy of procedures and by taking greater caution. Having on-the-spot regulators with those powers would be synergistic to that culture change. I beg to move.

[Lord Hunt of Kings Heath (Lab)]

My Lords, I have Amendments 71 and 210 in this group, which deal with financial fraud. I very much support what the noble Baroness, Lady Bowles, said, and am sure that, between now and Report, there can be further discussions about the best way to embed in the Bill the tackling of financial fraud. As she said, we have two pieces of legislation going through in parallel, and we need to ensure that at the end of the day there is a concerted strategy to deal with financial fraud, which has been lamentably missing from our affairs over many years. The Bill certainly provides protection for victims of authorised push payment scans, but little else to address the growing and worrying problem of financial fraud.

We had a canter round some of these issues last Monday, when the Minister was very reassuring. She said that

“tackling fraud requires a unified and co-ordinated response from government, law enforcement and the private sector”;

that

“strong punishments … already exist under the Fraud Act”;

that

“the police and the National Crime Agency already have the powers to investigate fraud, with the FCA providing strong support”;

and that

“The Home Office is investing £400 million in tackling economic crime over the spending review period, including £100 million dedicated to fraud.”—[Official Report, 30/1/23; cols. GC 123-24.]

She mentioned the Joint Fraud Taskforce on a number of occasions and said that the Home Office will shortly publish a long-awaited new strategy—which I think was briefed out in some of yesterday’s Sunday newspapers.

That is all well and good. The problem is that one needs an act of faith to believe that the Government have finally recognised that they have to grip this in a much stronger way than has been evident over the last 12 years. The figures from the NAO are stark: in the year ending June 2022, fraud represented 41% of all crime against individuals, and there were an estimated 3.8 million incidents of actual or attempted fraud against individuals. Yet the number of fraud offences resulting in a charge or summons was paltry. In the year ending March 2022, 4,816 fraud cases resulted in a charge or summons. Less than 1% of police personnel were involved in conducting fraud investigations in the year ending March 2020. The public know that it is just hopeless going to the police; the default position is that they have no interest and want to give no help whatever, apart from encouraging you to go to Action Fraud—which your Lordships’ Select Committee on fighting fraud renamed “Report Fraud”, because it is a completely useless organisation.

I am particularly concerned about the financial abuse of older people, and noble Lords will see that my second amendment in this group is tailored towards that. It struck me that the previous debate on inclusivity is very much related to some points that I wish to raise this afternoon. The excellent organisation Hourglass has pointed out that the impact of financial abuse on older people can be devastating, especially as so many of them are on limited incomes such as the state pension. There are so many examples of frail older people losing large sums of money or property that they have lived in for years, or incurring large debts.

In September 2021, Hourglass and Hodge Bank collaborated on a survey to gain insights into the scale of financial and economic abuse and the impact of the digital divide. The report noted that 14.1% of respondents indicated that an older person they knew or cared for had been a victim of financial abuse in the past year. Research also pointed to a significant number of older people falling victim to economic abuse, in part due to the digital nature of banking and the digital divide.

Your Lordships’ Select Committee report, Fighting Fraud: Breaking the Chain, published only last November, was explicit about the scale of the problem generally. It said:

“A person aged 16 or over is more likely to become a victim of fraud than any other individual type of crime, including violence or burglary”,


and that

“Even though fraud is a massive problem,”

it is hardly given any priority at all. Indeed, my understanding is that fraud statistics are removed from public statements on crime rates. I wonder why that is. We know that law enforcement is hopelessly underresourced for the fight against fraud. Law enforcement agencies and digital investigation remain outside the capacity of mainstream policing, despite police forces operating in a highly digitalised society.

The Select Committee points out that

“The organisational structure for policing fraud is complex and confusing”—


it certainly is for members of the public seeking to report fraud—and that

“The criminal justice system has also failed to keep pace with the threat, resulting in a significant decrease in the prosecution of fraudsters over the last decade.”


The Select Committee warns that

“The telecoms sector has no … incentive to prevent fraud and has allowed blame to be placed elsewhere for too long.”


Similarly, the tech sector does not do anything like enough to

“slam the brakes on fraudsters using online advertising and social media platforms to reel in consumers”

and must

“do more to verify the identity of those using online dating platforms before they commit romance fraud.”

The Select Committee makes the point that all these industries, which are doing very well and enable fraud to take place, do not fear any significant financial, legal and reputational risks for failing to prevent fraud.

When fraudulent payments slip through the net, it should not be the sole responsibility of the financial services sector—in particular, the victim’s bank—to pick up the bill, although I believe that banks need to do much more than they do at present. All stakeholders in the fraud chain, including the payee’s bank, must know that they have a duty to prevent fraud and to address their failings and the victim’s losses once it has occurred. Despite the Minister’s confidence, the Government have shown very little enthusiasm. It has taken so long to even produce a strategy, that one really doubts the commitment to taking this forward.

My first amendment would add to the list of regulatory principles to be applied to the FCA and PRA

“the need to promote the detection, prevention and investigation of fraud in relation to the provision or use of financial services.”

In a sense, this can be seen in parallel to the amendment in the name of the noble Baroness, Lady Bowles. My Amendment 210 complements and adds to my noble friend’s amendment by emphasising the strategy he proposes, which I very much support, but there are some special arrangements in relation to older people.

I am sure that we will want to come back to this on Report. I am sure that noble Lords with an interest in this can come together with a unified amendment—I almost said composited amendment, but I hesitate to use those wonderful words in your Lordships’ Committee. We have to persuade the Government that, once and for all, we take fraud seriously. We need to kick a lot of the regulatory bodies, including the police, into taking this seriously.

[Lord Tunnicliffe (Lab)]

My Lords, I will speak to my Amendment 209. This Committee is unusual, in that the level of consensus seems enormous. A lot of the differences are around how to achieve where we want to go, but the coming together should worry the Government.

I will say a word or two about fraud. My noble friend has set out the fraud world. The two features, certainly of personal fraud, which are supposed to solve the problem are compensation, and investigation and prosecution. I am not against the idea of compensation being clearer and more open, but this has the potential for moral hazard. I will say no more than that. The problem with the compensation solution is that it takes the incentive away from proper investigation into criminality and prosecution. That is a bad thing.

There is so much fraud that there is an industry, and that industry breeds its own criminality—I fear that somewhere in the Bahamas they are setting up a university course on it. That spreads the atmosphere or culture more widely. We know that London has a horrible reputation for financial criminality in general—for example, money laundering. This is bad. We do not want big chunks of our society, particularly bright, competent people, involved in criminality. From every point of view, we must up the effectiveness of prosecution—treating the fraudsters as criminals and, where appropriate, locking them up.

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, I will first cover Amendments 67, 71, 73 and 214 tabled by the noble Baroness, Lady Bowles of Berkhamsted, and the noble Lord, Lord Hunt of Kings Heath. The question of the FCA’s powers on fraud has been raised before in this Committee, as noted. Before I address the detail of the amendments, it may be helpful if I set out for the Committee the FCA’s role under FSMA in relation to fraud. The noble Baroness, Lady Kramer, asked me specifically about this last Monday. I will write, but I thought it might also be useful to set it out in the context of these amendments.

Although FSMA does not provide the FCA with an express power to prosecute fraud, it is able to prosecute fraud if it furthers its statutory objectives. If fraud is committed by an authorised firm in the course of a regulated activity, or if it carries out a regulated activity without the correct authorisations, the FCA will be able to take action against the firm on the basis of a breach of the FCA’s rules or other FSMA requirements. If a senior manager within the firm is responsible for the fraud or has culpably failed to prevent one occurring within the area of their responsibility, the FCA can take action against that firm and senior manager.

Where a firm is authorised for one activity, but is also carrying out an unregulated activity, FCA powers in relation to the unregulated activity will depend on the specific details of the case. In the case of a serious fraud, the FCA is able to take action, including on the basis that the firm or the senior manager is not fit and proper. If a firm provides regulated products or services without being authorised, unless exempt, it may be carrying on unauthorised business in contravention of the “general prohibition” in Section 19 of FSMA.

The FCA does not have powers to investigate a firm that is unauthorised and not carrying out any regulated activities unless, for example, that unauthorised person is carrying out market abuse—where the FCA has a specific role. In these circumstances, where problems fall outside the FCA’s statutory remit, the FCA assists other agencies and regulators wherever it can. That is important context for the noble Baroness’s amendments.

As I said last week, the Government take the issue of fraud very seriously. I repeat the point made by the noble Lord, Lord Hunt, that the prevention of fraud is a cross-cutting policy that requires a unified and co-ordinated response from many stakeholders. However, I acknowledge that the financial regulators, including the FCA, play a critical role in that, but many levers for change also sit elsewhere.

The Government’s view is that the FCA’s broad existing remit in relation to reducing and preventing financial crime, including fraud, allows it to take proactive steps to tackle fraud and wider financial crime, while driving a whole-system approach with relevant stakeholders. The FCA is an active and named agency in the national economic crime plan and the soon-to-be-published fraud strategy. Most crucially, the FCA and the PRA require regulated financial services firms to maintain effective systems and controls to prevent their being used to further financial crime, including fraud. In the first half of 2022, UK banks blocked over £580 million being stolen from customers. In its 2022-23 business plan, the FCA announced that it was developing its approach to supervision to include further oversight of firms’ anti-fraud systems and controls.

The noble Baroness, Lady Kramer, asked about the number of vacancies in the FCA for those working on fraud. I will write to the Committee to provide that detail. Under the FCA’s existing remit, it is able to have a leading role in this important issue. It does not require further powers to pursue fraud, but I will come on to address other points raised in the Committee about what more must be done overall about fraud.

In respect of Amendment 214, as noted by the noble Baroness, Lady Bowles, the Government are currently assessing options presented by the Law Commission for strengthening the law on corporate criminal liability, including for fraud. This includes committing to address the need for a new offence of failure to prevent fraud through the Economic Crime and Corporate Transparency Bill. I note the differences highlighted by the noble Baroness, but the Government believe that that Bill is the right approach and vehicle for dealing with the failure to prevent offence.

Amendments 209, 210 and 211, tabled by the noble Lords, Lord Tunnicliffe, Lord Hunt of Kings Heath, and Lord Davies of Brixton, respectively, relate to a national financial fraud strategy. As I have said, the Home Office will shortly publish a new strategy that will set out the Government’s plan on fraud, including fraud prevention, consumer protection and criminal prosecution. I am afraid that I did not read the Sunday papers as closely as other noble Lords, but I hear, understand and note the great interest in the strategy from this Committee and a desire to see it published as soon as possible. I reassure noble Lords that that continues to be a key priority for the Home Office, which is working closely with the Treasury and other government departments to make sure that we get it right.

[Lord Hunt of Kings Heath (Lab)]

I am grateful to the Minister for giving way. As part of this work, are the Government looking at the costs to the various statutory agencies of pursuing fraud? The noble Baroness, Lady Kramer, raised the example of the cost to Thames Valley Police—I think—of a prosecution, which on their budget was enormous. The fine was substantial, but there seemed to be no way of compensating the police for those costs. Can the Minister say whether that will be looked at within the strategy?

[Baroness Penn (Con)]

Funding is of course an important part of any strategy, and I have set out to noble Lords previously the increased funding that has gone to the specific issue of tackling fraud. I will turn to the specific proposal from the noble Baroness a little later, but I understand the point about not just the amount of funding but the incentives that different approaches can create.

The noble Lord, Lord Tunnicliffe, and other noble Lords talked about the devastating personal costs that fraud can have and the societal costs that having high levels of fraud in our society can bring. I agree with noble Lords on that. The noble Lord spoke about compensation not overshadowing the need for investigation and prosecution, and I also agree with that. Those considerations are all being taken forward through the strategy.

--- Later in debate ---

[Baroness Penn (Con)]

I am afraid I will not be able to address the noble Lord’s first two points, but I will happily write to him. On his third point, I referred to the fact that, as part of the Economic Crime and Corporate Transparency Bill, we are looking to take forward the issue of corporate criminal liability and the offence of failure to prevent fraud, which would strengthen action in the areas he talks about.

I was talking about our work with other sectors. My noble friend Lord Northbrook and the noble Lord, Lord Sikka, raised the issue of online fraud. There is an intention to bring forward a tech sector charter with industry, to include public and private actions to drive down fraud in this area. Of course, fraud has been brought into the scope of the Online Safety Bill to better protect the public from online scams through, among other measures, a new stand-alone duty requiring large internet firms to tackle fraudulent advertising, including that of financial services.

The Government also recognise the particularly devastating impact that fraud can have on the elderly and the most vulnerable people in society and on people’s mental health. They have taken various steps, including banning cold calls from personal injury firms and pension providers and supporting National Trading Standards to improve the quality of care available to vulnerable fraud victims. More broadly, the FCA’s guidance on vulnerability explores how firms can understand the needs of vulnerable customers. This includes those who are older or have mental health conditions and sets out how the sector can provide targeted services for this cohort, including in the context of fraud. Where firms fail to meet their obligations to treat customers fairly, the FCA will take further action. I hope noble Lords are assured that further work is being taken forward on data sharing and on supporting older people and those with mental health conditions who are victims of financial fraud.

The noble Lord, Lord Davies of Brixton, mentioned measures in the Online Safety Bill, as have I. I have also mentioned the measures in the Economic Crime and Corporate Transparency Bill and revisions to the Data Protection Act. I am cognisant of the need to ensure that this work is well co-ordinated and that the progress we are making in other Bills is co-ordinated with the work we are doing on this issue more generally.

I turn finally to Amendment 217. Currently, the proceeds of such fines imposed by the courts must, by law, be paid—

[Lord Hunt of Kings Heath (Lab)]

I am sorry to interrupt the Minister again, but her comments have prompted a thought. Many of us are trying to cover, albeit not always successfully, three or four different Bills that are running through your Lordships’ House with slightly similar amendments around this issue of financial fraud. I do not know whether it would be possible for the Ministers dealing with all these Bills to come together at some point for a more general discussion; it might make this easier for us all. The Minister will know that these debates are going to be repeated on a number of occasions.

[Baroness Penn (Con)]

I will absolutely take away the noble Lord’s suggestion. I cannot speak for others but I would be happy to engage further on this before Report, drawing on the other strands of government work; I agree with the noble Lord that it might be useful to have other Ministers there too. I recognise that the other Bills are not as far along as this one is, so we will not be able to pre-empt some of that work, but I think we can co-ordinate it for noble Lords if that would be helpful.

Finally, I was dealing with Amendment 217 and noting that, by law, income from fines imposed by the courts needs to be paid into the consolidated fund. That income is not ring-fenced but is used towards general government expenditure on public services. The Government agree that it is important for bodies responsible for investigating and prosecuting fraud to be appropriately resourced to discharge their responsibility. The NCA’s budget is made up of a number of different funding streams. That budget has increased every year since 2019-20 and, as part of the 2021 spending review, it was allocated a settlement of more than £810 million. This represents an uplift of approximately 14%, or £100 million, compared with the previous spending review. The noble Baroness, Lady Kramer, asked me a few more specific questions beneath those headline figures; perhaps I can write to her and the Committee with that information.

The FCA and the PRA are operationally independent regulators funded by a levy on the firms they regulate. I would like to reassure the noble Baroness that the regulators already have the power to ensure that they are resourced appropriately, without the need to divert funds away from general government expenditure. As I said to the noble Lord, Lord Hunt, I recognise the important principle behind this amendment—that consideration should be given to how the proceeds of fines can support the costs of enforcement activity.