Lord Northbrook (Con) [V]
My Lords, putting the contribution of the UK’s financial services in context, according to a City/PwC paper in January 2020 they contributed £75.5 billion in tax revenue in 2019, employing about 1.1 million people. Overall, I support the Bill’s measures, which bolster the consistent use of international standards. This is crucial to reducing the unnecessary fragmentation of markets that impacts on consumers. I agree with the delegation of responsibility for financial firm requirements to the regulators, subject to an enhanced accountability framework and necessary parliamentary scrutiny.
The three main objectives stated in the Bill are entirely sensible. The Bill also amends existing laws on financial services in the 17 separate areas grouped by these three stated objectives.
My only criticism of the second objective is that, while it promotes openness to EU and overseas financial firms that come here, no attempt was made in the Brexit negotiations to obtain passporting rights from the EU as a quid pro quo. The Government seem to have believed that these should only now be negotiated—alas, when we have no bargaining tools left in other areas. The EU seems in no hurry to assist us. Can the Minister explain the logic in this?
I welcome the new regulatory regime proposed for non-systematically important investment firms. The Government rightly state that the existing regime for these institutions can be disproportionate, inappropriate and impose unnecessary burdens. The Bill would rightly allow the Financial Conduct Authority to introduce a tailored regime for such companies. The Government say that the UK regime will be flexible and is intended to achieve similar outcomes to the reform in the EU in 2021 but
“tailored to the specificities of the UK market.”—[Official Report, Commons, Financial Services Bill Committee, 17/11/20; col. 59.]
I welcome the Bill’s implementation of Basel III standards on banking supervision. Some member firms will have been working towards implementing the EU’s capital regulatory requirements, CRR II. How may the UK diverge from CRR II?
I also support the framework to wind down the Libor benchmark, as outlined in the Bill. Will the Minister urge the FCA to publish further detail on its replacement as soon as possible?
Can the Minister clarify how the Treasury intends to make equivalence decisions under the framework for the new overseas fund regime? Will the Government publish a regular report on the progress and results of negotiations for obtaining equivalence for UK firms in EU countries? I strongly support maintaining the effectiveness of the financial services framework and sound capital markets in Clauses 8 to 17.
During the rest of my contribution, I will focus on the unfortunate statistic of the rise in complaints to the FCA and cite two examples of regulatory failure. According to an FTAdviser article of February 2020, the number of complaints about the City watchdog jumped by more than 50% in 2019, primarily due to concern about the regulator’s supervision of the industry. The main driver behind the hike was the sharp increase in the number of complaints relating to the FCA’s advisory role—namely, failure to act on information and to spot a problem. In the same month, the FCA was reprimanded by the complaints commissioner, Antony Townsend. He wrote to the FCA board expressing serious concerns, branding the current situation at the watchdog “totally unacceptable”. This followed a previous report in 2019, where the complaints commissioner highlighted a
“lack of effective prompt action”
by the financial regulator, in a number of cases where advisers and consumers reported concerns about a fund.
The two individual examples of regulatory failure on which I will focus are London Capital & Finance and Beaufort Securities. In December 2020 an independent investigation into the FCA’s handling of the LCF mini-bond scandal rebuked the regulator for “significant gaps and weaknesses” in its policies and practices. The review found that the City watchdog had failed to properly regulate the now collapsed company. It warned that its handling of information about the business from third parties was “wholly deficient” and an
“egregious example of the FCA’s failure to fulfil its statutory objectives”
in regulating the company. The mini-bond provider collapsed in May 2019, owing more than £230 million and putting the funds of some 14,000 bondholders at risk.
The main highlights of the review were that, first, investors had not received enough protection from the regulatory regime, and, secondly, LCF had not been adequately supervised by the FCA. Most importantly, the review stated that the root causes of the FCA’s failure to regulate LCF were “significant gaps and weaknesses” in the policies and practices it implemented to analyse the business activities of regulated firms. It had allowed LCF to use its authorised status to promote
“risky, and potentially fraudulent, non-regulated investment products to unsophisticated retail investors”.
Although the regulator’s financial promotions team had raised concerns about LCF’s financial promotions on six occasions, the breaches did not result in a referral to the supervision or enforcement divisions. Lastly, the report said:
“FCA staff who reviewed materials submitted by LCF had not been trained sufficiently to analyse a firm’s financial information to detect indicators of fraud or other serious irregularity … Neither did the FCA appreciate the significance of an ever-growing number of red flags, which were indicative of serious irregularities in LCF’s business. This occurred at a time when LCF’s unregulated bond business was growing at a rapid pace and substantial funds were being invested by Bondholders.”
I do not have time to go through the case of Beaufort Securities with which there were many of the same problems, though in a number of cases, investors got their money back. Overall, I welcome the Bill.