Authorised Push Payment Fraud Performance Report

Lord Vaux of Harrowden Excerpts

Tuesday 14th November 2023 Lords Chamber

Asked by

[Lord Vaux of Harrowden]

To ask His Majesty’s Government what assessment they have made of the authorised push payment (APP) fraud performance report published by the Payment Systems Regulator in October 2023.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, the Government are committed to tackling authorised push payment fraud and stopping customers falling victim to scams. The Government welcome the publication on 31 October by the Payment Systems Regulator of data on the levels of APP fraud and of reimbursement among payment service providers. This will ensure that firms are properly incentivised to combat fraud and explore all avenues to do so.

[Lord Vaux of Harrowden (CB)]

My Lords, this excellent report allows us at long last to see which banks are behaving best and worst in preventing and reimbursing fraud. One of the best ways to reduce fraud would be to stop fraudsters using UK bank accounts to receive the stolen money. We can now see from this report that Metro Bank, TSB, Starling and Monzo are the banks that receive and process the most stolen money. Smaller payment providers are even worse. For every £1 million received by Clear Junction, for example, more than £10,000 was stolen money, and almost 20% of Dzing Finance’s receipts by number were fraudulent. Now that we have this information, what are the Government doing to ensure that banks take real action to stop their accounts being used by fraudsters? Secondly, I congratulate Anthony Browne on his promotion yesterday, but what does that mean for his essential role as the Prime Minister’s Anti-Fraud Champion?

[Baroness Penn (Con)]

I congratulate the noble Lord, because he was a strong advocate for the publication of this data. As he says, it has indeed been revealing, and I assure noble Lords that action has already been taken on the back of it. On 27 October, the Financial Conduct Authority imposed restrictions on Dzing Finance Ltd, which was the worst-performing payment service provider for fraud volumes received. It now cannot on-board any new retail customers or allow any new incoming funds from retail customers for the purposes of issuances of electronic money or providing payment services without the written agreement of the FCA. In March this year, the FCA wrote to all payment firms, highlighting fraud risks and instructing them to take action to address this. Where issues are identified, the FCA will continue to take action. I also congratulate my friend in the other place on his appointment, but I assure noble Lords that his excellent work will continue under the work of the Home Office.

Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) Regulations 2023

Lord Vaux of Harrowden Excerpts

Wednesday 19th July 2023 Grand Committee

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, this Government recognise the threat that economic crime poses to the UK and our international partners, and are committed to combating money laundering and terrorist financing. To help respond to these threats, and building on the recently enacted Economic Crime (Transparency and Enforcement) Act, the Government are currently taking through a second Bill, the Economic Crime and Corporate Transparency Bill, which will bear down on kleptocrats, criminals and terrorists who abuse the UK’s financial and services sectors.

The money laundering regulations provide the legislative framework for tackling money laundering and terrorist financing, and set out various measures that businesses must take to protect the UK from illicit financial flows. Under these regulations, businesses are required to conduct enhanced checks on business relationships and transactions with high-risk third countries. These are countries identified as having strategic deficiencies in their anti-money laundering and counterterrorist financing regimes that could pose a significant threat to the UK’s financial system.

This statutory instrument amends the money laundering regulations to update the UK’s list of high-risk third countries. It removes Cambodia and Morocco from the list to reflect changes agreed by the Financial Action Task Force, the global standard setter for anti-money laundering and counterterrorist financing. The FATF found that both Cambodia and Morocco have made the necessary domestic reforms to improve their compliance with FATF standards, which have been confirmed through on-site visits to both countries.

The Government will pass further changes in due course to add to the UK’s list of high-risk third countries those that the FATF added to its own list in February and June 2023. The reason for passing these changes separately is to give time to complete a full impact assessment for these additions.

This is the seventh SI amending the UK’s list of high-risk third countries to respond to the evolving risks from third countries. This update ensures that the UK remains at the forefront of global standards on anti-money laundering and counterterrorist financing. In 2018, the Financial Action Task Force assessed that the UK has one of the toughest anti-money laundering regimes in the world. The UK was a founding member of this international body, and we continue to work closely and align with international partners, such as the G7, to drive improvements in anti-money laundering and counterterrorist financing systems globally.

Lastly, this list of high-risk third countries is one of many mechanisms that the Government have to clamp down on illicit financial flows from overseas threats. We will continue to use other available mechanisms to respond to wider threats from other jurisdictions, including applying financial sanctions as necessary. This amendment will enable the money laundering regulations to continue to work as effectively as possible to protect the integrity of the UK financial system. It is crucial for protecting UK businesses and the financial system from money launderers and terrorist financiers. I therefore beg to move.

[Lord Vaux of Harrowden (CB)]

My Lords, I thank the Minister for introducing and explaining the regulations. I realise that all they do is follow the recommendations of the Financial Action Task Force, FATF, to change the list of countries designated as high risk and therefore subject to enhanced due diligence requirements in relation to anti-money laundering, counterterrorism financing and counterproliferation financing. In that respect, so far so uncontroversial.

It has to be said, however, that the list is somewhat surprising—both for those on it and, in particular, those not on it. The changes made by these regulations are also somewhat surprising: they remove Morocco and Cambodia from the high-risk list. It seems rather odd that Cambodia, which is generally regarded as among the most corrupt countries in Asia, is no longer treated as high risk. I am very fond of Cambodia and have spent a lot of time in that country, but that does not change the fact that it is extremely corrupt.

According to Transparency International’s Corruption Perceptions Index, Cambodia is ranked 150 out of 180 countries on the index. This is a slight improvement on previous years, but still considerably lower than many countries that remain on the high-risk list, such as Albania at 101, Panama at 101, the Philippines at 116, Barbados at 65, Burkina Faso at 77, Iran—which is on the blacklist—at 147, Jamaica at 69, Jordan at 61 and Mali at 137. I could go on. In fact, Cambodia has a worse corruption score than all but seven of the 27 countries that remain on the FATF high-risk list. It is not only Transparency International that ranks Cambodia badly. With perhaps more relevance to this regulation, the Basel AML Index ranks Cambodia as having globally the seventh worst money laundering and terrorism financing score. Despite that, we are reducing the level of due diligence that the regulated sector will have to apply to it. Seriously, is there anybody in this Room who believes that Cambodia should be treated better than, say, Gibraltar, Barbados or even the Philippines? I should like the Minister to look me in the eye and state that she really believes Cambodia is not a high-risk country for corruption.

This starts to beg the question about the value and legitimacy of the FATF high-risk assessment process, known as the mutual evaluation assessment. That value is called into even greater question when we look at the countries not included in the high-risk designation. I will give a high-profile example: until February of this year, Russia was a member of the FATF. In February, the FATF suspended its membership because of the war against Ukraine—somewhat belatedly, one could say. I emphasise “suspended”; Russia has not been expelled. It is evidently a paragon of virtue when it comes to money laundering and terrorism financing because, unlike the British territory of Gibraltar, Russia is not designated as high risk and therefore not subject to enhanced due diligence. It is odd, then, that we have spent so much time passing Bills in this House specifically to deal with the stolen laundered money coming from Russia. Almost unbelievably, in its last review of Russia in 2019, the FATF praised Russia’s efforts to prosecute terrorist financiers and suggested that AML/CFT is afforded the highest priority by the Russian Government. This is a country that finances and supports organisations such as the Wagner Group, while Putin’s Government is generally regarded as a kleptocracy. Other countries not on the list, and therefore not subject to enhanced due diligence, include such famously uncorrupt ones such as Somalia, Venezuela, Libya, Turkmenistan, Nicaragua and Zimbabwe, to name but a few. All score worse than Cambodia in the corruption index; all are apparently low risk, according to the FATF. The Explanatory Memorandum refers to the FATF’s “robust assessment processes”; frankly, those do not stand up terribly well to scrutiny, if this list is anything to go by.

It is worth quoting the recently departed FATF CEO, David Lewis, who was very highly regarded. He said the agency structure of “mid-level bureaucrats” means that it does not have the scale to take on the big global financial crime issues. He said that they are

“very comfortable dealing with the finest minutiae of technical detail, but aren’t comfortable or able to have big picture discussions and are often only in their jobs for one of two years”.

He stated that genuine reform of the FATF is difficult to achieve, with typically two to four countries blocking consensus, meaning it is rare that you can get any meaningful change, which probably explains the list we are looking at.

Concerns are often raised about the FATF’s lack of transparency. The minutes of plenary sessions that make these risk designations are not published and it is clear that political horse-trading plays a significant role in the decision-making process. To be fair, there is no doubt that the FATF has had a positive impact on global financial crime since its inception in 1989, but there are growing doubts about its ability to cope with the challenging global situation we currently face. In an article for RUSI, Tom Keatinge of the Centre for Financial Crime and Security Studies makes some helpful suggestions about how the FATF could be improved. He suggests, first, greater transparency: it should provide greater assurance of independence and oversight. Its activities should be overseen by an independent board and its evaluation should be independently reviewed, not subject to the evidently politicised horse-trading that occurs currently. The minutes of the plenaries should be published, or the plenaries themselves could be livestreamed. Secondly, it needs to create a dedicated technical-assistance capability to ensure that unintended negative consequences, such as financial exclusion and the use of the FATF recommendations by autocratic regimes against civil society organisations, are addressed.

Thirdly, he suggests that the FATF needs to show greater ambition. Ultimately, the question is whether it is addressing financial crime effectively. It currently evaluates how effectively its recommendations are implemented, but not the extent to which financial crime is addressed as a result. He suggests an independent review of the FATF’s effectiveness, which seems a simple and sensible suggestion 45 years after it was founded.

Fatima Alsancak, also of the Centre for Financial Crime and Security Studies, suggests that Russia is a good

“case study in the deficiencies of the … FATF mutual evaluation process, which allows countries with high levels of institutionalised corruption to complete their evaluations despite the lack of integrity in their AML systems”.

She goes on to say:

“It is essential for the watchdog to revisit its standards”,


and again highlights the need for greater transparency in the decision-making and listing process.

I was going to ask why South Africa, Nigeria, Croatia, Cameroon and Vietnam are not the list, but the Minister answered that in her opening statement. I mentioned earlier that Gibraltar, a British Overseas Territory, is on the high-risk list. Will she please comment on that, too?

There are important questions to answer about the value of the FATF evaluation process. We should not rely passively on what are, frankly, flawed recommendations. Do the Government agree that FATF’s procedures and the high-risk list itself appear to have important deficiencies and, if so, what are they doing about it? Do they agree with the recommendations that I referred to earlier?

[Lord Purvis of Tweed (LD)]

My Lords, it is a pleasure to follow the noble Lord, Lord Vaux, who made a probing and persuasive argument about the deficiencies in some of the process. I have two questions for the Minister.

In a debate on a previous instrument, in which I spoke, the Government made the case that, with the new freedom as a result of Brexit, they would immediately make the decision to remove British sovereignty by having an automatic updated list of the Financial Action Task Force. I thought that rather inconsistent with the argument that we had left the European Union to gain freedom: the very first act was to give that freedom away.

The noble Lord highlighted the inconsistencies, and I will add another. The Minister has heard me talk about the Wagner Group and its lack of proscription, and the fact that it operates almost with impunity in many countries. One of the countries in which it has been operating, which is not on the list, is Sudan. It is beyond me that the UK, having done excellent work through our diplomats, development and security operations in that conflict-afflicted country, would not want the ability to act immediately in putting Sudan on the list, whose two warring parties, the Sudanese Armed Forces and the Rapid Support Forces, are operating across organised crime, including conflict. Why would that not be a high-risk third country? If the Minister is saying that we have made the decision simply to adopt an external organisation for making determinations of what would be high-risk third countries, what was the point of seeking the sovereignty to make decisions ourselves?

My second question relates to the United Arab Emirates, which maintains its position on the list. I have asked for the text of the UK-UAE investment agreement, but it has not been forthcoming. Why not? If there is an investment agreement that binds the UK into certain preferential market treatment for financial vehicles within the UAE, and the UAE is on a UK list of high-risk third countries, we should, as a matter of good governance, be able to see the text of the UK-UAE investment agreement and to consider what elements in it ensure that we comply with all the elements that would be required of our financial relationship with the UAE. This is even more important given that, in Grand Committee debates on the sanctions regime for Russia, we have raised the joint ventures that operate between the UAE, Russia, the Wagner Group and countries such as Sudan. I hope the Minister will be able to respond by saying that new regulations will be brought forward at pace to ensure that these loopholes are now closed.

Financial Services and Markets Bill

Lord Vaux of Harrowden Excerpts

Report stage
Tuesday 13th June 2023 Lords Chamber

Moved by

[Lord Vaux of Harrowden]

94: Clause 68, page 85, line 9, at end insert—
“(8A) At least annually after the Payment Systems Regulator has imposed the requirement set out in subsection (5), it must publish a report on the impact of the requirement, including its assessment of the impact on the protection of consumers and the behaviour of payment service providers in relation to consumer protection.(8B) Reports published under subsection (8A) must provide at least the following information for each payment service provider subject to the requirement—(a) the number and value of authorised push payment (APP) scams notified to them;(b) the percentage by number and value of APP scams that have been reimbursed;(c) the percentage by number and value of APP scams initially rejected and subsequently appealed and the results of such appeals;(d) the percentage by number and value of APP scams that have been finally rejected;(e) the shortest, longest and average time from notification to decision about reimbursement.”Member’s explanatory statement
This amendment aims to ensure that the impact of the APP reimbursement requirement is assessed and reported on regularly and to ensure that consumers can see whether the rules are being applied consistently and which institutions are better and worse at reimbursing victims fairly and promptly.

[Lord Vaux of Harrowden (CB)]

My Lords, I introduced a number of amendments on the subject of authorised push payments fraud in Committee. At the time I said I was broadly happy with the Minister’s responses but would look to return to the reporting question again, which is what Amendment 94 does. I should say at the outset that I support what the Bill is trying to do in respect of APP fraud to make it easier, and in particular fairer, for victims of APP fraud to get their money back. Before I go any further, I remind the House of my interest as a shareholder of Fidelity National Information Services, Inc., which owns Worldpay.

My new Amendment 94 has two elements to it. First, it would introduce requirements on the PSR to report annually on the impact that the reimbursement requirement had had on consumer protection and on the behaviour of payment service providers. Secondly, it would effectively create a league table to enable consumers to see how each bank is actually performing both in preventing fraud and in reimbursing victims.

On the first point, the annual impact report is necessary because the mandatory reimbursement requirement could have unintended consequences that might damage consumer protection. I shall give a couple of possible examples of that. First, there is the possibility of moral hazard. If the mandatory requirement means that consumers start to take less care about protecting themselves because they will be repaid anyway, that could have the undesirable consequence of actually making it easier for the fraudsters to commit fraud and so actually increase levels of fraud. While, as we discussed in Committee, we must not put the blame on the victims, there is a balance to find in this area to avoid making it easier for the fraudsters while improving consumer protection and outcomes. We will know whether we have found the right balance only when we start to see the results.

A second example might be that the banks change their behaviour in an undesirable way. Rather than improving their fraud detection and prevention processes, they might simply decide that the easiest thing to do would be to stop providing services to people whom they see as being at the highest risks of fraud in order to reduce their potential reimbursement liability. I think many Members of this House have seen similar behaviour in respect of PEPs—politically exposed persons—where, rather than undertaking sensible risk-based steps, banks have on occasion just decided that it is too difficult or expensive to deal with PEPs and have refused to open accounts or have even closed accounts. We will come to that later today, but it is a good example of a well- intentioned risk measure having undesirable consequences. In the case of APP fraud, if the banks see it as too great a financial risk to provide banking services to those deemed to be at a higher risk of fraud, then we might see a whole swathe of more vulnerable people unable to obtain banking services.

These are just two examples, but I hope that they demonstrate the importance of the PSR keeping the impact of the requirement for mandatory reimbursement under regular review and amending it if it turns out to have unintended negative consequences. Reporting on this regularly and publicly will ensure that the impact assessment is robust.

Turning now to the second element of the amendment, the requirement to report annually on the performance of the banks, a major criticism of the current voluntary reimbursement code is that it is completely non-transparent. While numbers are published, they are anonymous. Consumers cannot see which banks are behaving best, and which are behaving worst, unless, as TSB does, they tell us voluntarily. The TSB example is encouraging—it is using its 100% reimbursement policy as a selling point. Introducing competitive good behaviour is highly desirable, and this amendment would help achieve that.

The amendment would effectively create an annual league table that would enable consumers to see which banks have the lowest levels of fraud—which will give an indication of how good they are at detecting and preventing fraud—which banks are better and quicker at reimbursing victims when fraud occurs, and, by including the appeal information, which banks make it more difficult for victims. That would allow consumers to take this information into consideration when deciding whether to stay with their existing bank or when considering opening a new account—something that would otherwise not be possible. That would, I hope, provide a real competitive incentive for banks to change their behaviour both in detecting and preventing fraud and in treating victims promptly and fairly.

This would not introduce a significant additional burden; the PSR will have all this information anyway, so reporting it is not a significant job. However, the benefits to consumers of making this information public are potentially significant.

When we discussed this in Committee on 13 March, the Minister stated in relation to the impact assessment that the PSR

“has committed … to a post-implementation review”

and that the Government would also

“monitor the impacts of the PSR’s action and consider the case for further action where necessary”.

That does not go far enough. Fraudsters keep changing their business models in reaction to actions by industry and the authorities, so it is essential that this is kept under continual review rather than only a one-off, post-implementation review. It is also important that the impact assessments are published. Can the noble Baroness provide any greater comfort in those respects?

On the league table, the noble Baroness said on 13 March that the PSR

“is currently consulting on a measure to require payment service providers to report and publish fraud and reimbursement data”.—[Official Report, 13/3/23; col. GC 166.]

It is now nearly three months later, so can the noble Baroness provide an update on whether this consultation has progressed and whether the data will in fact be published? It would be better if such data was published by a single source such as the PSR rather than piecemeal by payment service providers. I beg to move.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I support this amendment and I can be relatively brief. It is important not only to collect the statistics but also at times to dig underneath to see how they might be being gamed. From personal experience, I know of instances where banks are treating microbusinesses more strictly than they are treating consumers, saying that a business should know and therefore rejecting them out of hand at the first time of asking, if I can put it that way. I have heard, in a similar case, stories of someone making contact by telephone repeatedly, their inquiry getting lost and the person having to go through the whole story with a case handler multiple times, the strategy obviously being, “Let’s try and make them give up”. That was with a very large bank; I will not name it because I do not have absolutely all the detail. Therefore it is quite important that different criteria are not being used between sole traders and individuals when it has already been determined via the ombudsman that both have a route.

--- Later in debate ---

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, the Government and the Payment Systems Regulator recognise the importance of regular, robust data collection. This is crucial for monitoring the effectiveness of the reimbursement requirement and ensuring that firms are held accountable. I am grateful to the noble Lord, Lord Vaux of Harrowden, for his considered engagement on this issue. I reassure noble Lords that the PSR has committed to half-yearly publication of data on authorised push payment scam rates and on the proportion of victims who are not fully reimbursed.

I can tell my noble friend Lord Naseby that a voluntary system is already in place and the PSR has already begun collecting data from the 14 largest banking and payment groups. The first round of transparency data is due for publication in October this year. The data that the PSR will publish includes the proportion of scam victims who are left out of pocket, fraud rates where the bank has sent customers’ money to a scammer, and fraud rates where the bank has hosted a scammer’s account. That means that, from October this year, the PSR will publish data for total fraud rates, both for sending money and receiving fraudulent funds, and reimbursement rates, on a twice-yearly basis for the 14 largest banking groups. This so-called league table will provide customers with the information they need to consider the relative performance of different banking groups on these metrics, and to factor that into their banking decisions.

Further to this data, once the reimbursement requirement is in place the PSR will use a range of metrics to monitor its effectiveness on an ongoing basis. These include the length of reimbursement investigations, the speed of reimbursements, the value of repatriated funds, the treatment of and reimbursement levels among vulnerable customers, and the number and value of APP scams. Data on appeals will be captured and reported by the Financial Ombudsman Service separately.

More broadly, the PSR will publish a full post-implementation review of the reimbursement requirement introduced by this Bill within two years of implementation. The review will assess the overall impact of the PSR’s measures for improving consumer outcomes. That does not mean it will not also consider the effectiveness of this measure on an ongoing basis. Indeed, more widely, the PSR will consider risks across different payment systems and, where necessary, address them with future action. This includes a commitment to work with the Bank of England to introduce similar reimbursement protections for CHAPS payments, and with the FCA in relation to on-us payments.

The PSR has been working closely with industry to develop effective data collection and reporting processes for its work on fraud. While the Government recognise the intention behind the noble Lord’s amendment, they do not consider it necessary or appropriate to prescribe specific metrics to be collected in primary legislation. I hope that, given the reassurance I have been able to provide today, he would agree with that point.

The noble Lord, Lord Livermore, spoke about the wider impacts of fraud and the duties that go beyond financial services companies or payment system providers in addressing those risks of fraud. That is being looked at through both the Government’s counter-fraud strategy and other Bills. He mentioned the Online Safety Bill. I disagree with his assessment of the measures in there. The measures that we have to tackle fraud in that Bill are a significant step-change in what we expect of companies in this space, and I think they will make a real difference. We are committed to working across all sectors to look at what more we could do in this space once we have implemented those measures and see how effective they are. I hope noble Lords are reassured by our commitments more broadly on this issue, and specifically by the fact that the PSR will be publishing data in this space once we have implemented the measures in the Bill.

[Lord Vaux of Harrowden (CB)]

My Lords, I thank all those who have taken part in this debate, particularly the Minister for her constructive engagement on this and the reassurance she has just given. In fact, in one area, she has actually gone further than my amendment suggested, as the noble Lord, Lord Naseby, pointed out: the annual report is now to be six-monthly, which is hugely welcome. It is only for the top 14 payment service providers, which will cover the bulk of the market, but that is something that the Government and the PSR might want to keep under review, particularly as different players come in and out of the market. I thank her very much for her reassurances.

I will make one comment more generally, echoing some of the comments made by the noble Lord, Lord Livermore. It is not only the banks that are players within the fraud chain, it is all those other parties that enable or facilitate fraud, from the tech companies to social media companies, the web-hosting companies, the telecom companies, et cetera. This measure puts all of the liability on to the banks. While it is a simple solution for victims—and that is to be commended—we need to find some way of incentivising all those other players in the fraud chain to behave properly and to stamp down on their services being used by fraudsters. I am hoping that we will see progress on that in the Online Safety Bill, and also in the failure to prevent fraud clauses in the economic crime Bill that is coming forward. With that, I beg leave to withdraw my amendment.

Amendment 94 withdrawn.

Financial Services and Markets Bill

Lord Vaux of Harrowden Excerpts

Report stage
Thursday 8th June 2023 Lords Chamber

[Lord Eatwell (Lab)]

My Lords, there is a certain amount of confusion about the competitiveness objective and it is important to clarify it in discussion on Report. To illustrate this point, we have to understand that London is a rather peculiar financial centre, because it has a very limited hinterland of domestic savings. It is unlike the United States, where New York has a huge hinterland of domestic savings. It is therefore necessary for London to attract savings and funding from around the world, and it does that brilliantly well.

An important component of that is that London is seen as a well-regulated and efficiently regulated centre. The primary objectives set out in FSMA of maintaining market confidence, financial stability, public awareness, protection of consumers and the reduction of financial crimes are competitiveness goals in and of themselves. They make London more competitive and are a crucial component of the success of London at attracting funds from around the world.

The competitiveness objective that was introduced as a subsidiary objective is rather different, because there competitiveness means being allowed to take more risk. As everyone knows, in financial affairs the balance of risk and return is one of the key elements in making sensible decisions. This is true as much in regulation as it is in the operation of financial services business. It is particularly true in regulation when it applies to systemic risks, which only the regulator can understand and deal with.

It is therefore important that we do not overegg the competitiveness objective. It is important—it has introduced an important element in discussing the relationship between risk and return—but we should recognise that the primary objectives are the key to London’s competitiveness as a financial centre.

[Lord Vaux of Harrowden (CB)]

My Lords, I will comment briefly on government Amendment 11. The competitiveness and growth objective is a long-term, ongoing objective and, with the best will in the world, it is highly unlikely that we will see any discernible change in measurable competitiveness or growth in just two years. The objective does not end in two years and yet the amendment put forward by the Government has only two years’ worth of reporting.

As usual, the noble Lord, Lord Holmes of Richmond, has put together an elegant solution in Amendment 12, which would create an ongoing annual reporting requirement, as well as being a bit more specific about what should be included within the reports. I understand from the Minister’s earlier speech that she expects this to be covered off in the normal annual reporting thereafter, and I think we can probably live with that.

I will add to the comments made by noble Lord, Lord Eatwell, with this caveat: I support the competitiveness and growth objective, but only as a secondary objective. The primary objective of stability must remain paramount. Can the Minister confirm that, as part of the reporting on the competitiveness and growth objective that is expected, the regulators will consider and report on the impact it is having on the primary stability objective? The two are not unconnected, as we have just heard, and it is really important that when we report on one, we also report on its impact on the other.

Financial Services and Markets Bill

Lord Vaux of Harrowden Excerpts

Report stage
Thursday 8th June 2023 Lords Chamber

[Viscount Trenchard (Con)]

My Lords, I too thank my noble friend the Minister for again responding to the strong views expressed within your Lordships’ House and for introducing the amendments that she has. I also agree with what my noble friend Lord Holmes said.

I also thank the noble Baroness, Lady Bowles of Berkhamsted, for the introduction of my noble friend Lord Bridges’ Amendment 64 and the others in that group. I supported his amendments in Grand Committee and am pleased to do so again today. My noble friend set out with his usual clarity, as did the noble Baroness, why we should support these amendments, and I will not waste your Lordships’ time in repeating them.

As my noble friend Lord Forsyth of Drumlean said in Committee, in order for Parliament to be able to hold the Treasury and the regulators to account, it is necessary to have an independent source of information. The proposed office would provide that. It is also welcome that the main duties of the office will include a duty to prioritise the analysis of regulations that restrict competition, negatively affect competitiveness and add compliance costs.

I do not believe that the new office would be a regulator of the regulators. Rather, it would be a means to ensure that the regulators really do get on with the job on which they are behind schedule—the promise made in 2016, in the general election manifesto and many times since that we will take advantage of our regulatory freedoms to eliminate or simplify those regulations which do not suit our markets and which place a disproportionate burden on market participants. We should not do this at the expense of standards, but to recast the rulebook in common law style will make it much easier for firms to maintain the high standards on which the regulators, the Treasury and noble Lords will all insist. The proposed office would greatly assist in ensuring that this will happen.

I also note—although we will discuss this in the next group—that, ideally, the office would deal principally with a Joint Committee of both Houses rather than two separate committees which might compete with each other. That would double the work and the costs that the office and the regulators would have to bear in carrying out their duties.

I believe the creation of an independent office such as the one proposed would be more helpful than the creation of a multiplicity of panels, which may be set up by statute but remain panels of the entities of which they form part. These are also duplicated between the two regulators, which doubles the cost and time taken by the regulators, and by the relevant committees of your Lordships’ House, in discussing with them.

I hope my noble friend the Minister is prepared to consider further the creation of something which is truly independent of the regulators. I think we have too much legislation by statute to require entities to negotiate with panels of which they are a part, which conceptually I find rather odd in any case.

[Lord Vaux of Harrowden (CB)]

My Lords, this is the first of two groups that seek to improve the level of parliamentary scrutiny and accountability. Arguably, I think the groups are the wrong way around from a logical point of view, but we are where we are. We had long debates on this in Committee, and it was clear that accountability and parliamentary scrutiny was probably the single biggest issue on which Members from across the House felt that the Bill fell woefully short, particularly given the huge amount that is being transferred to the responsibility of the regulators by the Bill.

We heard in Committee of the need for three legs to the whole process of scrutiny and accountability: reporting, independent analysis and the parliamentary accountability elements. This group is about the second leg—the independent analysis that will support the parliamentary scrutiny and accountability. The Government have listened, and that is welcome, but I am sure I am not alone in finding what they have proposed to be rather thin gruel.

The Government have introduced a number of amendments which enhance the role of the various policy panels, in particular the cost-benefit analysis panel. These are welcome, but I am afraid they really do not go far enough. Other noble Lords, especially the noble Lord, Lord Holmes of Richmond, have tabled further amendments to enhance and support the role of the panels. Again, that is very welcome but not, I think, sufficient. Despite these improvements, the panels remain appointed by the regulators and are not genuinely independent.

I remain strongly drawn to the amendments in the name of the noble Lord, Lord Bridges of Headley, introduced by the noble Baroness, Lady Bowles, to which I have added my name, to create a genuinely independent office for financial regulatory accountability. As I said, so much responsibility is being handed to the regulators that it must make sense to have a genuinely robust system of oversight over the regulators, not just responding to consultations about proposed changes to regulations that the Government have put into the Bill but a much more holistic oversight of the whole regulatory direction—something that deals with what the noble Viscount, Lord Trenchard, referred to as the multiplicity of panels. We need to draw this all together, and we need to be much more forward-looking about the direction of regulation, rather than backward-looking as to what is proposed.

This is such an important matter and such a huge volume of work that, if we are to scrutinise it effectively, we need to have something such as the proposed office for financial accountability to enable parliamentary committees and others to carry out the meaningful scrutiny. The noble Baroness, Lady Bowles, talked about the need for resources; we will come on to that in the next group, but she is quite right. This would really help because, if the independent information were available to the committees, it would save them the job of doing all the sifting and all the rest of it, and they would be able to concentrate on the bits that really matter.

Even with the amendments proposed by the Government, I do not think that we get anywhere near that real scrutiny. I am sorry to hear that the noble Lord, Lord Bridges, does not intend to push these amendments; I would have liked him to do so and would have supported him if he had. I hope that he will continue to use his influence as the chair of the Economic Affairs Committee to push for a similar approach.

[Lord Eatwell (Lab)]

My Lords, I totally agree with what the noble Lord has just said and therefore I will not repeat his words. The office for financial regulatory accountability proposed by the noble Lord, Lord Bridges, would become an important part of the whole regulatory architecture in this country. The reason why I have proposed a couple of amendments—I am delighted to hear that the noble Lord, Lord Bridges, actually likes my amendments to his amendments—is to enhance the position of the office within that architecture.

We have to recognise that there will be virulent opposition to this in the Treasury. The Treasury’s darkest day in recent years was the day that the Office for Budget Responsibility was established as an independent entity evaluating the performance of the economy. In the same way, having gone through that dark day, I can imagine the horror with which the Treasury observes the possibility of an independent entity evaluating the performance of regulators and the performance of the Treasury in its activity in guiding regulation. It is no surprise at all that we have what the noble Lord has quite appropriately called “thin gruel”, instead of something that would be truly effective and would create both an independent assessor and a sounding board for the industry, consumers and others who have an interest to express in regulation to get their views on to the front line.

With my Amendments 67 and 72 I am again in slight opposition to the noble Viscount, Lord Trenchard, in the sense that I want to remove the lines in the amendment from the noble Lord, Lord Bridges, that specifically focus on the competition objective, because I do not want to second-guess what the office might do. The office could choose to travel over any part of the regulatory countryside. I regard my Amendment 72 as much more important because, as part of the architecture, the office should be funded through the levy in the same way as other parts of the regulatory system; the FCA, the Financial Services Compensation Scheme and so on are all financed via the standard levy on the industry. After all, this would be a trivial amount of money because—as has been pointed out—it would be only a relatively small entity. I am delighted that the noble Lord, Lord Bridges, liked my amendment to his amendment. I hope that he will be able to carry forward these proposals in the way that the noble Lord, Lord Vaux, suggested.

I will comment on Amendments 44 and 47 from the noble Lord, Lord Holmes, on the membership of panels at the FCA and the PRA. I support his view that placing practitioners on panels can have a very positive effect. I say this because I was an independent member of the board of the old Securities and Futures Authority, which was a practitioner-run regulatory authority with independent members, of which I was one. I was very impressed by the way that practitioners, when required to be regulators and placed in a regulatory role, assumed the role of regulators—they were not just representatives of their special interests. In fact, their special interests were left at the door; what came in with them was their specialist knowledge. I was sceptical when I first joined the board of the SFA but was won over by the performance of practitioners there. The proposal from the noble Lord, Lord Holmes, for practitioners will add to the regulatory effectiveness and knowledge of these panels.

--- Later in debate ---

[Lord Eatwell (Lab)]

My Lords, I will comment briefly on the proposal which has emerged and is contained in Amendment 30 in the name of the noble Baroness, Lady Penn. It refers to the possibility of parliamentary committees being

“the Treasury Committee of the House of Commons … the Committee of the House of Lords”

or a Joint Committee. It says “and” but I presume that they would be mutually exclusive.

What is extraordinary about this amendment is that it contains a seriously bad idea which might lead to an extremely good outcome. The seriously bad idea is that the two committees, one in the other place and one here in the Lords, would be sitting at the same time and looking at the same material, requiring the same levels of expertise to advise them and the same commitment of time by the regulators—and, perhaps, producing divergent opinions which would lead to regulatory uncertainty. That is a very bad outcome. Why I fully support these amendments, however, is that the seriously bad idea will lead to an extremely good outcome, because people will see that the possibility of having a committee in the other place and a committee here doing the same thing, with all the negative connotations that I have just discussed, will lead to the rational outcome of a Joint Committee of both Houses.

[Lord Vaux of Harrowden (CB)]

My Lords, I added my name to the amendments by the noble Lord, Lord Forsyth, so I thought I would stand and associate myself completely with his comments. I am delighted that the noble Baroness has effectively accepted the proposal. I will add my voice to say this: the subject of financial services is so huge, complex and important that it really requires a dedicated committee, whether a Joint Committee or committee of this House, not just to be part of, say, the Industry and Regulators Committee or the Economic Affairs Committee. It is much too big a subject to be covered by a committee that is not dedicated to the subject—and, if you have a dedicated committee, it must be properly resourced.

The Government rightly say that this is a matter for Parliament, but let us be realistic: they have huge influence on what happens there. I really hope that the Government and whoever the powers-that-be in this House who make these decisions are—even as the chair of the Finance Committee, this is still slightly opaque to me—are listening. This is so important. We must go ahead and must resource it properly.

[Viscount Trenchard (Con)]

My Lords, I strongly agree with what my noble friend Lord Forsyth has said. I also put my name to his Amendment 25 and other amendments, and I think that he is entirely right.

I also thank the Minister for responding to the concerns expressed on all sides of the House and for recognising that the parliamentary oversight of the regulators may need to be done by a Joint Committee of both Houses. Like the noble Lord, Lord Eatwell, I had also noticed that the amendment says not “or” but “and”, so there is a danger that there might be three committees doing the same thing, which would treble the work required by the regulator and, presumably, by the witnesses and experts who would be called to assist.

Also like the noble Lord, Lord Eatwell, I had the experience of serving on the 1999 Joint Committee of both Houses. This was established by resolution of your Lordships’ House and another place separately but was effectively driven, or at least strongly encouraged, by the Government at the time. The noble Lord, Lord Burns, was a most effective chairman of the Joint Committee, and it was a pleasure to serve on it under his leadership. An added benefit of that Joint Committee was that it enabled noble Lords with an interest in financial services to work much more closely with Members of the other place and concentrated the expertise of both Houses in one committee. I agree with the noble Lord, Lord Eatwell, that it would be a seriously bad outcome were there to be two committees tasked with this huge job.

I also refer to what the noble Baroness, Lady Bowles, said. I was in Brussels at the same time that she was chairman of the ECON, the economic affairs committee of the European Parliament. I often visited the European Parliament at that time. I was struck by the large number of staff and the great facilities available to the committees to carry out their role of scrutinising the legislative proposals brought by the Commission. We have not experienced that burdensome type of work: in the past, under the European model, all our financial services regulation was in primary legislation. It will now be given to the regulators. We therefore need more resources than have been available to us to scrutinise and supervise them properly. This is really important.

Noble Lords should also be grateful to the Minister for restoring equality of involvement between another place and your Lordships’ House. I thought that this was an unfortunate precedent for this type of legislation, particularly as many noble Lords have recent and continuing involvement with financial services firms. I look forward to the Minister’s winding up.

Financial Services and Markets Bill

Lord Vaux of Harrowden Excerpts

Report stage
Tuesday 6th June 2023 Lords Chamber

[Baroness Meacher (CB)]

My Lords, I shall speak to Amendment 91—this is a somewhat variegated group. The amendment was very ably introduced by the noble Baroness, Lady Boycott, and I am privileged to be asked to speak to it—it has widespread support across the political parties and within the public, as well as from key figures such as Sir Ian Cheshire and financial institutions representing no less than £1.18 trillion in assets under management and advice.

The UK is in the invidious position of being a leading financier of global deforestation and linked human rights abuses. This country provided an estimated $16.6 billion to businesses implicated in deforestation over five years to 2020. How many of us have money in pension funds contributing to the £300 billion of UK pension fund money supporting high deforestation risk companies and financial institutions? The Government claim that the answer to this problem—if you like—is the Taskforce on Nature-Related Financial Disclosures. However, the Government’s own expert Global Resource Initiative task force has already explicitly rejected the TNFD’s disclosure-based model as a solution. It has told the Government that new due diligence laws are needed to stop UK finance flowing to deforestation —and that is precisely what this amendment does.

I am aware of the noble Lord, Lord Field’s rather wonderful Cool Earth charity, which finances indigenous tribes in the great forests to retain the trees and live within them. Amendment 91 is vital to prevent all Cool Earth’s good work being undermined by UK financial institutions investing in high deforestation risk companies. The UK led the Glasgow leaders’ declaration on forests and land use at COP 26, making a commitment to halt and reverse deforestation and land degradation by 2030, including by realigning financial flows. This amendment begins to meet that commitment; surely, this should not be neglected. My only regret is that the amendment allows for a 24-month delay before due diligence obligations come into force to allow the sector to prepare—and, of course, I understand that sectors need to prepare. But this issue has been debated in Parliament for some months. I wonder how far the sector has reached in its preparations and whether it would support a reduced delay. How does such a delay fit with the view of experts that commodity-driven deforestation must end by 2025 at the latest to limit global warming to 1.5 degrees centigrade? A 24-month delay takes us right into 2025. I understand that agricultural expansion drives more than 90% of tropical deforestation. Again, the amendment is business friendly and widely supported, and I hope that the Government will support it and accept it.

[Lord Vaux of Harrowden (CB)]

My Lords, I have added my name to Amendment 15, tabbed by the noble Baroness, Lady Hayman. It aims to ensure that the conservation and enhancement of the natural environment are included in the regulatory principles of the regulators. Like the noble Baroness, I would have preferred another secondary—what is the word?

[Baroness Northover (LD)]

Objective.

[Lord Vaux of Harrowden (CB)]

Yes, objective, thank you. But we are where we are.

The noble Baroness has already explained this with her usual skill, so I shall not repeat what she has said. However, I am sure that I am not alone in experiencing a feeling of déjà vu in even having a debate on this subject. The noble Baroness, Lady Hayman, has given similar excellent speeches on multiple occasions now— I am really quite amazed by her patience. All this amendment tries to do is ensure that government policy is embedded in the activities of the regulators, yet we seem to have the same debate on so many Bills. Each time, generally, the Government give way—and rightly so. I think that the most recent occasion might have been on the UK Infrastructure Bank Act. Frankly, if it makes sense to accept this for that bank, how much more sense does it make to accept it in respect of the entire financial services industry? Surely, it is time that all Bills to which the impacts of environmental change and risk are relevant should include these clauses by default. It really should not be up to this House to ensure that the Government apply their own policies. So I hope that the Minister will follow the multiple precedents and accept Amendment 15.

The Minister introduced Amendment 4 on SDRs, which is extremely welcome, but it is only a “may prepare” clause, not an obligation, and there is no timeframe included. Frankly, it could have gone an awful lot further.

I add my support to Amendment 91, which seeks to introduce a new due diligence requirement for regulated persons to ensure that the forest risk activities that they wish to finance or otherwise support are in compliance with local laws. I am sure that the Minister will refer to creating undue burdens on regulated persons, which seems to be the usual argument in these things—but the amendment leaves the level of required due diligence for the Government to decide and regulate, so I am not going to be terribly impressed by that argument. To put it simply, our financial services industry should not be financing illegal deforestation activities.

I also strongly support Amendments 93 and 113, which seek to ensure that the impacts on climate, nature and society are properly considered by occupational pension scheme trustees, and that the FCA may publish guidance in that respect. Noble Lords with much more experience in this area than myself have spoken to that at length. Pension funds are by their nature long-term investments and systemic in size, so it is especially important that these issues of sustainability are considered fully by pension schemes. I hope, perhaps forlornly, that the Minister will look favourably on these amendments, but particularly on Amendment 15, which seems self-evident to me.

[Baroness Northover (LD)]

There have been a number of powerful contributions in this group. I add my voice as a signatory to Amendment 114. My noble friend Lady Sheehan will speak to others in this group, which we also support from these Benches.

The noble Baroness, Lady Wheatcroft, very ably made the case for Amendment 114, which seeks to give the powers to Ministers and regulators to legislate for sustainability disclosure requirements along the whole length of the investment chain. As she indicated, although we obviously welcome the fact that the Minister has brought forward Amendment 4, this simply does not match up to what needs to be done and what the Government, as others have said, say that they wish to do. We know that some change is already being driven—for example by the disclosures that are now required under the task force on climate-related disclosures. We know that the International Sustainability Standards Board continues its important work, with the involvement of Mark Carney, and we hope that the Government will adopt its recommendations—they are currently equivocal about that.

We urgently need the guardrails that Chris Skidmore recommended were required to reach net zero by 2050. The Government have made repeated commitments, as we have heard, to legislate for sustainability disclosure requirements and in these other areas to which noble Lords have referred. Amendment 114 and all the others help to deliver what the Government say that they wish to do. The noble Baroness, Lady Hayman, beautifully outlined how the other amendments also help to deliver for the Government on what they say that they wish to do. Therefore, I support this amendment and the others.

Financial Services and Markets Bill

Lord Vaux of Harrowden Excerpts

Committee stage
Tuesday 21st March 2023 Grand Committee

[Baroness Penn (Con)]

As I said, the approach we take will be determined alongside the consideration of any design of a central bank digital currency. The decision to move ahead with a CBDC has not yet been taken; however, we do believe that it is likely to be needed in future. Although it is too early to commit to build the infrastructure for one, we are convinced that further preparatory work is justified. Therefore, that definition will become clearer as the design of the approach also becomes clearer—but the commitment at the outset to parliamentary engagement is there.

[Lord Vaux of Harrowden (CB)]

The Minister just made a statement that it is likely to be needed in future. Can I ask a very simple question: why? Why is a CBDC likely to be needed in future? That seems a fairly bald statement.

[Baroness Penn (Con)]

My Lords, we may not wish to repeat the debate that we had in the Chamber earlier this year, but I was going to address my noble friend’s question about retail versus wholesale and the point from the noble Lord, Lord Vaux, about the use case for a CBDC.

The noble Lord, Lord Eatwell, made one of the points in relation to a CBDC. We want to ensure that central bank money, which is currently available to the public only as cash, remains useful and accessible to the public in an ever more digitalised economy. We have heard about access to cash in our debates earlier in Committee.

UK Infrastructure Bank Bill [HL]

Lord Vaux of Harrowden Excerpts

Consideration of Commons amendments
Tuesday 14th March 2023 Lords Chamber

[Baroness Bennett of Manor Castle (GP)]

My Lords, I join in the congratulations to the noble Baroness, Lady Hayman, who is both a force for nature and a force of nature in your Lordships’ House. I thank everyone else who has joined in getting this progress on nature-based solutions, although we should not look at those solutions as an alternative to cutting our carbon emissions. Both those things have to be done.

I was not going to speak but, given something the Minister said in her introduction, I feel forced to ask her a question. In justifying the exclusion of “circular economy” in the Commons amendment, she said that it was “not a precise term”. Does the Treasury understand the term “circular economy” and its essential nature in delivering the sustainable society we need? If the Minister wants a source for this, I point to a government paper entitled, Circular Economy Package policy statement, from 30 July 2020, which was put out jointly with Wales, Scotland and Northern Ireland and which defined “circular economy” as

“keeping resources in use as long as possible, extracting maximum value from them, minimizing waste and promoting resource efficiency”.

Will the Minister confirm that the Treasury recognises that the circular economy is an acknowledged term and is urgently needed?

[Lord Vaux of Harrowden (CB)]

My Lords, I wanted to thank the Government and to associate myself with the words of the noble Baroness, Lady Hayman. I thank them for their constructive engagement, which has allowed us to reach a satisfactory conclusion.

However, I thank the Government for listening in relation to a couple of other places. First, during the progress of the Bill through this House we had a lot of discussions about the position of the devolved Administrations and how they should be involved. While they have not gone as far as I should have liked, I welcome the amendments that have now been included and the constructive engagement that has obviously taken place with the devolved Administrations. That is a nice change from some of the things that we have seen with other legislation in the past.

Secondly, Amendment 8 is identical to an amendment that I tabled on Report, which shortens the reporting cycle to five years. My amendment was not accepted by the Government at that time. When I tabled it, it led to what I think was a unique achievement of being co-signed by both the noble Baroness, Lady Noakes, and the noble Baroness, Lady Bennett of Manor Castle. That has not been achieved before or since. I said at the time that such a unique and powerful alliance should make the Government take that amendment seriously, so I am delighted and grateful that they have done so.

Financial Services and Markets Bill

Lord Vaux of Harrowden Excerpts

Committee stage
Monday 13th March 2023 Grand Committee

Moved by

[Lord Vaux of Harrowden]

202: Clause 68, page 84, line 27, leave out paragraph (a)
Member’s explanatory statement
This amendment would remove the limitation that APP mandatory reimbursement is limited to APP scams made via the Faster Payments system, so that all APP scams must be covered regardless of payment system used.

[Lord Vaux of Harrowden (CB)]

My Lords, it is an unexpected feeling to be zapping through groups at some speed. In moving my Amendment 202, I will speak to the various other related amendments in my name in this group. I am very grateful to the noble Baroness, Lady Bowles, for her support.

I greatly welcome the introduction of the requirement in Clause 68 to improve the current voluntary arrangements under the contingent reimbursement model, or CRM, for the reimbursement of losses resulting from authorised push payment, or APP, fraud. My amendments attempt to apply some of what we learned during the inquiry by the Fraud Act 2006 and Digital Fraud Committee, which reported at the end of last year, but I should stress that these are my amendments, not those of the committee.

The committee’s inquiry heard that the current voluntary system has led to a wide range of inconsistent outcomes for victims. In fact, the very process of claiming can add to the trauma for victims, especially when they are not applied consistently or fairly. At one extreme we have TSB, which has chosen to reimburse all fraud victims; at the other, we heard of banks that, because they are not signed up to the CRM at all and do not reimburse victims, have no incentive to try to prevent fraud going through their systems. We heard that some banks are now seen by fraudsters as a soft touch.

Levels of reimbursement vary widely even within the CRM and the scheme does not publish league tables, so consumers cannot see which banks are more likely to reimburse and which are not. That lack of consistency and of clarity over the circumstances in which reimbursement will be made leads to greater uncertainty and trauma for victims. Importantly, the lack of consistency also leads to different levels of incentivisation for banks to take the steps necessary to protect their customers. Any new mandatory scheme needs to address that and make things fairer for victims, but at the same time it needs to be balanced against the risk of unintended consequences. That is what my amendments try to achieve and I turn to them specifically.

As currently drafted, the rules will apply only in respect of fraud carried out using the Faster Payments scheme. I am sure the Minister will explain that this is because this will cover the majority of frauds by number. She is quite right; that is true. However, other payment methods are often used by fraudsters, such as CHAPS. Although smaller in volume, those other payment methods often involve larger, more life-changing sums. CHAPS is used for large payments, such as house purchases. Many frauds involve overseas payments.

Amendment 202, together with Amendment 207, would widen the scope of the reimbursement provisions so that all payments are covered, regardless of the method. I am sure the Minister will tell us that the Bill does not prevent the scheme being widened to other payment methods, but I am concerned by this statement on the PSR website:

“We are working with Pay.UK—the operator of the Faster Payments system which is how APP scams are carried out”.


That shows no recognition that the problem is wider than just Faster Payments. APP scams are carried out using all payment methods, not just Faster Payments. I wonder whether the real reason for restricting the changes to Faster Payments is because it allows the PSR to subcontract its responsibilities under Clause 68 to Pay.UK, the operator of the Faster Payments system. The Minister will be aware that concerns have been raised by the Treasury Select Committee in the other place about this approach. What are her thoughts on the PSR subcontracting its responsibilities to Pay.UK?

The Bill leaves the details of the reimbursement scheme entirely to the PSR, so Amendment 204 sets out some matters that it should consider when creating the new compulsory requirement. First, the key problem with the current situation is the lack of clarity for victims in how reimbursement decisions are made and the inconsistency of those decisions. Proposed new paragraph (a) of Amendment 204 therefore says that the PSR must consider

“how to ensure that the parameters used to determine whether or not reimbursement should be made are transparent and applied consistently”.

If that does not happen, we will not have moved much further forward, so that key point should be stated in the Bill.

I turn to proposed new paragraph (b) of Amendment 204. I have long felt that the bank that is more in the wrong in a fraud situation is the receiving bank—the one that, in effect, processed the stolen money on behalf of the fraudster. Although it is not in the Bill, the PSR apparently intends that the liability for reimbursement should be split 50:50 between the paying and receiving banks, with a mechanism to change that split in certain circumstances. I am content with that proposed approach as a starting point. Proposed new paragraph (b) of Amendment 204 simply puts in the Bill that the split must be considered but, as we move forward, the PSR and the industry should look to refine this. Importantly, discussion of how to split the reimbursement between the banks must not make things more difficult for victims.

Proposed new paragraph (c) of Amendment 204 says that the PSR should consider how

“mandatory reimbursement is likely to affect the behaviour of consumers”.

Our fraud committee deliberated long and hard on whether to recommend blanket reimbursement; in fact, we were criticised for not doing so. We recognised that there is a case for mandatory blanket reimbursement but concluded that such a policy could fall foul of moral hazard and lead to increased levels of fraud, including, potentially, directly to new avenues for APP reimbursement fraud. Our recommendation therefore was that this needed to be explored further and a solution should be found that creates a level playing field for all consumers.

I do not often disagree with the noble Baroness, Lady Kramer, but I am a little concerned by her Amendment 203, which says that

“reimbursement … cannot be refused on the basis that a victim … ought to have known that the payment order was executed subsequent to fraud or dishonesty.”

If someone really should have known but went ahead anyway, this feels reckless to me. We need people to take some basic level of precaution and we need to help them do that.

Proposed new paragraph (c) of my Amendment 204 tries to address this difficult area by saying that the PSR must consider how the reimbursement policy might alter the behaviour of potential victims. If the effect is that people stop taking any care to avoid fraud, because they are going to be reimbursed anyway, the policy might make it easier for the fraudsters; it might increase fraud, which would be an extremely undesirable unintended consequence. At the same time, we need to move away from victim blaming and ensure that, unless consumers have acted irresponsibly, they are reimbursed. There is a delicate balance here and it is something that the PSR should consider carefully and keep under review.

Finally, proposed new paragraph (d) of Amendment 204 says that the PSR must consider how appeals can be made. I hope this is self-explanatory.

Amendments 205 and 206 attempt to bring some transparency to the process. Amendment 205 would enable consumers to see which banks are most susceptible to fraud; in other words, which are doing less to protect their customers in the first place and which are better at reimbursing customers who become victims. This is important. If we want to incentivise banks to do the right thing and behave well, shedding daylight on how they perform is the best way to ensure it. Customers will be able to vote with their feet.

There is also a danger that banks might react to mandatory reimbursement by changing their behaviour in a way that disadvantages vulnerable consumers—deciding that it is too risky or expensive to provide services to those seen as more vulnerable to fraud, if the reimbursement process is seen as too one-sided. Later today, we shall talk about PEPs, which are a good example of how the banks are reacting to overzealous regulation.

Similarly, we need to avoid a situation in which the reimbursement process puts off new entrants into the system or innovation in payments. Amendment 206 requires the PSR to keep the situation under review and to report annually on the impact that the requirement is having, including whether it is causing any change in the behaviour of the payment service providers. Fraud is constantly changing—fraudsters are constantly finding new ways to get around rules and find victims—so the amendment requires the PSR to make changes to the requirement as it considers necessary, taking account of the actual impacts to keep protecting consumers better.

I will finish with a couple of general points. First, it is critical that people are properly and fully informed and educated about the changes. Clause 68(3)(b) mentions that, which is welcome, but in relation only to the draft requirement, not the final requirement. UK Finance and others have raised concerns about whether the full six-month timeframe is sufficient to ensure that that information and education process happens.

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, I recognise the keen interest across this Committee in the provisions in the Bill to tackle financial crime and fraud more generally, and, in this group of amendments, on tackling APP scams specifically and the related work of the Payment Systems Regulator to introduce mandatory reimbursement. The noble Baroness, Lady Bowles, said that she hoped that the sense of the amendments could be taken forward, or that the Government could provide reassurance to noble Lords that it will. I hope to be able to do so.

Measures in the Bill not only enable the Payment Systems Regulator to act on APP reimbursement regardless of the method of payment used, but also have a specific requirement mandating, within a specific timeframe, that they are taken forward under Faster Payments. We have sought within the Bill both to provide further powers for the regulator and to specify that it needs to act within a certain timeframe on the form of payments, which currently represents the largest form of fraud, not only by volume—97% of payments by volume—but by value. The figures I have are that Faster Payments account for approximately 85% of the value. The noble Lord and noble Baroness also mentioned CHAPS. That is the next highest in value, but it is about 4%, so it is right that we prioritise action on Faster Payments first. That does not rule out further action on other forms of payment further down the line.

I appreciate that we often have a debate on what needs to be in a Bill versus powers that, in this case, we are giving to the regulators to make rules. We have also heard during this debate about fraud how dynamic that situation can be, so enabling the regulator to update its response to approaching these questions through its rules is the right approach in this situation.

None the less, a lot of detail of the Payments Systems Regulator’s approach is in the public domain, and I hope it would reassure the noble Lord, Lord Vaux, on a number of his amendments that the approach being taken is consistent with many of the recommendations made by his committee. Indeed, having its proposals out for consultation on how mandatory reimbursement should work has provided an opportunity for all interested parties to comment.

Turning to the specifics in the amendments and hopefully updating the Committee on work that the PSR is taking in relation to each, I begin with Amendments 202 and 207, tabled by the noble Lord, Lord Vaux, on the scope of the requirement on the PSR to mandate reimbursement. As I have noted, under this legislation the PSR could act in relation to any designated payment system, but with a specify duty on Faster Payments which, as I said, accounts for 97% of scams by volume today. We expect the PSR to keep under review the case for action across other designated payment systems, in collaboration with the Bank of England and the FCA.

In relation to Amendment 204, on issues that the PSR should consider as part of its approach, I assure the Committee that the PSR has set out how it has considered these issues in its consultation. For example, as discussed, the PSR is proposing that the cost of liability is split equally between the sending and receiving banks, recognising that both parties have a responsibility in preventing fraud.

On Amendment 205 on the publication of data, the PSR is currently consulting on a measure to require payment service providers to report and publish fraud and reimbursement data. I was surprised to hear Green support for league tables. I did not know that they were supportive of them on schools, but in this case that data is important and the transparency we are talking about helps noble Lords keep track of how effective these provisions are once they are implemented.

Amendment 206 is on a duty to review. The PSR regularly reports on the discharge of its functions through its annual report and has committed in its consultation to a post-implementation review of its action on APP scams, to assess the overall impact of its measures for improving consumer outcomes. The Government will also monitor the impacts of the PSR’s action and consider the case for further action where necessary. While the Government recognise the intention behind the noble Lord’s amendments, we do not think it necessary or appropriate to further circumscribe the actions of the regulator in primary legislation at this stage, given the extensive consultation the PSR has undertaken on this matter and its responsibilities and expertise in this area as the independent regulator.

On Amendment 203, tabled by the noble Baroness, Lady Kramer, and spoken to by the noble Lord, Lord Sharkey, the Government’s intention, as already expressed in the legislation, is to ensure that more victims of APP scams across the Faster Payments system specifically, and wider payments systems in general, are reimbursed, and to enable the PSR to act in this area. The Government recognise that no one sets out to be defrauded and that APP scams are, by their very nature, convincing and sophisticated.

None the less, we also recognise that many banks take action to engage with their customers ahead of making a payment, and that questions of liability can be complex. As the noble Lord, Lord Vaux, set out, a blanket approach to mandatory reimbursement raises questions of moral hazard and the potential for APP reimbursement fraud itself to become an area of difficulty. This is a difficult balance to strike. While this amendment is well meaning, it will not help achieve effective resolution in these cases. We are confident that the PSR has the appropriate objectives, expertise and powers to develop proposals for APP scam reimbursement that both ensure strong protections for victims and incentivise banks to engage effectively with their customers to prevent fraud. In its consultation on its reimbursement approach, the PSR stated its intention to require firms sending payments over the Faster Payments system to fully reimburse all consumers who are victims of APP scams, with very limited exceptions. The PSR considers that this will ensure that victims are reimbursed in the vast majority of cases. In that regard, the PSR has already signalled its intention to set a high bar for customer liability—higher than currently applies within the existing code of voluntary reimbursement.

We do not believe that this amendment will improve outcomes for customers beyond the provisions already set out in the Bill, and it could impede the work of the regulator, which has already consulted on the proposals. I hope that noble Lords genuinely feel reassured by the level of detail in which the PSR and the Government have thought through these proposals, and acknowledge the ability to have a dynamic response in this area. I therefore hope the noble Lord can withdraw his amendment.

[Lord Vaux of Harrowden (CB)]

Can the Minister comment on the Treasury Select Committee’s recommendation on the PSR, effectively subcontracting its responsibilities to Pay.UK?

[Baroness Penn (Con)]

I apologise to the noble Lord; I did have an answer for him on that. The Bill is clear that the Payment Systems Regulator has the duty to act on mandatory reimbursement. The PSR has the relevant powers and expertise, as well as the appropriate discretion, to determine the most effective approach in that area.

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[Lord Vaux of Harrowden (CB)]

I thank all noble Lords who have taken part in this short debate. I think the comments from the noble Lord, Lord Sharkey, set out the difficulty in finding the right balance to ensure that victims are not blamed and are reimbursed, unless they have really been irresponsible, versus the question of moral hazard and the issue of potentially making fraud worse. That will just have to be kept under review.

While I am reassured by a lot of what the Minister said and what the PSR has said publicly, the Government might want to think more seriously about Amendments 205 and 206 on transparency and review. The PSR may say that it will do a post-implementation review, but this has to be consistent and carry on happening, because fraud keeps on moving and changing. It is similar to the statistic that 85% of fraud, by value, is Faster Payments, but what we are doing now may change that. This will hopefully incentivise the banks to lock down the ability to carry out fraud over Faster Payments.

There is nothing specifically in here to prevent fraud, but we are providing an incentive to do that. Fraudsters are very good at moving, and if they move on to CHAPS or overseas payments—the Bill itself introduces stablecoins as a new method of payment—we can see that the situation will move. This has to be not just a one-off, post-implementation review; it has to happen regularly and be reported on. We must see which banks are doing better and which are doing worse. It is a question of not just who is reimbursing better but how many frauds they are suffering. If a bank is suffering greater levels of fraud, it is a clear sign that it is not taking as strong action to prevent it as other banks are. The only way to see that is for it to be reported on.

While I am unlikely to chase the other amendments, we might want to return on Report to Amendments 205 and 206 on transparency, reporting and review. With that, I beg leave to withdraw Amendment 202.

Amendment 202 withdrawn.

Financial Services and Markets Bill

Lord Vaux of Harrowden Excerpts

Committee stage
Wednesday 1st March 2023 Grand Committee

[Lord Naseby (Con)]

My Lords, I have added my name to this amendment, which in my judgment is absolutely vital. On 8 February, I listened to the chairman of the City of London Corporation’s policy and resources committee; I will quote a couple of points that he made on that evening. He said:

“Faced with increasing global competition”


the UK needs

“a long-term sense of direction, a programme for government, regulators, and industry to act and sustain our global powerhouse status. As a country we need a renewed focus, to adjust our compass, to be the destination that incentivises investment, thrives with talent, and commands the competition. And we need ambition and focus to achieve these goals.”

He finished by saying that we need “the courage to change” in three areas. I will quote two, which are relevant to this amendment:

“Firstly, we need to reduce frictions. That means strengthening UK policy and regulation with an effective and coherent sustainable finance framework. Secondly, we need to nurture innovation. More creativity in the market will inspire better products, which will help attract capital, firms, and customers.”


The City wants confidence in scrutiny and the supervision of the regulator. I hope that my noble friend on the Front Bench will take note of the feelings of the City. I am sure that it would be more than happy to communicate directly with my noble friend and put some flesh on the summary that I have given.

[Lord Vaux of Harrowden (CB)]

My Lords, I, too, have added my name to the amendments in the name of the noble Lord, Lord Bridges. The noble Lord explained in detail the need for the amendments far better than I can, so I will be brief. I support the noble Lord’s every word but, rather than repeating what has been said, I will comment specifically on how this would complement rather than replace the parliamentary scrutiny that is also required.

We have had a lot of discussion so far in Committee about the need for strengthened parliamentary scrutiny and accountability of the performance of the regulators, with an extraordinary level of agreement on all sides— I hope that the Minister listened to that. I strongly supported the idea of creating a bicameral committee specifically for that purpose, as proposed by the noble Baroness, Lady Noakes. Having an independent office for financial regulatory accountability would greatly assist such a committee in carrying out its work. We heard on a previous day in Committee from the noble Baroness, Lady Bowles, who is probably the expert in such matters, and from others about the enormous volume of work that scrutiny of the financial regulators will involve. That is one reason why we need a parliamentary committee focused solely on this subject. Having available independently prepared and, importantly, non-political analysis of both the performance of the regulators and the regulations themselves would make the work of the parliamentary scrutiny committee, or committees, that much more effective, enabling the focus to be on areas where shortcomings were identified, rather than wading through unmanageable volumes of information trying to find those areas.

I therefore make the point that the Minister should not be tempted to see these amendments as an alternative to the enhancements to parliamentary scrutiny that we have already discussed. Rather, she should understand that they are an important element within the three legs required for effective scrutiny and accountability, which the noble Lord, Lord Bridges, has previously explained as being reporting, independent analysis and parliamentary accountability. All three aspects should be embraced. These amendments cover the second, but please do not think that they would replace the others.

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[Baroness Penn (Con)]

My Lords, I believe that I have already made the offer to noble Lords to meet to discuss the issue of accountability, both parliamentary accountability and the proposals such as those put forward in the amendments today. That still stands. I am afraid that I cannot—

[Lord Vaux of Harrowden (CB)]

I apologise for interrupting. The Minister is quite right that she has made that offer. We were grateful for it, but it is of fairly limited use if there is no recognition on the part of the Government that there is a gap here in terms of parliamentary accountability and scrutiny. She has not actually said yet that she recognises that there is a gap. I have to say that she should look around her: it is pretty clear that it is there.

[Baroness Penn (Con)]

What I have tried to say to noble Lords is that, in bringing forward the proposals in this Bill, we absolutely recognise that, with the increased responsibilities that go to the regulator, we need to ensure that there is proper accountability and scrutiny. We have put forward the proposals in the Bill to attempt to do that.