Financial Conduct Authority Redress Scheme

Mark Garnier Excerpts

Thursday 4th December 2014 Commons Chamber

[Guto Bebb]

The hon. Gentleman makes an important point. There have been concerns throughout the process about the level of provision within banks. In view of some of the information provided by the KPMG whistleblower, RBS’s confidence in having a very low level of provision probably justifies its attitude to the review.

Another point about the lack of consistency relates again, unfortunately, to the behaviour of RBS. It has been argued that a good result for a business from the redress scheme is to have a full tear-up of the agreement or to implement a cap rather than a swap. Indeed, it has been argued that a cap would in many cases have been a much better original product. From the detail of many of the caps offered to RBS customers, it transpires that most of them are for 10 years. I do not claim to be an expert, but experts in the field of derivatives and interest rate protection tell me that there is no demand in the marketplace for a 10-year cap. They have challenged RBS to give one example of a 10-year cap that it has sold commercially in the past 10 years, but as yet RBS has not come back with such an example. Yet, time and again when businesses are offered a cap as an alternative product, the cap is for 10 years. It will not surprise hon. Members to learn that a 10-year cap is significantly more expensive than a five-year one. That added cost comes out of the redress made available to the relevant businesses. There are therefore questions to be asked about the behaviour of some banks, including RBS, and those questions raise doubts about the consistency of the scheme.

On transparency, I am concerned that the agreement between the banks has not been disclosed. That means that it is very difficult to assess the success or otherwise of an outcome, because we do not know what to measure it against. The agreement has not been made available to the all-party group or the Treasury Committee, but I must ask why, because when the FCA says that it is robustly ensuring that the agreement is maintained, we cannot assess whether that is the case.

[Mark Garnier (Wyre Forest) (Con)]

Will my hon. Friend give way?

[Guto Bebb]

I will of course give way to a member of the Treasury Committee.

[Mark Garnier]

I, too, congratulate my hon. Friend on all the work he has done so far. Given that this is the first time that a voluntary scheme has been used, does he agree that full transparency of the whole system is absolutely crucial in ensuring that the scheme can safely be used again in future? Otherwise, there will be long-term fundamental doubt about whether it should ever be used again.

[Guto Bebb]

I could not agree more. I am concerned that some of the banks involved in the scheme now fear that they have played by the rules, while others have not. If there is no transparency on that issue, banks may go into future schemes with the same attitude as RBS’s attitude to this scheme.

We do not have bank-by-bank details on outcomes, so it is very difficult to measure whether they are appropriate. In the same way, there is real concern that the FCA has not fully shared its legal opinion on excluding businesses with embedded swaps from the whole review process. In the briefing that the FCA provided for this debate, it implies that it has fully shared its information on that with the Treasury Committee, but my understanding is that it was willing only to allow a QC acting on the Treasury Committee’s behalf, not its members, to see the information. I do not consider that to be full accountability to Parliament.

I said that I would call on the FCA to consider an appeal process. In view of the revelations about the possible activities of the KPMG reviewers of RBS, there is merit in a proposal made by the all-party group a year and a half ago. All the independent reviewers have been trained to the FCA’s satisfaction, so if an RBS client is unhappy with its outcome it would surely be appropriate to ask another independent reviewer—for example, Deloitte, which acts in relation to HSBC—to review the case. That would not unduly complicate the situation, because the reviewers have been trained by the FCA and have satisfied it as to their expertise. It would give clients a degree of independence if those unhappy with the redress outcome could have all the case notes reviewed by a third party that is independent of the original bank and of its independent reviewer. Will the Economic Secretary consider that request?

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[Guto Bebb]

I agree entirely, and that is why we need a review of the current redress scheme.

My final point, which the Government could respond to positively, concerns the decision by HMRC to tax redress received by businesses. HMRC has decided to treat any redress received as income generated in the year in question, which means that many small businesses will pay tax on that redress at their marginal tax rate. Has HMRC taken seriously the possibility of using extra statutory concession D33, paragraph 11, which states:

“A right of action may be acquired in a situation where it is not possible to identify a separate underlying asset. For example, where a professional adviser has given misleading advice on a tax or other financial matter, or in relation to private or domestic matters…Broadly, when we are looking at capital sums without an underlying asset which fall within paragraph 11 of ESC D33 we are looking at a financial loss, for example compensation for poor professional advice or for mis-selling of financial products.”?

In effect, that means that when the compensation is for bad financial advice or mis-selling a financial product, it should be treated not as income but as a gain for capital gains tax purposes, which would be a fairer resolution. Currently, banks are able to offset any redress paid for their tax purposes, although businesses end up paying tax on any redress they receive. It is unacceptable that the wrongdoers get tax relief while the wronged have to pay tax on their compensation, and I ask the Minister to consider that point.

I wanted to touch on businesses sold in embedded swaps. If the advice from the FCA is comprehensive, I appeal to it to make it public. Those businesses are in limbo. They believe they have a right to be in the redress scheme and are told that legal advice is clear. I call on the FCA to make that advice available so that those businesses know what possibilities they have when trying to resolve their situation. [Interruption.] The hon. Member for Wyre Forest (Mark Garnier) seems to want to intervene.

[Mark Garnier]

I am grateful for that prompted intervention. My hon. Friend refers to legal advice given to the FCA, but it is clear that these are unregulated products and therefore the FCA is not addressing them. It could be argued that selling an unregulated product to a non-professional customer is a regulated activity and should be covered by regulated activity rules. There is a lot of confusion about that.

[Guto Bebb]

I am grateful to my hon. Friend for that intervention.

It is fair and right to acknowledge that the redress scheme has been better than no action whatsoever, but concerns clearly remain. Action is required on consequential losses, and there is no justification for refusing an internal appeals process within the review process. The lack of transparency allows people to make assumptions about the behaviour of banks and the FCA, which is damaging to the financial system, and more transparency would give greater confidence in the way the scheme works. HMRC needs to address the issue of taxing redress paid to businesses with a degree of sympathy that has not so far been shown.

Crucially, allegations about the behaviour of some banks in the scheme should be a cause for concern not just to Members of the House but to those on the Government and Opposition Front Benches. The issue must be considered carefully, which is why the motion asks for consideration to be given to the establishment of a review of the current redress scheme. If the regulator is unable to regulate the scheme it has established and make right the wrongs committed by the banks, it is important for the Government to take responsibility.

--- Later in debate ---

[Mark Garnier (Wyre Forest) (Con)]

It is a great pleasure to follow my hon. Friend the Member for Beckenham (Bob Stewart). I should like to add my congratulations to my hon. Friend the Member for Aberconwy (Guto Bebb) on securing the third of these debates. This is turning into a running series, although I hope that we shall not need a further debate on this matter in the next Parliament because we will have resolved the issue by that time.

Great progress has been made as a result of the huge amount of work that my hon. Friend has done, and it should be recognised that, in many cases, the banks have stepped up to the plate to handle the problems that they have created. However, we have been left with a cohort of claimants who feel that they are not getting the redress they deserve, and I want to concentrate on them today.

When I consider the plight of those businesses that have been mis-sold interest rate hedging products, I have yet to find a victim for whom I do not have enormous sympathy. This appalling scandal has destroyed many people’s lives, including those of people who have not been directly affected. For example, people have found themselves out of a job when their employer went bust as a result of the scandal. Other people have been creditors who could not suffer the cash flow shortfall resulting from banks taking too long to make redress payments, especially consequential loss payments, to the businesses that owed them money.

The scandal’s implications go far beyond the victims who were mis-sold swaps, and it is therefore right that we should consider the regulator’s response. The response of the Financial Conduct Authority is incredibly important, not least because this is one of the first full-blown scandals to which it has had to respond. How the new regulator behaves over this scandal will set a precedent for how it behaves in the future and tell us whether it is fit for purpose.

I want to raise a couple of issues, given that the regulator has opted for a voluntary redress scheme. That in itself is probably not unreasonable, and it gives the banks an opportunity to show how they have changed their culture and responded to the chaos they have caused. However, this is a brand new way of responding to such a crisis, and it must be looked at very carefully. The briefing note that the FCA prepared for this debate states, in the frequently asked questions section, that the voluntary approach is different from previous redress schemes, citing speed in compensation. Speedy outcomes have not been achieved in all cases, however.

It is noteworthy that the regulator cites part of the Financial Services and Markets Act 2000 as a reason for not having to make public the arrangements between itself and the banks. Any new process needs to be fully transparent if there is to be confidence in that process. There is no confidence in this process, and the situation is fundamentally flawed.

[Bob Stewart]

How can anyone possibly think that there should not be full transparency in this sort of activity? I do not understand how the FCA can justify not being transparent about all its dealings.

[Mark Garnier]

I am not sure that the FCA can justify it. The FCA is answerable to Parliament and to the Treasury Committee, and until such time as we can conduct a proper investigation into what it has been up to, how can anyone believe that this is a good system?

[Tessa Munt (Wells) (LD)]

Does the hon. Gentleman anticipate that the eventual outcome of this complete lack of transparency is that the FCA will have to revisit this whole process, as it has done relatively recently with payment protection insurance, because so many people have had a very poor deal?

[Mark Garnier]

The hon. Lady is absolutely right, and I shall return to that as I progress through my speech.

My first point is that there is little consistency between the banks in how they tackle the problems they have created. One of the FCA’s frequently asked questions is:

“Are the offers consistent between banks?”

Interestingly, its response reads:

“The independent reviewers report regularly to the FCA, both on the judgements they are making and how the banks are performing, and will regularly bring all the independent reviewers together to ensure consistency of approach. The FCA also collects data on the offers being made by each bank and we carefully consider any variances to ensure that the standards are being applied consistently.”

That in itself demonstrates that there is a huge amount of useful information that we are not getting a chance to see. It goes on:

“We also regularly select individual case studies to follow up with banks”.

The FCA is trying to be consistent, but cannot say that it is being consistent. We have heard on many occasions this afternoon about its not being consistent.

My example concerns not one of my constituents but someone else who came to see me and involves how the banks treat businesses that have gone into insolvency. Clearly, any insolvent business will have an insolvency practitioner winding up that business. It is a tragic time, but somebody has to come in and do it. In the event of an insolvency, the banks are involved both as a creditor, as they have lent money to the business in the first place, and as a debtor, as they owe redress and in many cases consequential losses to the business. Some banks behave quite well. HSBC is a reasonably good example and recognises that the insolvency practitioner is duty bound fairly to distribute the assets of an insolvent business to a wide range of creditors. To that end, HSBC will pay what is owed under the redress and consequential loss scheme into the insolvency practitioner’s funds and then put in a bid for what it is owed from the original bank loan. The insolvency practitioner therefore makes a correct and fair assessment of who is owed what, and in some cases HSBC will get back not just less than it lent but less than it would have got back had it done what RBS does.

RBS is a frequent flyer in this debate, so I shall have a go at it, too. I am told that RBS will offset what it owes by way of redress and consequential loss against what it is owed by way of repayment of the loan. Therefore, although it is still owed money by the bankrupt business, it is owed less than it otherwise would have been, and when RBS seeks to limit its losses at the expense of other creditors’ owed money, those creditors will lose money as a result of RBS’s mis-selling. That is just plain wrong.

It is also wrong that some loans have been left outside the redress scheme. Those who took on tailored business loans, otherwise known as hidden or embedded swaps, have had exactly the same financial problem but for a technical reason are outside the regulated arena. Under article 85 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, due to some pretty technical reasoning, if a loan looks like a duck, swims like a duck and quacks, it is in fact a donkey. Some pretty smart lawyers have looked at that and the inescapable fact is that the legislation was written in a way that allowed many businesses to be mis-sold swaps in an area that is unregulated.

The FCA’s frequently asked questions talk about these so-called commercial loans, stating:

“Commercial loans generally fall outside the regulatory remit of the FCA and we therefore cannot direct the banks to set up a review of these products”.

That might possibly be so, but is not the act of an FCA member’s selling any product to an unsophisticated customer a regulated activity that therefore falls under the FCA’s remit?

[Mr Bellingham]

I agree entirely with my hon. Friend. Many of these businesses are not large concerns—some are SMEs and some are micro-businesses—and one could not describe some of the proprietors as highly sophisticated business people. As far as they were concerned, they were mis-sold these fixed-rate tailored business loans with the hidden swaps attached to them. Some have been dealt with very quickly by the banks, but others have not and the banks have just ignored them completely.

[Mark Garnier]

My hon. Friend makes an incredibly important point. The point of the regulator, the FCA, is to protect unsophisticated consumers, but it has manifestly let down the consumers who subscribed.

The paragraph in the FCA briefing note continues:

“The FCA has received legal advice supporting this view”—

about article 85. It goes on to say that the Treasury Committee has carried out scrutiny of that advice. I am a member of the Treasury Committee and I think it is worth putting on the record just what that constitutes.

The Treasury Committee asked the regulator on many occasions for sight of the legal advice on these embedded swaps and on many occasions it said no. We asked whether we could send our legal advisers around to have a look at the advice on our behalf, but it continued to say no. We had a public evidence session with the chief executive officer and chairman recently and questioned them about the issue again. The answer they gave was that they were not prepared to let us see the advice as it was confidential. We pressed them on whether we could send our legal team to have a look at it and they answered that they needed space from Parliament to conduct their activities.

The regulator is answerable to Parliament. Although I am sympathetic to the submission that the regulator cannot have every confidential document shown to all hon. Members, who may well then tell the press, the CEO and chairman simply cannot say that they need to be excused one of their most fundamental duties—that of answering to us here in this place. In the end, we pressured them to relent and our legal adviser looked at the advice they had been given, and in fact they were right. But this is a sorry story of the regulator not understanding its duties and its constitutional place as answerable to Parliament.

In any sort of resolution scheme, it is inevitable that some people will feel well treated and others hard done by. One of my constituents was entitled to redress but felt that he did not need it, because he had bought exactly the product that he wanted and expected and he thinks it unfair on other people that he should seek redress when he took what he thinks was a fair deal. But he is unusual. I have constituents who have been completely and totally rolled over by the banks. Consequential loss offers are derisory for businesses that have taken a lifetime to establish and just a few telephone calls by mis-incentivised relationship managers to destroy. There are no consequential loss payments for reputations destroyed, or for goodwill wasted and track records smashed.

I was a member of the Parliamentary Commission on Banking Standards. We looked hard at how the regulator could drive better standards in the banking industry. There should be incentives for better behaviour, and banks are working on making their staff perform to higher ethical standards, but for every carrot there must be some sort of stick. If it is possible for banks to be fined for fixing LIBOR and forex benchmarks and for mis-selling insurance products, why have those banks who have destroyed so many businesses been allowed to choose their own form of redress with no further financial penalty?

I am baffled why the regulator has set up a redress scheme that is voluntary, has just one opportunity for appeal and is not being reviewed or assessed. Surely, it is right that people who are unsatisfied can have an independent appeal assessed by the Financial Ombudsman Service. A special unit could easily be set up at the FOS, funded by the banks, to give one last chance of appeal to those small businesses that fall outside the FOS’s remit but inside the redress scheme. I am also baffled why the regulator will not publish the terms of reference and the agreements between the regulator and the banks on how the scheme is managed and run and what is expected of it all. That lack of transparency can only lead to mistrust in the system and the regulator. I am also concerned that the regulator is so reluctant to share with agents of the Treasury Committee legal advice on whether embedded swaps are regulated.

With so many people left destitute and impoverished by what has happened, it is wrong that no one has been brought to account over this. Until such time as fines are levied and front-line staff guilty of mis-selling brought to book, confidence in the banking sector and the regulator will struggle to improve and standards may languish at an unacceptable level.

The last sentence of the motion before us calls respectfully for the Government to consider a review of this whole process and the conduct of the regulator. I urge my hon. Friend the Economic Secretary to the Treasury to look carefully at whether to hold an independent review of this whole regrettable scheme.