Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill (First sitting) Debate

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Department: Department for Work and Pensions
Peter Grant Portrait Peter Grant
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Q Possibly—depending on the answer.

Ms Howard, another major problem has been not the unregulated activities carried out by regulated organisations, but unregulated companies that hide behind the fact that some company associated with it is regulated—for example, if a regulated company gives section 21 authorisation for its marketing materials. I will ask the same question again: do the people being encouraged to make these investments understand that the fact that marketing material is issued by a company registered with the FCA does not mean that its activity is regulated?

Sheree Howard: In evidence as part of LCF there was substantial discussion of the financial promotions regime—of the section 21 approval regime in particular. The Government are currently considering changes to that regime to help to improve understanding by making it a specific gateway so that we can test firms that wish to give such approvals to ensure that they do so appropriately. That should help to ensure that consumers understand better.

Matt Rodda Portrait Matt Rodda (Reading East) (Lab)
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Q I thank the witnesses for their time in giving evidence this morning. As the shadow pensions Minister, I have a series of questions on pensions, but I preface them by pointing out to those watching proceedings today who are not pensions experts that there have been some absolutely dreadful pensions scams.

None Portrait The Chair
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May we ensure that questions are in scope of what is before us? You have only three to four minutes.

Matt Rodda Portrait Matt Rodda
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I will move through them rapidly.

To what extent do the witnesses believe that pensions scams are a tangible risk to the future of people’s retirement in the UK?

James Darbyshire: The FSCS is seeing an increase in pensions scams in our work. The area certainly needs further attention, given the distress and the potential for losing life savings. Where we see evidence of scams, particularly use of the FSCS logo, we are working closely to reassure pensioners in relation to scam investments and are sharing data with regulatory colleagues to ensure that they can take action as appropriate.

Matt Rodda Portrait Matt Rodda
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Q What further action would you like to see taken following the terrible problems created by the introduction of pensions freedoms without further regulation associated with it?

James Darbyshire: Focusing specifically on scams, we think that online scams and the ability to scam investors and pensioners should be considered for inclusion as part of the online safety Bill. That is certainly our position, and I believe it is also the FCA’s.

Matt Rodda Portrait Matt Rodda
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Q What further resources do you need to help to tackle scams? In particular, is there a need for a major Government information campaign to alert savers?

Sheree Howard: Picking up on James’s final comment on the online harms Bill, we definitely would support that. Good changes have been made recently, but further changes would be helpful in mitigating the risk of scams and fraud in pensions and investments. We have our ScamSmart campaign and have done targeted campaigns around it. We work with partners, as James said. Could more be done? Yes, more could be done, such as the online harms Bill, education and so on. We are working with partners, but more could be done.

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None Portrait The Chair
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I now call Mr Matt Rodda.

Matt Rodda Portrait Matt Rodda
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Q Thank you, Ms Ghani. Thank you, Mr Taylor, for your evidence. First, could you reflect on the lessons that need to be learned, following the imposition of pension freedoms? It seems to me that the sector is addressing a series of quite difficult problems that should have been better anticipated when the freedoms were introduced.

David Taylor: Our role relates to paying the compensation at the end of the process. The cases we are talking about here almost entirely predate pension freedoms. The reasons for the liberation cases have gone away to an extent, as a result of pension freedoms. There is not a great deal that would be appropriate for me in my role to talk about pension freedoms.

Matt Rodda Portrait Matt Rodda
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Q Perhaps I can address this in a different way. This is a broader question about the nature of the levy. Did you and your colleagues look at other models for the design of the levy? Could you explain the process you went through in coming up with the levy as currently designed?

David Taylor: We have almost no discretion in how the Fraud Compensation Fund levy is set. Members will probably be familiar with the Pension Protection Fund levy, the much larger levy on defined benefit schemes, where we have a lot of discretion and we do a lot of work on structuring that levy. As far as the Fraud Compensation Fund levy is concerned, it is simply a flat-rate levy. Our only choice is whether to charge the maximum amount or less. In the light of the size of the claims we are now dealing with, we will charge the maximum for the foreseeable future.

Matt Rodda Portrait Matt Rodda
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Q What work did you do to explore the effects of the levy on particular schemes? Certain schemes seem to bear a very high cost.

David Taylor: Again, that is slightly outside our remit but we are, of course, well aware of the debate around the fact that it is a per-member levy, and the representations made by master trusts, in particular, on the impact that has where they manage numerous small pots.

None Portrait The Chair
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I call Mr Richard Fuller.

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None Portrait The Chair
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I call Matt Rodda.

Matt Rodda Portrait Matt Rodda
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Q Thank you, Ms Ghani. I thank the witnesses for their evidence today. My first question is to Mr Brown about the effect of the issues we have discussed today on the People’s Pension, which is a very worthy scheme offering pensions to many people who otherwise would not be able to receive them. What are the potential issues with the levy and the way it affects the People’s Pension and pension savers in the scheme?

Philip Brown: Yes, of course. Fraud is a serious issue and people should have a route to redress, as has been said by other witnesses. The challenge is how you pay for that redress.

The current levy system was created a long time ago, before master trusts existed. The People’s Pension is a master trust and a not-for-profit organisation. If a levy is put upon us, it comes from our members’ savings—from the savers we are trying to help create pensions.

The challenge we have with the current system is that it works on a member basis. Between ourselves and NEST, as the two very large master trust schemes, we paid approximately 37% of the Fraud Compensation Fund levy the last time it was taken, in 2019. That is a significant amount of money. At the time, the levy raised £6.9 million.

If we are going to raise a levy using the same mechanism, the current estimate is £350 million. The proportion of that that falls on the two schemes that I referred to is very significant, and it needs to be put in the context that, between those two schemes, we have roughly 1% of the assets in the sector, so there is a very disproportionate effect of how the current levy system works. A fundamental review is necessary for how levies are calculated.

Matt Rodda Portrait Matt Rodda
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Q In summary, are you saying that a very large proportion of the cost of the levy is falling on pension savers who are on low incomes and whose assets form a small part of the overall sector?

Philip Brown: Yes, absolutely. Between ourselves, the People’s Pension and NEST, we are serving the small and medium-enterprise end of the market. Those savers are all relatively new to pensions, so they have modest funds, and it is a very disproportionate effect if you are taking roughly 37% of the fees from those organisations.

Matt Rodda Portrait Matt Rodda
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Q Thank you for explaining that so clearly to the Committee.

I wonder whether I might ask Dame Elizabeth a short question as well. In your view, Dame Elizabeth, should there be a wider explanation of the rights of consumers in relation to the regulatory failure that we have heard about today?

Dame Elizabeth Gloster: I am not sure I understand the question. What do you mean by “a wider explanation”?

Matt Rodda Portrait Matt Rodda
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Exploration, sorry. Should there be a wider exploration of this issue?

Dame Elizabeth Gloster: I am not sure what you are suggesting. Do you mean the regulatory failures in connection with LCF or more widely?

Matt Rodda Portrait Matt Rodda
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Q Is there a need for a broader review of regulatory failure?

Dame Elizabeth Gloster: I do not think that is something that I am qualified to comment on. I did my report. The problem about wider reviews is that they need to focus, as my report did, on a specific case and specific facts. The idea of a judicial commission looking at all the financially regulated firms that have gone bust in the last two years—I am not sure what it would achieve beyond the failings that I have identified in my report. It might identify other failings, or it might not, but I do not know that my answer is a very informed answer to that.

Matt Rodda Portrait Matt Rodda
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Q Well, thank you for trying to explore the issue. I appreciate your expertise in this matter.

Finally, I want to turn to Mr Agathangelou—I apologise if I have mispronounced your name. You talked about catastrophic failure across the system. I am particularly interested in the issue of pensions, and obviously we are talking about the wider financial services system. I wonder whether you might comment on the scale of the problems in the pensions sector on its own.

Andy Agathangelou: As it happens, most of my career has been connected to the pensions sector. To know that the issue is very widespread, you only have to look at the report produced by the Work and Pensions Committee as a consequence of the excellent investigation that it had into the pension schemes problem. There is a long list of recommendations in that report. Most, if not all of them, are very warmly supported by the Transparency Task Force.

Unfortunately, the trajectory is worsening. The problem we have is widespread regulatory failure leading to catastrophic losses for people—sometimes literally life-changing losses—and sometimes extreme emotional harm as well as financial considerations. The problem is getting worse. I genuinely believe that the only way we are going to have a chance to deal with these issues systemically is if there is a high-level, widespread investigation into what is going wrong. I believe that could be carried out it a very constructive way. It is not about apportioning blame; it is about having very honest conversations about what is actually broken here and the most pragmatic ways to solve it.

None Portrait The Chair
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I now call Mr Gareth Thomas. You will be pleased to know the witnesses are with us until 11.25 am, Mr Thomas.