Financial Services Bill (Twelfth sitting)

Pat McFadden Excerpts

Committee stage & Committee Debate: 12th sitting: House of Commons
Thursday 3rd December 2020 Public Bill Committees

[The Chair]

Just a word of warning—we are a little bit behind time. There are still 11 groups of amendment on the selection paper to debate. We have the room until 5 pm, but I think there were some murmurings about moving that forward a bit. Hint hint: if we make progress, that would help.

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

Forgive me, Dr Huq. I might have got this wrong, but I think there might be one more vote on the previous group before we move on.

[The Chair]

When we reach it on the amendment paper, so not quite yet.

New Clause 8

Money laundering: electronic money institutions

‘(1) The Proceeds of Crime Act 2002 is amended as follows.

(2) In section 303Z1(1) after “bank” insert “, authorised electronic money institution”.

(3) In section 303Z1(6) after “Building Societies Act 1986;” insert—

““authorised electronic money institution” has the same meaning as in the Electronic Money Regulations 2011.”

(4) In section 340(14)(b) after “Bank” insert “, or

(c) a business which engages in the activity of issuing electronic money”.’—(Abena Oppong-Asare.)

This new clause would update definitions in the Proceeds of Crime Act 2002 to reflect the growth of financial technology companies in the UK by equalising the treatment of fin tech companies with banks on money laundering and Account Freezing Orders.

Brought up, and read the First time.

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[Stella Creasy]

Absolutely. We know who such companies are targeting, and they are doing so deliberately. I hate to say this, as I do want to win over the Committee, but we might not be their target audience at this point in our lives, because we might not be actively reading the social influencer media posts. I might be completely wrong—I am sure some Government Members are regularly on their Instagram accounts looking at posts by ASOS.

Some 20% of those young people say they have missed a payment in the last year—the figure has doubled in the last year—because they thought that a purchase would cost a certain amount and that they had an income, but that income has gone. The companies will say that they are very good to their customers because they do not lend more than people need and they do not charge interest—the companies’ interest is in people paying back the money—but those companies go silent on what they do when people do not pay back. What happens to people’s credit references? How do they chase money? Do they use debt collection agencies?

Those companies are growing rapidly, just as the payday lending industry did. We watched that happen and, in that Cassandra-like way, all tried to warn of it, but it took too long for us to act. In 2019 Klarna was boasting that it had signed a partnership with a new merchant every eight minutes in this country. By the end of 2019, 6 million people had used its product, and it said that 55,000 were using it weekly. Imagine what it is like now, with people having been stuck at home and stuck on their phones.

The Money and Mental Health Policy Institute found that more than 3 million people with mental health problems have found it harder during the pandemic to control their online spending, and two in five said the BNPL industry has been “harder to resist”. Because it is not regulated, it does not have to follow any of the rules we might want to point to that protect consumers. That is why we see all those adverts saying, “No interest, no fees—don’t worry about it.” The industry does not have to provide the normal financial information we see in other forms of credit because it is not regulated in that way.

Just as with the payday loan industry, as soon as we started talking about these companies, along came the offers of dinners and discussions and talks, where the industry says it is in fact a misunderstood new technology. Those of us who are not regularly on the internet have obviously missed them.

[Mr McFadden]

rose—

[Stella Creasy]

I am sure the shadow Minister is about to tell us about his Instagram account.

[Mr McFadden]

No, I am not, but I am interested to hear that my hon. Friend got an offer of dinner. All I got was an email.

[Stella Creasy]

Sadly, during the pandemic, none of us has been able to take up any of those offers to explain our concerns to these companies directly, as opposed to on Zoom. It is a simple concern: the way in which these products are marketed encourages people to spend money as a way of dealing with the emotional and social impacts of the pandemic. The adverts, using those social influencers, say, “When you’re feeling low, sat at home by yourself with nowhere to go, there is something to make you feel better.” Essentially, the message is, “Get into debt. Don’t worry about it. You can spread the payments. Don’t worry about whether you can afford it.” They get away with saying and doing that because they are not covered by the regulations.

I know the Minister is looking at this issue—he said so—and that the FCA is doing so. I have made a series of complaints to organisations such as the Advertising Standards Authority about these issues, because, just as with payday lending, we have seen the rapid expansion of these companies. My worry is that if we take 18 months it could be too late in terms of consumer detriment. I do not doubt these companies when they say they want to have a sustainable business model, but it is for us in this place, in crafting the Bill, to decide what sustainability is and how they make their money. Otherwise, we are handing them our young consumers, in particular, on a plate to be exploited. The new clauses speak to those issues.

New clause 16 would ensure that all forms of consumer credit are covered by regulation, because the gap that Klarna and company have fallen into is arguing that they are not a form of consumer credit so they do not need to be regulated. We should always apply a sniff test: if somebody is giving us money to buy things on tick, that is a form of credit. If it walks like a duck and talks like a duck, it should be regulated like ducks should—see, we have moved on from the dinosaurs to ducks.

New clause 17 would make rules explicitly about the buy now, pay later industry. I do not believe we can wait another year or so before we do something. It makes sense to bring the industry under the FCA’s umbrella so that the FCA can act. The new clause would ensure that Ministers could act based on the industry’s actions, given the risks that come from them. Unlike customers of Amigo Loans or indeed the remaining payday loan industry—or even the credit card industry—nobody who uses buy now, pay later can go to the ombudsman for redress, so what do they do if they get into difficulty? I pay tribute to Alice Tapper from Go Fund Yourself, who has been collecting the evidence about young people getting into debt from unaffordable forms of spending with such companies and not knowing how to get out of it.

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Brought up, and read the First time.

[Mr McFadden]

I beg to move, That the clause be read a Second time.

Although it is late in our proceedings, this is the first chance I have had to say what a pleasure it is to serve under your chairmanship, Ms Huq. New clause 24 introduces an offence of failing to prevent economic crime. I should make it clear that it is a corporate offence for companies.

The Committee will know that we have received written evidence on this issue from Spotlight on Corruption. In previous debates, we have all agreed that money laundering and fraud are big problems for the UK, although they are difficult to quantify. As I have said, I appreciate that the Minister has very likely been advised not to accept any amendments to the Bill. When a party has been in power for 10 years, that tends to reinforce itself, because it can become more difficult to admit that things are wrong. I should say in all candour that I am not suggesting that fraud or money laundering only started in 2010.

These are big, difficult and long-term issues for all Governments, so this is not a game of gotcha. It has been a problem for a long time, and Governments and regulators have to adapt constantly to deal with it. As we have been discussing this afternoon, as the pattern of business, trade and company ownership changes, so must the law and the regulatory rulebook. There is no embarrassment in acknowledging that we have a problem with money laundering or fraud, or, indeed, in introducing changes. Doing so is a strength.

The problem that the new clause deals with is twofold. First, there is the straightforward issue of fraud or crime—positive acts of wrongdoing—being committed. Secondly, there is the situation where breaches of the law take place in a company and it is impossible to hold the company to account because there is no duty on the company to prevent such acts in the first place. We saw that kind of thing graphically during the LIBOR scandal, which we have discussed in our proceedings. One chief executive after another—some of the highest-paid people in the world, it should be said—professed their profound shock at what their traders were doing. They knew nothing about it until they read about it in the newspapers, and they were absolutely dumbfounded at what was going on several floors below them in the same company. It worked for them: there were no corporate prosecutions in the UK.

I have already spoken to the Committee about the incentive to look the other way that this situation entails. It is better for a senior director of a financial institution to appear to be a fool than a knave, because the defence that they did not know what was going on is usually better for them than saying that they did know what was going on, but they did nothing about it. Not only that, but further down the chain it creates a disincentive to report wrongdoing further up the hierarchy, because doing so may mean that the ignorance defence is not available to those at the top of the hierarchy. That creates a mismatch between how small companies and large companies are treated, because small companies are assumed to have a directing mind, so that, if wrongdoing is identified, professing ignorance is not a defence for senior managers.

What would creating an offence of failure to prevent economic crime do? It would create a level playing field between small and large companies; it would send out a strong signal about the kind of financial sector that we want as we come to the end of the transition period; and it would equalise how different kinds of economic crimes are treated, because such a liability—I stress that it would be a corporate liability—already exists when it comes to, for example, bribery or tax evasion. Why should the ignorance defence be available for some offences but not for bribery or tax evasion? The Treasury would never accept it if senior members of a company said, “Oh, we didn’t know we were supposed to pay those taxes.” That would not be a legitimate defence, and yet it can be used for some other kinds of wrongdoing.

Let me return to the point about the signal that we want to send. A lot of the Bill is about onshoring EU directives. The sixth anti-money laundering directive requires EU member states to have corporate criminal liability for money laundering. Under the directive, corporate liability must include an offence that occurs owing to a lack of supervision or control by a person in a leading position in a company. We do not have that at the moment. The Bill is an opportunity to correct that. Remember, we are waiting for an equivalence decision. Do we really want our first big signal on divergence to be a departure from the rules on money laundering? Is that really the message that we want to send?

However, we should not do this only because the EU is doing it. We should do it on its own merits. The Treasury Committee reported last year on how difficult it is to prosecute multinational companies, saying that

“multi-national firms appear beyond the scope of legislation designed to counter economic crime. That is wrong, potentially dangerous and weakens the deterrent effect a more stringent corporate liability regime may bring.”

I anticipate the Minister’s response—that he thinks there are a lot of strong points here, and that he is sympathetic to the argument, but that he wants to wait for the Law Commission consultation. I cannot remember which pot we would put that in. [Interruption.] If it is pot three, I will take his word for it.

The focus of the Law Commission’s consultation is what is known as the identification doctrine, or what we might call the question of a directing mind. However, nothing in that consultation should prevent the Government from introducing a “failure to prevent” offence that could apply to small and large companies alike. Indeed, it is already implicit in the way that small companies are treated. Why should larger companies continue to be able to wield an excuse that is not available to smaller firms? When it comes to the treatment of small firms, I suspect that the Minister will hear that argument in the Chamber, if not in the Committee, from Members on his side of the House as well as on ours.

Furthermore, the Law Commission may take some time. We heard oral evidence that the pace on this has been glacial. However, our transition period ends in less than a month. It is not as though we do not have an ongoing problem with money laundering and financial crime, so what are the advantages of waiting? Corporate liability is not a new or revolutionary idea; it already exists for bribery and tax evasion. HMRC has said that it

“does not radically alter what is criminal, it simply focuses on who is held to account for acts contrary to the current criminal law.”

The lack of such an offence was also pointed out in the Financial Action Task Force 2018 UK evaluation, which pointed out the difficulties in proving criminal intent.

There are a number of reasons to act: the size of the problem, the unfairness between small and large companies, consistency in the way we treat tax evasion, our desire for equivalence recognition, the signals that we want to send about the character of our post-Brexit financial regulatory system and, perhaps most of all, because it is a good thing to do. For those reasons, I hope the Minister will consider the proposals in the new clause.

[John Glen]

The new clause proposes to create a new criminal offence, for FCA-regulated persons only, of facilitating economic crime and of failing to prevent economic crime.

In recent years, the Government have taken significant action to improve corporate governance and culture in the financial services industry. Following the financial crisis we introduced the new senior managers and certification regime. The regime is now in place for all FCA-regulated firms, and it requires firms to allocate to a specific senior person a senior management function for overseeing the firm’s efforts to counter financial crime. If there is a failure in a firm’s financial crime systems and controls, the FCA can take action against the responsible senior manager where it is appropriate to do so. That enforcement action includes fines and prohibition from undertaking regulated activities.

As well as creating the senior managers regime, through the Money Laundering Regulations 2017 and subsequent amendments, the Government have recently strengthened the anti-money laundering requirements that financial services firms must adhere to. Failure to comply with these requirements can be sanctioned through either civil or criminal means. Recent FCA regulatory penalties related to firms’ anti-money laundering weaknesses include a £102 million fine for Standard Chartered in April 2019 and a £96.6 million fine for Goldman Sachs in October 2020.

I hope that recent action demonstrates to the Committee that the Government are committed to upholding a robust framework that deters and sanctions any corporate criminal activity in the financial services industry. It is only right that we challenge ourselves on whether we need to go further, and I listened very carefully to the right hon. Gentleman. Regardless of our tenure, the Government must always take that responsibility seriously.

In 2017, the Government issued a call for evidence on whether corporate liability law for economic crime needed to be reformed. It is fair to say that the findings of the call for evidence were inconclusive. As such, the Government’s response to the call for evidence determined that a more comprehensive understanding of the potential options and implications of reform was needed. As the right hon. Gentleman acknowledged, the Government have therefore tasked the Law Commission to conduct an expert review on this issue.

Through the Bribery Act 2010 and the Criminal Finances Act 2017, the Government have demonstrated we are open to new “failure to prevent” offences. These offences, however, were legislated for because there was clear evidence of gaps in the relevant legal frameworks, which were limiting the bringing of effective and dissuasive enforcement proceedings.

Before any broader new “failure to prevent” offence for economic crime is introduced, there needs to be strong evidence to support it. It will also be important that any new offence is designed rigorously, with specific consideration given to how it sits alongside associated criminal and regulatory regimes and to the potential impacts on business. The scope of who a new offence applies to must also be holistically worked through.

The Law Commission’s work will take some time, but it is clear that we are zoning in on that aspect of the problem. In the light of that response, I ask the right hon. Gentleman to withdraw the new clause.

[Mr McFadden]

I am happy to withdraw the new clause today, but I suspect the Minister might meet a very similar amendment later in proceedings on the Bill. I beg to ask leave to withdraw the clause.

Clause, by leave, withdrawn.

New Clause 26

Legal protections for retail clients against the mis-selling of financial services

‘(1) Regulation 3 (Private Person) of the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 is amended as follows.

(2) In paragraph 1(a), after “individual”, insert “, partnership or body corporate that is or would be classified as a retail client”.

(3) In paragraph 1(b), leave out “who is not an individual”, and insert “not within the definition of paragraph 1(a)”.

(4) For the purposes of this regulation, a “retail client” means a client who is not a professional client within the meaning set out in Annex II of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU.’—(Stephen Flynn.)

This new clause seeks to give retail clients greater legal protections against the mis-selling of financial services products.

Brought up, and read the First time.

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Division 17

Ayes: 6

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Labour: 4
Scottish National Party: 2

Noes: 10

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Conservative: 10

[Mr McFadden]

On a point of order, Dr Huq, I would like to thank you and Mr Davies for your chairmanship during the proceedings, and the Clerks from the Public Bill Office for helping all of us with our amendments in recent weeks. I would like to thank my colleagues on the Opposition side of the Chamber; I believe we approached this in the right spirit. We set out at the beginning the way we would approach it and I think that is the way that we have carried through: trying to improve the Bill, to give it proper scrutiny and to try to point to some kind of future direction for UK financial services as we come to the end of the transition period. Some of us here are Front-Bench Members and this is part of our terms of appointment, so, with their indulgence, I would particularly like to thank my hon. Friends the Members for Wallasey and for Walthamstow, who I believe both brought considerable experience and value to our proceedings.

I would like to thank the Minister for his patience and forbearance. We did not set out to torture him, I promise, but I appreciate that for him, taking through a Bill like this is a substantial piece of work, and I am grateful to him for the spirit in which he responded to amendments, questions and so on as we went through. Finally, I thank the Back Benchers on the Government side. For the most part they took a rather passive approach to the proceedings. There is a mixture of experience and new MPs on that side. To the new MPs in particular I will say that I hope the last three weeks have been an important part of their learning about what it means to be a Government Back Bencher.

[John Glen]

Further to that point of order, Dr Huq, I thank the right hon. Member for Wolverhampton South East for the courteous and constructive way in which he led the Opposition scrutiny of the Bill. I thank all members of the Committee for their contributions. I looked carefully at all amendments, and I did not categorise them in buckets. I thank you, Dr Huq, and your colleague Philip Davies, and the team of Clerks, as well as my officials from the Treasury, who sit silently at the end and do a great deal to support me and the much wider team back in the Treasury who have helped to prepare the Bill. Clearly, we shall now move on to its further stages, and there is more work to do. I thank my hon. Friend the Member for Macclesfield for his support, in particular, as well as my hon. Friend the Member for Montgomeryshire, who has given me enormous support throughout.