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

Pat McFadden Excerpts

Report stage & 3rd reading
Wednesday 22nd September 2021 Commons Chamber

[Gareth Thomas]

The hon. Member may be right. I simply put out the idea at this stage, and I hope Ministers will be sympathetic to it, that we should not just accept the sense that, following Dame Elizabeth Gloster’s report, the payment of compensation and the introduction by the FCA of this new consumer duty, everything is suddenly all right in the world of consumer financial regulation. Perhaps Ministers on the Treasury Bench are inadvertently suggesting that. I think another step needs to be taken to hold the feet of regulators to the fire.

I will briefly raise two other concerns about financial regulation and some of the lessons that need to be taken from the LCF debacle, which the amendment from the hon. Member for Glenrothes helpfully gives me the opportunity to raise. The first is the idea that all the information available to the boards and the management of companies that has to be shared with the FCA and the PRA from time to time should be regarded as commercially sensitive. Clearly, there is genuinely commercially sensitive information that it is right for companies and businesses to keep for themselves. However, I fear—certainly in the case of Liverpool Victoria, which I have been looking at—that the excuse that information is financially sensitive is being used to deny consumers’ legitimate rights to know what the future holds for the business in which they have invested their savings or money. I gently suggest that that topic is worthy of a review in itself, potentially with changes to regulatory practice and, if need be, to legislation.

Lastly, the existence in legislation at the moment of provisions for so-called independent experts to look at the decisions that boards are taking in the context of demutualisations are a recipe for regulatory failure. In the case of Liverpool Victoria, independent experts are being appointed by the board, paid by the board and briefed by the board. Obviously, it is fairly easy to predict what the outcome of the independent experts’ work is going to be: to recommend largely what the board wants to happen. That is another issue that needs to be looked at.

I put those points on the record to suggest that Ministers should not be complacent about the quality of the FCA’s performance. There needs to be a bit more of a robust challenge and a look again at how financial regulation works.

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

I want to use the opportunity provided by the amendment to raise a few points, particularly about clause 1, and to put them to the Minister. I thank Dame Elizabeth Gloster and both the Treasury Committee and the Work and Pensions Committee for the work they have done on this issue.

The issues covered by the Bill have been widely set out in debates on Second Reading and in Committee. They include: the wholly deficient practices at the FCA that meant that hundreds of reports of harm were not acted on, which was described by Dame Elizabeth Gloster as an “egregious” failure of the FCA to fulfil its statutory duties; the fact that this failure allowed LCF to continue in operation for years longer than it might otherwise have, thereby multiplying the harm to investors; the reassurance at one point from the FCA that what was happening was not a scam; the impact of the halo effect in having a regulated firm selling unregulated products, leading unsuspecting investors to believe that these products were far safer than they actually were; the loss of a whistleblower’s letter three years before the firm’s collapse, and the damning conclusion from Dame Elizabeth Gloster that the loss of that letter probably did not make any difference, because the FCA was so dysfunctional that, even if it had not been lost, it would not have been acted on; the repeated failure to join the dots and the treating of each LCF transgression—for example, on its use of financial promotions—as an isolated incident, when instead it was a pattern of behaviour designed to use its regulated status to bolster confidence in unregulated products; and the public disagreement between Dame Elizabeth and the Governor of the Bank of England about the issues of responsibility and personal culpability.

I served on the Parliamentary Commission on Banking Standards, which said that

“a buck that does not stop with an individual stops nowhere.”

That quote has been much used in the debate about this issue, which has raised sharply the limitations of collective accountability and the question of whether in this case the buck really stopped with anyone. Of course, most importantly of all, there is the issue of the distress and the financial loss to investors and the question of how they should be compensated. All of this has led to the Government stepping in with this Bill to authorise compensation up to a certain level for investors.

Based on the amendment, I want to put a number of questions to the Minister arising from the Bill. First, why has compensation been set at 80% of the Financial Services Compensation Scheme maximum of £86,000, not the full level? That is probably the main outstanding concern of LCF investors, who are grateful that compensation will come but who cannot understand the 80% cap given the manifest failures set out in Dame Elizabeth’s report. Are the Government completely fixed on this 80% figure, or is there any prospect of that being reconsidered?

[Rehman Chishti]

I thank the shadow Minister for giving way, and I will of course raise the same point with the Minister in due course. The right hon. Gentleman says that the victims will of course welcome the compensation coming their way, but the point raised with me by those who have suffered a loss is whether the Government can look to prioritise those who have suffered the most due to their loss. There has been a lot of data gathering by the FSCS, the FCA and the Serious Fraud Office, so that should be easily apparent. What is his view about ensuring that compensation is quickly given out and prioritised to those who have suffered the most?

[Mr McFadden]

The hon. Member raises a very fair point. It has already been referenced in the debate that this is not just about amounts, but about the timescale, and we all want the Government and whoever is administering this scheme to be able to get on with it.

[Sammy Wilson]

I understand the point, but does the right hon. Gentleman accept that defining those who have suffered the most could be quite difficult? Are those who have suffered the most those who have lost the most, or perhaps those who are not all that well-off and have found that they had lost all of their savings, even though all of their savings would not have been the same as the loss of some of the bigger investors? Does he accept that that is a difficult definition?

[Mr McFadden]

The right hon. Member raises a very fair point. If we pluck a sum of money out of the air, it could be a lot of money to one person and perhaps less to somebody else, depending on their wealth.

Let me return to the questions for the Minister arising from the amendment and the Bill. The second is the important question of where the decision to compensate the LCF investors leaves investors in other firms where regulatory failure is alleged. Where has the bar now been set for future compensation in the event of regulatory failure? The taxpayer cannot stand behind every investment loss. Some investors will make money and some will lose. That is in the nature of a market economy. However, the question of compensation arises when there is a clear regulatory failure, because that is considered to be a different matter. Having come up with this scheme, where do the Government now draw the line?

How can we be sure this will not happen again? There are two aspects to this question. The first is the role of the regulator. The FCA is going through a transformation programme designed to ensure that changes are made to prevent a similar thing from happening in the future.

[Peter Grant]

There is clearly a need to specify which kinds of investment losses might be compensated, and which ones will not be. Given that the Financial Conduct Authority has outlawed the targeting of mini-bonds at retail investors, is that a clear indication that something was fundamentally flawed with all selling of those bonds, whether it was done by LCF, Blackmore Bond, or anybody else?

[Mr McFadden]

The hon. Gentleman makes a fair point. On how we can be sure that this will not happen again, and the transformation programme, it is to be expected that companies would go through such a programme, given the damning nature of Dame Elizabeth’s findings. There is also, however—and this is not just about this specific case—understandable public scepticism when a scandal happens, people talk about lessons being learned, there are some changes to management, and the organisation moves on. How do we ensure that, while understandable, such public scepticism is not justified in this case because something different is happening, and that we will not end up back here, some time in the future, debating another investment scam that was not spotted and acted on in time?

The second aspect to the question of how we can ensure that this does not happen again relates to legislative protections. This scam was promoted by a lot of online advertising. The online safety Bill is coming up, and at the moment paid-for advertising is excluded from that. Why should that be the case? Surely the LCF case shows that paid-for advertising must be included. As the Minister will be aware, there is a growing coalition behind the argument that the online safety Bill must offer greater protection against financial scams and fraud, and that is bound to be a major issue as the Bill goes through the House.

That issue is important, because consumers are being targeted every day with adverts, text messages, emails, and phone calls geared either to obtaining their financial details, or promising get-rich-quick schemes. As covid has pushed more of our lives online, it is imperative that legislation keeps pace with the increased use of online scams that are designed to strip people of their money. It is becoming more and more difficult for consumers to ascertain the difference between a genuine approach and a scam approach. We in this House have a legislative duty to keep pace with what organised criminals are trying to do.

[Rehman Chishti]

rose—

[Mr McFadden]

I am coming to the end of my remarks; I hope the hon. Gentleman does not mind. I leave the Minister with this: is it not better to try to stop people being ripped off in the first place, than to have to ask the taxpayer or, as in clause 2, members of pension schemes, to compensate people after such scams have already happened? I will leave it there, although I will later have a few remarks and questions about clause 2.

--- Later in debate ---

[Mr McFadden]

We have just had a short debate on an amendment that was largely focused on clause 1. Before we finish the Commons stages, I want to put a few questions to the Minister, mainly relating to clause 2 and pensions.

We discussed some of these issues in Committee. Clause 2 imposes a levy on the pension schemes to pay for the consequences of the Dalriada case, which means that the pension fund compensation scheme has to raise what Ministers expect to be around £300 million. I have a few questions about that.

My first question is about the flat-rate way of raising such levies. It leaves schemes with large numbers of members, many of whom have small pension pots—for example, those on auto-enrolment schemes—paying a significant proportion of the levy, even though they are run in a completely honest way that has never been near any kind of pension fraud. Have the Government considered a more proportionate way of raising such levies, to protect pension scheme members with very small pots?

My second question is about the relationship between the greater pension freedoms in recent years and the risks of scams and financial fraud. The advent of these freedoms has resulted in a number of examples where unsuspecting pensioners have been persuaded to transfer their pensions in ways that were not in their interests or, even worse, that led to fraud and a loss of their hard-earned savings. The Select Committee on Work and Pensions has shown significant interest in the issue, and it has received estimates from the Pension Scams Industry Group that 40,000 people may have lost up to £10 billion since the pension freedoms were introduced in 2015.

Thirdly, great fanfare was made of advice and guidance when the pension freedoms legislation was introduced, but take-up has been very low, and efforts by the Department to improve it have not radically changed the proportion of people accessing good advice. Without good advice, pension scheme members are left much more vulnerable to unscrupulous sales pitches or, alternatively, bad decisions that are clearly not in their interests but may be in the interests of the financial adviser advising them. What are the Minister and his colleagues doing to change the situation with regard to pensions advice?

Finally, those accessing their pensions under the age of 55 are subject to a hefty tax charge, but sometimes people are persuaded to do this because they are advised that there is no tax charge and they will not have to pay any tax. They then find themselves not just victims of a scam but pursued by Her Majesty’s Revenue and Customs. What can the Minister do to persuade HMRC to take account of the difference between someone acting on false information and someone knowing that they will incur a tax charge? I would be grateful if the Minister could address those questions before we finish.

In my last contribution to the debates on this Bill, I want to thank the Minister and his colleague the Economic Secretary to the Treasury for their consideration of the points that have been raised throughout by hon. Members. I also thank the Clerks and the Bill team for their responses to inquiries. We will support the Bill because we want this compensation to be paid out, but I hope that the Minister will consider some of the questions we have raised about the nature of scams and the need to do more to protect consumers. Although this Bill will go through tonight, I have no doubt that consumer protection, frauds, scams and the amount of things happening online will be raised again when we debate the Online Safety Bill in the weeks and months to come.