Financial Markets and insolvency (Transitional Provision) (EU Exit) (Amendment) Regulations 2021

Pat McFadden Excerpts

Thursday 24th June 2021 General Committees

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

Thank you for your chairmanship this morning, Mr Robertson. I have a feeling of déjà vu—in fact, Mr Robertson, it might be déjà vu all over again: not only have we been in this movie before, but we might be in it again in the future. But if I have a feeling of déjà vu, it must be nothing compared with the Minister’s. He has spent a large part of the last couple of years taking through these statutory instruments. He mentioned that there were 65 from the Treasury; I do not know what proportion of those he took through—a large proportion, I would guess. A lot of that was the rolling over of particular European regimes. Now he is back doing that again.

As the Minister said, the regulations are about protecting assets in mid-transaction from being clawed back in the event of an insolvency, increasing confidence in the financial system and contributing to its stability. Such fire breaks in clearing and transactions are an established part of the system. They are important because they are designed to stop an insolvency in one company from leading to a chain reaction right through other parts of the system. That much is uncontroversial.

The original form of the regulations was to offer protection for up to six months after the end of the transition period to firms that were part of the EEA processes; as the Minister said, the timetable runs out next Wednesday. But not all firms have completed the transfer to a new system, so we have this further extension for a two-year period. I appreciate why the Minister has gone for two years: he does not want to be doing this every six months, and there is some rationale in that.

Brexit was sold as being an end to red tape—nobody said it would be replaced with all this red, white and blue tape that we are debating today. I am not just talking about this instrument. Yesterday, the Financial Secretary to the Treasury was in a room somewhere along this corridor doing exactly the same thing to the extension process for customs safety and procedures—that was supposed to be for six months and is now having to be rolled over again. It will not be just these two financial instruments; there will be others too. This is the legislative process that keeps on giving—the rollover of the rollover, but no EuroMillions prize at the end.

I do not know whether you were listening to the news this morning, Mr Robertson. There was a report about long covid, which is defined as people having symptoms for 12 weeks or more after they have been diagnosed. What we are dealing with here is long Brexit: the legislative process that never ends of extensions to transition measures, where British regulations were supposed to be replacing the ones that we were leaving.

On the substance, I should say that of course we are not going to oppose something designed to contribute to financial stability and avoid the kind of financial chain reaction that can come with an insolvency in one part of the system. But the broader point is about how long the process is going to go on. I cannot predict the Minister’s future and personally I wish him well, but it is certainly within realistic possibility that a different Economic Secretary to the Treasury and Opposition spokesperson will be standing here in two years’ time debating the rollover to the rollover to the rollover.

We do not oppose the substance of the regulations, but we are casting a wry eye over the process of legislative long Brexit.

Oral Answers to Questions

Pat McFadden Excerpts

Tuesday 22nd June 2021 Commons Chamber

[John Glen]

I thank my right hon. Friend for his representations on this matter, and I heartily agree with him. We are promoting the international role of the sector and developing ambitious trade and regulatory relationships with other jurisdictions. We keep all these matters under review. We have taken on board the work of the taskforce on innovation, growth and regulatory reform, and just after Question Time, the Chancellor and I will be meeting representatives of banks as we seek to work with them to make those interventions that our financial services sector needs.

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

Financial services were not even part of the Brexit agreement that the Government negotiated, because they never made them a priority. Equivalence arrangements are nowhere in sight, £1 trillion-worth of assets have been moved abroad, and now food and drink exports to the EU have fallen by 47% in the first three months of the year. The Government estimate their new trade deal will add just 0.02% to our GDP. Is the sight of Ministers doing a lap of honour for that trade deal not the equivalent of asking our export industries to give thanks for losing a pound and finding a penny? When will the Government actually help our industries with the red tape that is baked into the agreement that they negotiated?

[John Glen]

I do not accept the right hon. Gentleman’s characterisation of where we are. On financial services, as I hope he knows by now, we have deep dialogue across a number of jurisdictions. That is an ongoing process. If I think about the work we are doing with Brazil, India and China and the dialogues we are having with Switzerland, there is no end to this Government’s ambition to improve our financial services’ relationships and deepen the opportunities that Brexit has given us.

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

Pat McFadden Excerpts

Committee stage
Tuesday 15th June 2021 Public Bill Committees

[The Chair]

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

[The Chair]

[Mr McFadden]

[Gareth Thomas (Harrow West) (Lab/Co-op)]

[Mr McFadden]

[The Economic Secretary to the Treasury (John Glen)]

[Mr McFadden]

That brings us to the failure to take what Dame Elizabeth calls a “holistic approach” to viewing LCF from within the FCA. One could pose the question of what “regulated by the FCA” means if the regulator then ignores the vast majority of what the company does because it does not fall within the regulatory parameter. In the Treasury’s eyes, those regulatory failures, together with the others set out in the report, were enough to trigger the Bill, in both senses of the word. So, what is the principle at stake? When is regulatory failure so obvious and complete that the taxpayer should compensate investors for their losses? That is what the amendment seeks to clarify. We believe that such clarity would be of great benefit to the FCA in the conduct of its duties and in its task of learning the lessons from Dame Elizabeth’s report. It would also be in the public interest. Indeed, without such clarity, the question will continue to be asked: “Why compensate in this case and not others”?

[Gareth Thomas]

[Mr McFadden]

[Peter Grant (Glenrothes) (SNP)]

--- Later in debate ---

[John Glen]

[Mr McFadden]

[John Glen]

[Mr McFadden]

[Peter Grant]

[Mr McFadden]

[Mr McFadden]

[Gareth Thomas]

[Mr McFadden]

[Peter Grant]

--- Later in debate ---

Given those reassurances, I hope that hon. Members will not seek to press the amendment.

[Mr McFadden]

[John Glen]

[The Chair]

[Mr McFadden]

[The Chair]

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

Pat McFadden Excerpts

Tuesday 15th June 2021 Public Bill Committees

[The Chair]

We are now sitting in public and the proceedings are being broadcast. Before we begin, I have a few preliminary announcements. Members will understand the need to respect social distancing guidance. In line with the Commission’s decision, face coverings should be worn in Committee unless Members are speaking or are medically exempt. Hansard colleagues would be grateful if Members could email their speaking notes to [e-mail]. Please switch electronic devices to silent. Tea and coffee are not allowed during the sittings.

We now begin line-by-line consideration of the Bill. The selection list for today’s sitting is available in the room and shows how the selected amendments have been grouped together for debate. Amendments grouped together are generally on the same or a similar issue. Please note that decisions on amendments do not take place in the order that they are debated but in the order that they appear on the amendment paper. The selection and grouping list shows the order of debates. Decisions on each amendment are taken when we come to the clause to which the amendment relates. A Member who has put their name to the leading amendment in a group is called first. Other Members are then free to catch my eye in order to speak to all or any of the amendments within that group. A Member may speak more than once in a single debate. At the end of a debate on a group of amendments, I shall call the Member who moved the leading amendment again. Before they sit down, they will need to indicate whether they wish to withdraw the amendment or seek a decision. If any Member wishes to press to a vote any other amendment in a group, they need to let me know.

Clause 1

Compensation payments to customers of London Capital & Finance plc

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

I beg to move amendment 1, in clause 1, page 1, line 5, at end insert—

“(1A) Within six months of this Act receiving Royal Assent, the Secretary of State shall lay before Parliament a report that considers the circumstances and impact of the payment of compensation to the customers of London Capital & Finance plc and that, in the light of that consideration, sets out the following—

(a) the circumstances in which taxpayer-funded compensation should be paid following the collapse of investment companies in future;

(b) the extent of regulatory failure necessary to trigger compensation funded by the taxpayer in future; and

(c) the limits to taxpayer exposure to investment failings.”

This amendment would require the Secretary of State to lay before Parliament a report exploring the impact of the payment of compensation to the customers of London Capital & Finance plc and giving criteria for when the taxpayer should compensate investors for investment failures.

[The Chair]

With this it will be convenient to discuss amendment 7, in clause 1, page 1, line 18, at end insert—

“(5) Within six months of this Act coming into force, the Secretary of State must lay before Parliament a report that assesses the impact of the payment of compensation to the customers of London Capital & Finance plc under this section, and in the light of that assessment, sets out the following—

(a) an assessment of the regulatory failures that gave rise to the need to compensate the customers of London Capital & Finance plc;

(b) measures the Government is taking to prevent such regulatory failures in the future;

(c) the reasons why the Government is providing compensation to the customers of London Capital & Finance plc but not the customers of other failed investment firms;

(d) criteria for when the Government should be expected to provide compensation following the collapse of investment firms; and

(e) the reasons for the capping of compensation payments under this section at 80% of what customers of London Capital & Finance would have been entitled to under the Financial Services Compensation Scheme.”

This amendment would require the Secretary of State to lay a report before Parliament that assesses the impact of the Government compensating the customers of London Capital & Finance plc, as well as broader issues relevant to the mis-selling scandal.

[Mr McFadden]

Thank you for your guidance, Ms Ghani. Later, I will move amendment 2 and, with your help, my hon. Friend the Member for Reading East will move amendments 3, 5 and 6, which stand in the Opposition’s name.

Amendment 1 relates to the first clause of the Bill, which deals with the compensation scheme relating to the collapse of London Capital & Finance and which is based on the report published by Dame Elizabeth Gloster, on which we took oral evidence this morning.

Clause 1 enables a very significant Government decision to step in and compensate people for the collapse of an investment firm. The estimated cost given by the Treasury for that decision is about £120 million. As the Minister pointed out on Second Reading, it is rare that the Government do that. He told us that there have been only two other cases in recent decades—Barlow Clowes and Equitable Life—and even those decisions did not always bring matters to a close. With Equitable Life, some investors around the country remain dissatisfied with the levels of compensation that have been paid out. There is an all-party parliamentary group in this House, and we have my indefatigable hon. Friend the Member for Harrow West, who has led at least one debate, if not more, on these issues, on the Committee. Such decisions do not always bring the matter to a close.

The focus of the amendment is to try to bring some clarity to Parliament and the public about when the taxpayer should be on the hook for an investment collapse, and when not. This issue was raised in oral evidence this morning by the hon. Member for North East Bedfordshire. He used the well-known phrase “caveat emptor”, or “buyer beware”, which applies those who may buy investment products. The trouble at the heart of this case is that the investors did not think they were making a particularly risky decision. LCF sold mini-bonds on the basis of a guaranteed investment return. When those who suspected something might be wrong phoned the FCA, time after time they were reassured that nothing was wrong. To quote one of the FCA’s call handlers, “This is not a scam”. While the hon. Gentleman was right to raise the principle of caveat emptor, how can we blame the investors if the very regulator looking after the thing was reassuring them that there was nothing to be concerned about?

The Government have judged the level of regulatory failure to be so exceptional and egregious that they have decided that the taxpayer has a responsibility to compensate, or as it is sometimes put, to socialise the losses. The level of compensation set by the Government is 80% of the maximum level allowed by the Financial Services Compensation Fund. That maximum is £85,000, so 80% leaves investors with a maximum pay-out of about £68,000.

There is debate about that 80%. Members of the Committee will have been sent written evidence from various LCF investors who think that level is too low. They do not understand why they have been asked to forfeit 20% of their investment because of what the Government acknowledge to be a particularly egregious regulatory failure. The Government will have to debate that. Their justification for any compensation at all is that LCF is a unique case. Both Ministers spelled that out on Second Reading last week. In his opening speech, the Pensions Minister said:

“While other mini-bond firms have failed, LCF is the only mini-bond firm that was authorised by the FCA and sold bonds in order to on-lend to other companies.”

He went on to say:

“It is…important to emphasise that the circumstances surrounding LCF are unique and exceptional, and the Government cannot and should not be expected to stand behind every failed investment firm.”—[Official Report, 8 June 2021; Vol. 696, c. 905.]

We agree, and that is precisely what the amendment is about: to try to get some clarity on the Government’s thinking when the degree of regulatory failure is so exceptional that it warrants the taxpayer picking up the bill. When that is not the case, whatever losses there may be should be regarded as normal investment market failings.

[Gareth Thomas (Harrow West) (Lab/Co-op)]

My right hon. Friend rightly sets out the scale of regulatory failure. Does he think that one of the other potentially unique circumstances of this case is the apparent legislative lacuna about who had the responsibility for regulating mini-bonds? Dame Elizabeth Gloster set out that, on the one hand, the FCA said it should be Her Majesty’s Revenue and Customs; HMRC was equally clear that it thought it should be the FCA. We do not know whether that legislative lacuna has yet been sorted. Does my right hon. Friend think that was also a factor in the Government’s decision to compensate to the scale they have?

[Mr McFadden]

My hon. Friend is right; the lacuna referred to in the report relates particularly to the allocation of ISA status. We asked Dame Elizabeth about that during the oral evidence session this morning. This is important because if there are two things that gave the mini-bonds the stamp of respectability, it would be that prominent in LCF’s advertising was the statement that it was regulated by the FCA, which at firm level was true but was not true of the mini-bonds being sold, and that they could be placed inside an ISA wrapper. Although it is, of course, true that people who invest in ISAs can lose money, for understandable reasons, the ISA wrapper has a certain cachet and a note of respectability.

Dame Elizabeth confirmed during oral evidence this morning that once the ISA wrapper status was allocated in 2017, the degree of investment in those mini-bonds rose markedly, because people would have thought they were investing in something safe. The adverts spoke, in fact, of a 100% record in paying out, when what we were really dealing with was a pyramid scheme where any pay-outs that did come came from other investors and not normal market returns. People thought they were investing in a safe bond. They did not think they were playing investment roulette.

The Economic Secretary also emphasised the uniqueness of the LCF case in his closing speech on Second Reading. He said:

“LCF is unique in that regard; indeed, it is the only mini-bond issuer that was authorised by the FCA and that sold bonds to on-lend to other companies.”—[Official Report, 8 June 2021; Vol. 696, c. 918.]

That is an exact replica, with both Ministers saying the same thing, and I suspect that that phrase has been very carefully honed inside the Treasury. A case had to be made for the uniqueness of this that could not be applied to other investment failures, so I think that form of words is very carefully chosen. However, the Minister may be able to tell us more when he responds.

The amendment is designed to tease out the following point, which I want to clarify with the Minister. Is it the case that even though a number of mini-bond issuers have collapsed in recent years, LCF is the only one that was authorised and regulated by the FCA? The Minister can intervene now or I am happy to wait. As I said to the Ministers on Second Reading, there must have been a discussion in the Treasury about developing a compensation scheme such as the one set out in clause 1. The question would have been asked: if we did this for LCF, what about investors in the Connaught fund or Blackmore Bond or any of the other investment schemes that were raised either on Second Reading or during the oral evidence session this morning? What was the nature of those discussions at the Treasury and what is it about LCF that makes the Government convinced that compensation is due in this case but not in the others? That is why our amendment calls for a report. Having taken the decision to compensate, we believe it would be in the public interest for the Treasury to set out the circumstances under which the taxpayer might be expected to pay when investors lose money. Is it about a firm being authorised by the FCA? Is it about commissioning a report by an eminent and independent figure such as Dame Elizabeth Gloster?

[The Economic Secretary to the Treasury (John Glen)]

I am very happy to respond at length in my remarks at the end. The distinction we make is that LCF is the only FCA-authorised firm that was on-lending. That is the distinction; not so much the mini-bond issuance but the on-lending nature of it.

[Mr McFadden]

I am grateful to the Minister. I am just going through this series of things to try to clarify exactly what might place the taxpayer on the hook. Does it require the kind of report carried out by Dame Elizabeth Gloster and commissioned by the FCA into the collapse of LCF? Is there a clear threshold of regulatory failure to be passed? There was obviously regulatory failure in this case, but, as we saw from the witnesses this morning, people will argue that other regulatory failures have applied to other firms.

In this case, the regulatory failures were multiple. I do not want to go through them in detail because we will come on to other amendments in which they can be discussed, but I will mention a few of them briefly: misleading promotions by LCF using the halo effect have been regulated by the FCA yet not adequately dealt with by the financial promotions team at the FCA; a failure by the same financial promotions team to join the dots and alert other parts of the FCA, such as the supervisory team, on the implications of those misleading promotions; and multiple attempts to alert the FCA—more than 600 phone calls, according to annex 6 of Dame Elizabeth’s report. Yet, in the vast majority of cases nothing was passed up the line of pursuit, in large part because the mini-bonds were not regulated by the FCA, so the call-handlers’ instincts were, “You’re phoning us about something that we do not regulate, so we don’t have to pass it up the line”—even though the firm as a whole was regulated by the FCA.

--- Later in debate ---

[Gareth Thomas]

My right hon. Friend is understandably concerned to protect the taxpayer’s interest. Is there not also another dimension as to why the report he seeks is worthwhile? If there is regulatory failure by the FCA in other ways, and not just in the handling of investors’ resources, and if there is no chance of the Government stepping in and offering compensation for that failure, then, for example, if a big financial services company that was not properly regulated by the FCA were to be demutualised, would there not be a reason to offer compensation? Or, if not, would that let the FCA off the hook?

[Mr McFadden]

My hon. Friend raises a very important point. There are many reasons why clarity about the limitations of Government responsibility and taxpayer responsibility, to put it another way, would be extremely helpful. The very fact of producing the Bill will mean that the Government have asked those questions anyway. As I said earlier, the cost in this case is expected to be about £120 million. The costs of clause 2, which we will come to later, are expected to be over £300 million. Over both clauses the cost will therefore be more than £400 million. That is a large sum of public money that will, in the case of clause 2, be recouped over a period of years from pension scheme members.

Of course, it is possible to have investment failings on an even greater scale. Is there any upper limit that the Treasury would see to such taxpayer exposure, or is it always to be on a case-by-case basis? In theory, investment failings could cost billions rather than hundreds of millions. Our amendment seeks to clarify the Government’s thinking on that, which would be beneficial to Parliament and the public.

Those are the reasons why we have tabled this amendment. We think that the compensation scheme and the whole story of the collapse of LCF demands such clarity and that reports such as the one we have called for would be beneficial.

[Peter Grant (Glenrothes) (SNP)]

It is a pleasure to serve under your chairship, Ms Ghani.

I shall speak to amendment 7, in my name, and in support of the official Opposition’s amendment 1.

Both amendments call for the Secretary of State to report back to Parliament on issues that collectively raise many still unanswered questions about the Bill, about the compensation scheme, and about why the scandal of London Capital & Finance was allowed to happen.

By far the biggest criticism of the Bill, which we again heard from witnesses today, is that it has been deliberately framed so narrowly that those questions are in danger of being ignored. I know that the Government will argue that framing it narrowly increases its chances of getting on to the statute book—I accept that argument—but there is a downside to doing that.

The biggest question that is still unanswered is: why do we expect compensation for the victims of one investment mis-selling scandal when so many people have lost so much—possibly a total of more than £1 billion —in other company collapses that share most, and sometimes all, of the key features of London Capital & Finance?

I should make it clear that I am not asking for the setting up of other schemes. We are not asking for approval at this stage, or for other failures to be included in the LCF scheme. All we are asking for is some clear indication that the Government are taking action to look at the wider issues.

The Government’s answer is that London Capital & Finance was regulated by the Financial Conduct Authority and that companies such as Blackmore Bond were not. That smacks of looking for an explanation to justify a decision that has been taken for a completely different reason.

Companies such as Blackmore Bond set out to make prospective investors believe that the FCA had a role in protecting their money. Investors in LCF were misled into believing that its own registration with the FCA would cover their investments. The only difference with other company failures is that investors in those companies were misled into believing that someone else’s registration would cover them—a fine point lost on investors themselves.

The Government’s explanation appear to assume that the only problem, or even the biggest problem, with London Capital & Finance was that it was a regulated company selling unregulated investments. That was certainly part of the problem, but, as the written submissions from a number of investors and as evidence this morning made clear, there were other failings and possibly deliberate malpractice within the company and some of its advisers. Other failings of regulation went well beyond those laid at the feet of the Financial Conduct Authority in relation purely to LCF. If the Government constantly remind us that the sale of mini-bonds was not regulated by the Financial Conduct Authority, surely the elephant in the room is: why on earth not?

The Government will, I know, refer to the principle of caveat emptor. It is correct that anyone making an investment has a responsibility to ensure that the investment meets their needs, but there are hundreds—possibly thousands—of examples in UK regulation where we regulate the market but it is not realistic or fair to expect the emptor to caveat.

We do not expect people to do their own personal survey of a house to make sure it is safe before they buy it. We do not expect people to check the brakes on the bus before buying a ticket. We have regulation to protect public safety, on food standards, on product safety and on a number of financial transactions. It is perfectly possible for the Government to start to look at regulating these investments in future and compensating ordinary men, women and sometimes children who have lost sums that, individually, are not significant to the FCA but are massively significant to their plans for retirement, for paying to support their children at university or for ever.

We must make it clear that we are not asking the Government to approve compensation for every company failure. We are not asking them even to consider the implications of doing that. We are asking them to look specifically at cases where there is clear evidence of the mis-selling of investments, usually to people who the seller knew perfectly well were not suited to that investment. That has been a characteristic of all the cases we have looked at today.

--- Later in debate ---

[John Glen]

I am grateful to the hon. Gentleman for his intervention because it takes me to the question of what the Government are doing to improve the efficacy of the financial promotions regime that he mentioned in respect of a different failure. We continue to keep the legislative framework underpinning the regulation of financial promotions under review, including whether it is suitable for the digital age. Many of the promotions are obviously online. We will publish a response in the early summer to the consultation on a regulatory gateway for authorised firms approving the promotion of unauthorised firms. It is not an issue that we take lightly. Change, once in place, is designed to strengthen the regime by ensuring that firms able to approve financial promotions are limited to those with the relevant expertise to do so. The FCA will be better able to identify when a financial promotion has breached the restrictions and take action accordingly, but that does not mean that the LCF failure is not unique and of a different scale and quality from some of the other failures.

[Mr McFadden]

I want to ask the Minister about the point he made about on-lending. What is the relationship between on-lending and the degree of regulatory failure? He is probably right that this was the only firm doing on-lending, but Dame Elizabeth’s report focuses on an egregious regulatory failure and she sets out all the different things that we will discuss. I suspect that the Government have found something about this case that is unique in order to insulate themselves from claims from other investment failures. I do not see the relationship between that uniqueness and the regulatory failures outlined in Dame Elizabeth’s report.

[John Glen]

As the right hon. Gentleman set out, Dame Elizabeth’s report showed enormous failure in the way that the FCA discharged its responsibility for a regulated firm carrying out unauthorised activities. The point that he is making specifically is about the distinctiveness of the on-lending. There is a distinction between a firm, such as BrewDog or Hotel Chocolat, that raises funds for its own business activities and a firm that, although authorised, has not carried out regulated activities. Through the failure of the FCA’s oversight to look at the broader activities of the firm, it is impossible to verify whether those activities on lending bore any relationship to the raising of funds for that business. That is the distinctive difference. It is that failure of the FCA to execute its broader responsibility for an authorised firm carrying out an unauthorised activity in this distinct area that gives us licence to intervene.

On the specific issue of non-transferable debt securities, which are commonly known as mini-bonds, the Government are consulting on proposals to bring their issuance into FCA regulation. After listening to the evidence this morning, I would just make the point that Dame Elizabeth Gloster made 13 recommendations in her report. In the written ministerial statement of 17 December 2020 that was issued in my name all those recommendations were accepted—nine pertaining to the FCA and four to the Treasury. There has also been a subsequent undertaking by the FCA to report on progress against those actions and recommendations. The FCA is conducting a detailed piece of work to look at the issue of high-risk investments holistically, and that includes a discussion paper to get views on changes that can strengthen the FCA’s financial promotion rules for high-risk investments. This work follows the FCA’s ban on the mass marketing of speculative illiquid securities.

As the right hon. Gentleman rightly said, only three Government compensation schemes have been established in the past three decades: Barlow Clowes, Equitable Life and LCF. I acknowledge that, for some, they have not been complete and satisfactory. Despite many investment firms failing over that period, the fact that there have only been those three interventions on the scale that we are seeking to secure today demonstrates that this type of intervention is the exception and not the rule. Moreover, the particular circumstances of these three cases are quite different. For example, compensation was provided to Equitable Life investors, in most cases not because they had lost their original capital but because the firm had not met the expected returns on which many investors had based their future retirement plans. That contrasts starkly with LCF, where investors stood to lose their principal sum.

The common feature in each case is a degree of maladministration or misregulation—a major factor that the Government considered in deciding to launch the LCF compensation scheme—but the circumstances are idiosyncratic. It therefore would not be possible in any meaningful sense to set out the precise framework for Government to consider when establishing such schemes in future or to stipulate the threshold of misregulation ex ante.

That does not mean to say that as a Minister, and in my frequent engagement with the FCA, I do not look closely at all these matters. Indeed, I have done so throughout the process in getting to this point today. I believe that such a framework could create an unrealistic expectation among investors about the possibility of future Government compensation schemes and the misconception that Government will stand behind bad investments. That would create a moral hazard for investors and potentially lead individuals to choose unsuitable investments, thinking that the Government will provide compensation if things go wrong.

I want to address some of the points that the right hon. Gentleman made. He mentioned ISAs. As we announced in response to Dame Elizabeth’s report, HMRC and the FCA have now established an ISA intelligence working group to strengthen communication and information sharing between the two organisations. The group has met and agreed the structure and objectives, which is already resulting in information sharing between the two organisations.

In parallel, from this autumn, once recruitment of personnel is complete, HMRC will reinforce its ISA compliance regime with a programme of ISA manager audits. This will not focus on consumer protection, which does not fall within HMRC’s remit, but could detect technical breaches of the ISA regulations.

We are exploring steps to increase consumer understanding of the ISA wrapper. As the right hon. Gentleman rightly said, this has a large degree of consumer confidence vested in it. We need to tackle the misplaced perception that ISAs benefit from greater Government or regulatory assistance.

I have deep engagement with the FCA. I will speak later this week to the chief executive as part of my routine, regular engagement and I will relay the detailed comments of, in particular, the hon. Member for Harrow West on the degree of engagement of consumer groups versus the regulated firm’s representatives, and especially the case he is on at the moment.

We heard evidence this morning about the retention of one named individual. The chief executive has brought in five new people from outside the organisation in taking a balanced view on how to deliver a successful transformation programme. I urge him to continue successfully to implement the programme.

There are considerable principled and practical drawbacks to the amendment, which is why I ask that it be withdrawn.

[Mr McFadden]

I am grateful for the Minister’s response.

I am not entirely convinced about the relationship between on-lending and the decision to compensate. I am sure that the Minister is correct in the literal sense that this was the only regulated firm that was selling unregulated mini-bonds. I am not saying that the Minister is wrong, but from reading the report I believe that Dame Elizabeth would have made the same findings. The mini-bonds were not doing what it said on the tin: they were not on-lending but pyramid selling.

The degree of failure, the degree of investment loss and the degree of regulatory failure are not directly related to the point about on-lending: it is more substantial than that. I am not convinced that all the elements of the Government’s case add up. It looks to me as though they have had to find a unique element to insulate themselves from court action or other claims.

[Peter Grant]

As an indication of the Government having come to a decision and then looking for an explanation for it, I do not know whether the right hon. Gentleman picked up in the Minister’s comments how for the first time, in my knowledge, the concept of the scale of the failure—if I wrote down what the Minister said exactly right at the time—was that London Capital & Finance was unique and of a scale and nature that made it different from the rest. Does the right hon. Gentleman believe that the fact that the scale of the failure has now been quoted as a factor, when it was not before, is an indication that the Government have come to a decision and are now looking for reasons to justify it?

[Mr McFadden]

We are trying to put ourselves into discussions that we have not been party to so, to some extent, I am speculating on the way that the Government have built their argument.

I have made the point and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Mr McFadden]

I beg to move amendment 2, in clause 1, page 1, line 15, at end insert—

“(3A) Within six months of this Act receiving Royal Assent, the Secretary of State shall lay before Parliament a report setting out progress on the implementation of the recommendations in pages 47 to 49 of the Gloster Report.”

This amendment would require the Secretary of State to lay before Parliament a report setting out progress on the implementations of the thirteen recommendations in the Gloster Report.

Amendment 2 concerns the recommendations made in Dame Elizabeth’s report. It is a long report, but I am specifically referring to the series of conclusions and recommendations made on pages 47 to 49. As the Minister said a few moments ago, some of those recommendations are for the FCA and others are for the Government. We heard Dame Elizabeth say this morning that if she reached one overall conclusion that she wanted us to understand, it would be about the degree of culture change necessary for the FCA to fulfil its statutory duties. The fact that she judged that the culture that existed was so inappropriate that it stopped the FCA from doing its statutory job effectively is a serious charge. It is, after all, the body that we depend on to uphold the consumer interest and charged with ensuring proper conduct in the sale and provision of financial services. I do not need to tell anybody on the Committee how important those are, either to everyday life or to the UK economy.

One of the most telling parts of Dame Elizabeth’s report is when she discusses the loss of a letter sent to the FCA by a financial adviser called Neil Liversidge in November 2015, fully three years before the collapse of LCF. The letter warned in fairly graphic language, some of which I read out on Second Reading, what was going on at LCF and the financial adviser’s concern. Dame Elizabeth’s damning conclusion is that even if the letter had not been lost in the FCA, which appears to be what happened, so dysfunctional was the FCA that it would not have done anything about it anyway. She says on page 78 of the report:

“it is unlikely that it would have resulted in any”

action by the FCA. She found that degree of dysfunctionality to be deep and in need of urgent attention, as set out in the recommendations.

Every time there is a public failing, we hear some familiar things being said. In fact, we could almost play word bingo with them. People talk about lessons learned and new systems being put in place, and sometimes there is change of leadership or a change of the management team—all those things. In the report, there was a very well publicised disagreement about the nature of accountability and responsibility involving Dame Elizabeth and the now Governor of the Bank of England, who led the FCA at the time. That was all played out in front of the Treasury Committee over several hearings early this year. I want to focus on the 13 specific recommendations on pages 47 to 49. I am not going to go through them in huge detail, but I will mention a few.

The first recommendation is the desire to treat the regulation of companies holistically; that is, to deal with the halo effect of regulated companies selling unregulated products. That was at the very heart of the regulatory failures over LCF. It was a big part of why the many phone calls to the FCA alerting staff to investor fears about what was going on went unheeded. Indeed, Dame Elizabeth’s report records many instances where calls were not acted on because the mini-bonds concerned were not regulated. There is a whole annex containing the transcripts and I will not delay the Committee with them at the moment, but they are all set out in the report.

The failure to act exposed a major weakness in the FCA’s approach. Even if staff could tick a box that said that a phone call was about something that it did not regulate, the FCA was still on the hook at the end of the day if the firm failed, as the Bill now shows. The recommendation therefore requires a major change in how the FCA thinks about unregulated products.

The next two recommendations are about how the FCA deals with information passed on to it and how it is shared. Again, they highlight a failing in how the LCF information was handled. As we have said, the financial promotions team intervened several times to warn the company about the misleading nature of its promotions as it kept saying that it was regulated by the FCA. However, the financial promotions team did not escalate this information to other parts of the organisation that could have taken action.

The fifth recommendation deals with the financial promotion rules and what to do about breaches when red flags should be raised. Page 49 highlights recommendations more for the Treasury than the FCA. As we discussed a moment ago, the first of those deals with what Dame Elizabeth calls a lacuna in the allocation of the ISA-related responsibilities between the FCA and HMRC. The Minister referred to a working group—I think that is the phrase that he used—and I hope it reaches a conclusion quickly. Such a response is common in the catastrophe word bingo that we often hear. A working group is okay, but it has to deal with the lacuna that has been identified.

Just saying that something is regulated by the FCA gives it an aura of safety and respectability and so does saying that about investments in an ISA wrapper. As the report says, once ISA status was granted to these mini-bonds, investment in them grew markedly. Putting money into an ISA is thought to be a responsible thing to do. People believe that those operating ISAs are respectable companies and not those engaged in what are, in effect, pyramid selling schemes like the one that LCF was operating. That is why this issue is particularly important.

Recommendation 12 is about the optimal remit of the FCA. That matters because the failure of LCF sits so squarely on the boundary of regulated companies selling unregulated products. The FCA’s remit is known in the parlance as the perimeter. The Minister gave evidence to the Treasury Committee a few months ago and he said it was not an issue about the perimeter, but about the failure to use the enforcement and supervision powers that the FCA already had. I understand what he means by that. He is saying that if the FCA had acted on the reports that it had received, a great deal less damage would have been done and the taxpayer would not be faced with the compensation bill set out in the Bill. Even though I understand the point he made, the perimeter is still relevant because it informed attitudes inside the FCA on how alarmed it should be about calls reporting concerns about LCF and whether it should act. That behaviour was influenced by the fact that the calls were about products that were not regulated.

How should the Government and the FCA respond to the issue of regulated companies and unregulated products? In theory, one response could be to say that regulated companies can only sell regulated products, but that would involve a major extension of regulation. That is not to say that that is necessarily wrong, but it would be a big step. For example, foreign exchange trading is not regulated but it is carried out by every high street bank in the country and they are, of course, regulated entities.

If the answer is not a major extension of regulatory responsibilities, what is it? Is it the Government’s position that there is no need to look at this because this was such a one-off event that cannot be repeated? How can we be sure of that? We asked the FCA this morning whether this could happen again and, understandably, the witness from the FCA said that he could not tell us for sure that it could not.

[Gareth Thomas]

My right hon. Friend is rightly dwelling on the issue of the perimeter. May I give him another scenario that suggests that there might still be reasons to be concerned about whether the FCA has got the perimeter point in Dame Elizabeth Gloster’s report? Let us imagine that the FCA had investigated a financial services business that was recommending one thing to its customers but only 12 months later was doing the complete reverse. The FCA, having looked at it initially, says, “We’ve looked at it already. We’re putting a perimeter around that. We’re not going to consider what happened 12 months before in the context of this decision.” Were that to be a live situation, would it not suggest that the FCA had not grasped the perimeter point that Dame Elizabeth Gloster was making?

[Mr McFadden]

My hon. Friend makes a very strong point. The question of the perimeter is inescapable. One of Dame Elizabeth’s recommendations is that the Government consider the FCA’s remit, and the Government have said that they accept all her recommendations. The Minister said in his evidence to the Select Committee that this cannot be pinned on the perimeter, as it were, but as a conclusion of what has happened the perimeter must be considered. The Government have accepted that.

One way to deal with this is to say that regulated firms and regulated products must be brought together—I shall be grateful for the Minister’s response on that—but if that is not deemed to be the right response how will the question of the remit and the perimeter be responded to? At the heart of this failure is the halo effect of a regulated firm selling unregulated products.

Recommendation 13 is about ensuring that the legislative framework keeps pace with the sale of products through technology platforms. This field of activity is growing daily. It is driven by technological innovation—the movement of more and more activity online—and perhaps by the increased time people have had during the lockdowns to invest online. I do not want to try your patience, Ms Ghani, by delving too deeply into that today, but I think that this issue will occupy the House and this Minister in particular over the next couple of years. We will have to return to it again and again in the House, but recommendation 13 is precisely about legislation on selling things through technological platforms, and the Government and the FCA will have to adapt to it or they will fall behind the reality of the market and of financial crime.

Most of these issues have been put in the hands of the new chief executive, Nikhil Rathi, and the trans-formation programme to which the Minister referred on Second Reading. How are we to know that the 13 recommendations have been implemented? It is easy when a report is published to say, “We accept the findings.” The key is: are they followed through and properly implemented?

Dame Elizabeth’s report should be more than a series of individual recommendations. As she said this morning, it should result in a culture change. Much more communication needs to take place between different parts of the FCA while, crucially, not dropping the ball on regulated firms and unregulated products.

It is unfair of any of us, in government or in opposition, to load more responsibilities on to the FCA if it does not have the resources to fulfil them. We are clear in our amendment that the resources of the FCA have to be covered. Does the FCA have the resources to meet the ever-expanding list of responsibilities, including those on-shored as a result of our departure from the EU? It is funded through a levy on the sectors for which it is responsible. Is the levy giving it enough resources?

The failure of LCF exposed such a degree of dysfunctionality that it prompted the question: can the FCA really do its job? If not, the Government have to act because the public need the protection of a powerful regulator. The imbalance of information between the sellers of financial services products and the buyers absolutely demands that. This amendment is aimed at our receiving a report on the 13 recommendations and on their implementation by both the FCA and the Treasury. Its acceptance would provide Parliament and the public with a mechanism to ensure that statements saying that the recommendations had been accepted had actually been followed through and action taken.

--- Later in debate ---

Given those reassurances, I hope that hon. Members will not seek to press the amendment.

[Mr McFadden]

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

[John Glen]

London Capital & Finance was an FCA-authorised firm that primarily offered an unregulated investment product, commonly known as mini-bonds, to retail consumers. It entered administration in January 2019, impacting 11,625 people who invested around £237 million. The Serious Fraud Office and FCA enforcement have launched an investigation into individuals associated with LCF. The Financial Reporting Council has also launched investigations into the audits of LCF. As the Committee will know, Dame Elizabeth Gloster led that independent investigation, which also revealed shortcomings in the FCA’s supervision of LCF. A complex range of interconnected factors contributed to the scale of losses for LCF bondholders, creating a situation that is unique and exceptional. While other mini-bond firms have failed, LCF is the only one that was authorised by the FCA and sold bonds in order to “on-lend” to other companies. As I have said before, LCF’s business model was highly unusual both in its scale and structure. In particular, it was authorised by the FCA despite generating no income from regulated activities. Bondholders were badly let down by LCF and the regulatory system designed to protect them, and I announced that the Treasury had set up a compensation scheme for bondholders who suffered losses after investing in LCF. The scheme will be available to all LCF bondholders who have not already received compensation from the FSCS and will provide 80% of the compensation that they would have received had they been eligible for FSCS protection up to the maximum cap of £68,000. The LCF scheme is expected to pay out £120 million in compensation to around 8,800 bondholders in total. Where bondholders have received interest payments from LCF or distributions from the administrators, Smith & Williamson, these will be deducted from the amount of compensation paid.

There are two main aspects of clause 1, which I shall explain in turn. First, legislation is required to establish the financial authority to enable the Treasury to incur expenditure in relation to the scheme. That will ensure that the Treasury complies with the 1932 Baldwin concordat and the principles of managing public money. Clause 1 provides the Treasury with the spending authority that will enable payments to be made to eligible bondholders. We are working on the details of that scheme but I hope that it will be possible to reimburse them within six months of Royal Assent.

Secondly, the Treasury intends to use the process set out in part 15A of the Financial Services and Markets Act 2000 to require the Financial Services Compensation Scheme to administer the scheme on behalf of the Treasury. Clause 1 disapplies the FCA’s rule-making requirement so that existing rules relating to the FSCS can be applied to the scheme without the need to undertake a lengthy consultation. That reflects the fact that existing rules have already been consulted on and avoids any further unnecessary delays to compensation payments. In addition, as the Treasury will pay for the scheme, there is not the same obligation to consult FSCS levy payers as there would be for rules that sought to make use of FSCS funds raised by the levy.

I submit that clause 1 is an essential step in the introduction of the LCF compensation scheme without which compensation payments cannot be made. I therefore recommend that the clause stand part of the Bill.

[The Chair]

I understand that the right hon. Member for Wolverhampton South East wishes to make a short contribution.

[Mr McFadden]

It is really just a question. The Committee has received a number of representations from LCF investors about this 80% level. What is the Minister’s response to those representations? If LCF investors were here and were allowed to speak, they would say, “Why is it that those who invested after getting financial advice get 100% of the FSCS level because financial advice is a regulated product and therefore covered by the FSCS in full but we are getting 80% of that level?” What is his response on this differential treatment of the two types of investors?

[The Chair]

Before you respond Minister, I call the hon. Member for Glenrothes to make a short contribution.

Draft Payment and Electronic Money Institution Insolvency Regulations 2021

Pat McFadden Excerpts

Wednesday 9th June 2021 General Committees

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

Thank you for your chairmanship, Mr Davies.

Even by the standard of Treasury SIs, this is fairly technical material that we are discussing today, and I am grateful to the Minister for his explanation. Last night in the Chamber during a different debate, I challenged the Minister that legislation and regulation needed to keep up with financial innovation. In that context, we were talking about frauds, scams and such things, but the point still holds in respect of the regulations, so I am certainly not going to oppose their intention.

As the Minister said, the regulations have arisen on account of financial innovations and the growth of electronic money institutions and payment institutions and so on. The non-bank sector has become a far bigger part of the financial ecosystem. The Minister spoke of 1,300 firms to which the regulations could apply to ensure cover, and the impact assessment tells us that those firms currently hold about £17 billion of UK assets. It is true that as the financial sector changes, so must the regulatory and legal system around it.

The idea of resolution or winding up a failed financial company has been a much bigger policy priority since the financial crash, because that exposed how difficult some of the process is given interconnected payments, all sorts of different claims on assets and so on. After the crash, a special system was developed for investment banks. The collapse of Lehman Brothers involved a long, complicated process and it was thought that a special resolution regime was needed for such institutions. The Government are trying to take that idea and apply it to electronic money institutions. The policy aim is to speed up the process in the event of insolvency and stop it taking years to conclude.

A consultation on the regulations was carried out between December and January which pointed to six recent cases of insolvency in payments or electronic money institutions, some of which have gone on for three years or more and in only one case had people received some of their money back. The consultation only attracted 15 responses out of those 1,300 companies, so it was fairly thin, although in fairness, I think that the responses included one or two from trade bodies, so they may have represented a number of firms. Most of the responses broadly agreed with the Government’s action, so I have just few questions for the Minister.

The regulations relate to insolvency and ensuring continuity of service and payments where insolvency takes place. The regulations talk about an asset pool and the administrator having governance over that. The question in my mind goes back to Mr Micawber, and what if the asset pool is too small for the liabilities? Is that not the definition of insolvency, when someone has liabilities of 20 shillings and income or assets of 19 shillings? How can the administrator guarantee that people will get their money back from the asset pool if, by definition. the firm is insolvent? Are we talking about getting so many pence in the pound, rather than the full investment back? Or is it a question, as is often the case in insolvency, of a hierarchy of creditors, where some people—often the taxman—are first on the list and others are lower? What happens if the asset pool is too shallow to cover the liabilities.

The Financial Services Compensation Scheme does not cover the institutions in question, and that was raised in the consultation. Why is that? At least one respondent argued that the FSCS should have that remit. On capital requirements, I am sure that, like me, the Minister is regularly lobbied about how much capital institutions have to hold. One insurance policy against insolvency is to hold a reasonable amount of capital. Has the Government considered—I can hear the industry objecting to this as I speak—increasing the capital requirements to make insolvency less likely and to make the companies more resilient if they run into trouble?

As the Minister said, the regulations propose a bar date—a cut-off point—to avoid a long drawn-out process that takes years to conclude. The logic of that is completely understandable, but how will the administrator be guaranteed to make reasonable, in fact extensive, efforts to contact people who might have claims? The last thing we want is someone coming along and saying, “I never knew about this. I didn’t know it was insolvent. I have got assets in this”, and then a legal case pursuing.

Some of the firms will be involved in transferring remittances. That is a very important business for the UK as we have a population with roots all over the world. How will the regulations help consumers not to be hit with excessive costs in the event of foreign exchange transactions? That is already an issue, which we have debated in the context of other SI. If someone is sending a few hundred pounds to a relative possibly in a country that is much less wealthy than ours, the last thing they want is for a lot of that to be eaten up paying out to administrators.

Finally, when it comes to transferring assets, how will the insolvency practitioners deal with assets that are held abroad? Some of the organisations are international, with assets in the UK and assets abroad. Does the proposed regime just apply to UK assets or is the intention that the resolution process will also include assets abroad?

Oral Answers to Questions

Pat McFadden Excerpts

Tuesday 27th April 2021 Commons Chamber

[John Glen]

The Treasury has, as my hon. Friend will know, amended the CBILS rules to allow lenders to extend loan terms from six to a maximum of 10 years, and that would assist borrowers in that repayment. CBILS term extension will be offered at the discretion of lenders, unlike pay as you grow options for bounce back loans, because they are different in terms of the guarantees that the Government have offered. Extensions are limited to those borrowers that lenders assess are in difficulty and will benefit from that extension, and only for the duration required. That customised approach, as I am sure he would understand given his vast business experience, is appropriate given the nature and scale of that different intervention.

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

When Lex Greensill was given his No. 10 business card, he had no contract and no job description, and there have now been reports that during the pandemic, the financial empire that he built may have lent Government-backed money based on invoices to companies that had never done business with his client, GFG, some of which say they had no intention of doing so. Will the Minister look into the issue of how this financing was structured and ensure that hard-working British steelworkers do not pay the price for Greensill’s collapse?

[John Glen]

I thank the right hon. Gentleman for his question. I can assure him that this Government are fully committed to examining all those matters through the review process and complying with all requests for information in order to get to the bottom of this matter.

Financial Services Bill

Pat McFadden Excerpts

Monday 26th April 2021 Commons Chamber

Lords amendments 2 to 5, 10 to 12, 14, 15, 20 and 21 remove Northern Ireland from the scope of the relevant parts of clause 34 and schedule 12, and make changes to clauses 44 and 45 to help give effect to this. During the passage of the Bill, it became clear that, despite the best efforts of Ministers and officials from the Treasury and the Northern Ireland Executive, legislative consent motions for the relevant parts of this Bill would not be completed in time. Therefore, in line with the Sewel convention, the Government tabled these Lords amendments to ensure that the Government are not legislating for Northern Ireland without its consent. I am grateful to the Lords for the improvements made to the Bill but hope that this House will approve the Government’s motions in relation to Lords amendments 1 and 8.

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

I thank their lordships for their work in considering the Bill. In particular, I thank Lord Tunnicliffe and Lord Eatwell, who led for the Opposition in the relevant debates.

Let me start tonight with some of the areas where we agree with what the House of Lords has done with the Bill. Lords amendments 16 to 19 make the UK’s net zero targets part of the remit of the financial services regulators. We moved similar amendments in this House, both in Committee and on Report, and both times the Minister led MPs on the Government Benches to vote them down. Indeed, when the House last discussed the Bill, on 13 January, the Minister said

“I do not believe that regulators should be required to have regard to broader questions that are not so closely related to prudential standards.”—[Official Report, 13 January 2021; Vol. 687, c. 398.]

So what was it that led to this Damascene conversion? What happened between 13 January and now to make the Minister do a U-turn and support amendments that he and his party voted down repeatedly in the Commons?

There are many reasons to oppose legislative propositions in this House, but “not invented here” has to be one of the weakest. We have argued throughout the passage of the Bill that financial services, including the work of the regulators, are a vital part of the drive towards net zero. There was no good reason for the Government to oppose the idea during the earlier debates on the Bill. Every sector of the economy will have to adapt to the change and it will be for Government Members to explain to their constituents why they voted the amendments down.

We also welcome Lords amendment 6 on the regulation of “buy now, pay later” firms—a cause championed with characteristic energy and determination by my hon. Friend the Member for Walthamstow (Stella Creasy). Again, we called for such regulation in the Bill’s previous Commons stages and the Government voted against it on Report. As financial services innovate, so must the regulatory boundaries. The regulation was recommended by the Woolard report, which was published in February, and we welcome its inclusion in the Bill. The new clause that has been inserted will be just the first stage of the process; the FCA will have to decide exactly how it will be done. Given the enormous growth in the use of such platforms over the past year or two, it is important that the regulator gets on with it as soon as possible.

Lords amendment 9 deals with cashback without purchase. There has been a significant decline in the use of cash during the pandemic, with a big move to contactless payments and payments online. We understand that this has many benefits for consumers—indeed, the pandemic has been called the great acceleration in respect of the many ways it has influenced our behaviour. Despite that acceleration, there will still be a proportion of the population who need cash, both for payments and for budgeting purposes. The Government promised to legislate on this issue at the Budget last year. Since then, it has felt like this is an ownerless problem, with the banks, LINK, the ATM providers, the regulator and the Treasury all somewhere on the pitch but no one really gripping the situation.

Cashback without purchase might be part of the answer, but that alone does not fulfil the Government’s commitment to ensure a nationwide system of free-to-use access to cash. We cannot allow innovation in payments to mean that the lowest-income households in the country have to pay to access their own money. When will the Government get a grip of the situation and bring forward a proper plan for access to cash, even in a world where the total number of transactions paid for in cash declines?

Let me turn to what are perhaps the more contentious issues before us. For many years, consumer groups have campaigned for a duty of care for financial services providers, because of the enormous imbalance of information between the sellers of such products and the purchasers. If we add to that imbalance a financial incentive to sell, we have the seeds of many of the mis-selling scandals that we have seen, with all the distress they have caused to individuals, plus, of course, the lengthy and extremely expensive processes of redress that the industry has had to establish. Would it not have been better to avoid the push selling of inappropriate products in the first place? That is the idea behind a duty of care. Its aim is to change the question in the seller’s mind from, “Is it legal?” to, “Is it right?” The amendment made in the Lords would empower the FCA to introduce such a duty.

The Minister says that he is not convinced. Instead, his amendment in lieu proposes a consultation on the matter by the FCA. Of course there will be scepticism about that, because there have been consultations before and nothing has happened. However, we accept that this commitment, with the timetable set out, is a step forward. In any case, there would have to be a consultation before any such duty could be brought forward. We therefore encourage all the consumer groups, and anyone concerned, to take part in the consultation set out by the Minister.

That brings me to the final issue of mortgage prisoners. We have been living through a period of historically low interest rates. Few people would have predicted that, 13 years after the financial crash, interest rates would be at their lowest levels in modern times. For Governments, including our own, that has enabled the financing of large deficits. For mortgage holders—or the vast majority of them, at least—it has given them access to long-term fixed rates at a low level, enabling them to pay down debt and to finance their home ownership. Indeed, one of the policy aims of low interest rates is to help people pay down debt.

However, one group has been excluded from the ability to fix their mortgages at low rates: those mortgage prisoners stuck on high standard variable rates with little or no ability to switch to competitive mortgage rates available elsewhere in the market. That is not how it started for most of those borrowers. They borrowed from regulated high street lenders such as Northern Rock, which were considered robust institutions at the time they took out their mortgages. Since then, however, some of those lenders have gone bust and the mortgages sold on to inactive lenders. People have become stuck, often at the cost of paying thousands of pounds more per year than would be the case on a more competitive rate. An estimated quarter of a million borrowers are in that position.

The Minister quoted some figures about how much extra people were paying and how that 250,000 was broken down. Some of those figures are disputed by the all-party parliamentary group on mortgage prisoners. Let us take the 0.4% that he cited. He said that people were paying, on average, only 0.4% above average SVRs elsewhere. That is disputed by the APPG. It estimates that mortgage prisoners have in fact been paying an average of 1.33% above the average SVR available, according to the Bank of England. Also, remember that in the mortgage market in general, only a small minority of borrowers are on SVRs; most are on a two or five-year fixed rate. That is how the UK mortgage market works for most people.

The Minister said that half of those borrowers could switch now if they wanted to. However, when the affordability changes were brought in, the FCA assumed that it would be only a fraction of that number. Whoever is right, the question must be posed: why have so few of them switched if they had the ability to do so? It cannot be because they like being stuck on a rate of 4% or more. Nor is it the case that all of those borrowers are somehow at the top end of loan-to-value ratios. Three quarters of mortgage prisoners have loan-to-value ratios of less than 75%, and that figure was calculated before the increase in house prices over the past year or so.

The Government claim that 70,000 mortgage prisoners are in arrears and could not switch even if they were allowed to. Let us look at what happens when borrowers with active lenders have been allowed to switch. The APPG estimates that someone with a mortgage of £165,000 will have paid an extra £24,000 over the past decade, compared with the Bank of England average SVR.

In individual cases with active lenders, where borrowers have been able to switch the effects have been huge. The APPG cites the case of a borrower with the TSB who saw her rate reduced from 4.69% to 1.99% and her payment go down from £928 to £397 a month—a saving of about £500 per month. This is transformative for the family finances of those involved. The release of pressure and freedom conferred by such a change in their monthly finances makes a massive difference to people’s lives, and those who have benefited from being able to switch in that way talk of a great weight being lifted from their shoulders—and no wonder.

Financial Services

Pat McFadden Excerpts

Consideration of Lords amendments
Monday 26th April 2021 Commons Chamber

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

As we pass the midnight hour, we turn to the subject of money laundering. I am grateful to the Minister for his remarks and note that, alongside this statutory instrument, we had the statement earlier—I was going to say today, but it is now yesterday—by the Foreign Secretary, announcing sanctions against a number of named individuals. In that statement, the Foreign Secretary said that

“Our status as a global financial centre”

had made us both an attraction for investment and also a

“a honey pot—a lightning rod—for corrupt actors who seek to launder their…money through British banks or…businesses.”

It is precisely because we are a global financial centre that there is a special responsibility on the United Kingdom to ensure that each part of that sector always operates to the highest standards. We cannot build a future as a laundromat for dirty money, we cannot turn the other way when wrongdoing takes place and we cannot take part in the denigration of institutions. Of course, we also need the highest possible standards in our own public life if we are going to talk to other countries about corruption. That means allegations being properly investigated; it means a duty of propriety with public money; it means procurement based on open criteria, not on inside connections; and it means that those at the very top of our Government should tell the truth.

We support this instrument, which updates the list of third countries where extra due diligence is required in relation to money laundering and terrorist financing. We understand that these matters lie at the heart of national security and financial security, and we want systems as robust as possible in place to guard against money laundering and terrorist financing. Our defences against money laundering are not just a matter of law and regulation, vital though those things are; they are also a matter of enforcement, so I have a couple of questions for the Minister. Why does he think that in the recent FinCEN reports the UK was considered to be a higher-risk jurisdiction? Why does he think that so many shell companies are based in the UK? What are the authorities doing about that?

Both the Royal United Services Institute and Spotlight on Corruption have identified Companies House reform as an urgent issue in the tackling of corruption and money laundering. What are the Government doing to drive this? Where are we with the draft Register of Overseas Entities Bill? There was nothing about it in the most recent Queen’s Speech. Will there be anything about it in the next Queen’s Speech? A foreign property register was supposed to be established this year. Will the Government meet that deadline? Finally, where are the Government on implementing the findings of the Intelligence and Security Committee’s Russia report, which used the phrase “the London laundromat” in the first place?

Effective action against money laundering, terrorism and fraud is about a lot more than maintaining a list of countries; it requires action on all fronts if we are to fight these problems effectively. That is what we need to see.

Finance (No. 2) Bill

Pat McFadden Excerpts

Committee stage & Committee of the Whole House (Day 2)
Tuesday 20th April 2021 Commons Chamber

I therefore urge that clauses 92 to 97 and 128 to 130, as well as schedules 18 and 19, stand part of the Bill.

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

I rise to speak to new clause 30 in the name of the Leader of the Opposition and to make a few remarks on the other provisions in this group.

Clauses 92 and 93 relate to the temporary VAT cuts for the tourism and hospitality sectors. These are of course among the hardest-hit sectors of our economy over the past year, and it is absolutely right that this relief is extended. Only today we learned that, of the 800,000 jobs lost in the economy over the past year, 80% are those of people under 35 years old, many of whom previously worked in the tourism and hospitality sectors. Today’s unemployment figures show that it is young people more than any others who have borne the brunt of the job loss impact over the past year.

The vaccine programme of course gives us great hope and a platform for the cautious reopening of the economy, but only two in five hospitality businesses have outside space. Most of them are still not able to operate even under the conditions allowed at the time of this debate, so it is still a very tough time for the hospitality industry. After the experience of the past year, with the upsurges in cases in some countries, the emergence of new variants and vaccine resistance levels remaining uncertain, no one would yet say that we were out of the woods or that there was not still a need to support key sectors of the economy for some time yet. That is why it is right to continue the measures in clauses 92 and 93.

Clause 95 relates to payment schedules for VAT. Again, it is important to show some understanding of the difficulties that businesses have faced in the past year, and it is far better to have a measure that approves a realistic repayment schedule than bring support to an abrupt end and cause repayments at a defined deadline, which could have very damaging consequences for some of the businesses concerned.

Clause 97 and schedule 19 relate to steel moving between Great Britain and Northern Ireland. We of course support anything that will make life easier for the steel industry right now. It is the foundation for much of our manufacturing industry, and there is a great deal of uncertainty hanging over various steel plants in the UK right now. It is impossible not to reflect that, while the Government promised us free trade with the rest of the world, we need a clause and a schedule like these precisely because they have not even been able to guarantee free trade within the UK. We hope that this clause and schedule will make it easier to move steel goods between Great Britain and Northern Ireland, but the Minister will be aware that one of the broader uncertainties surrounding UK-made steel is how to avoid its being subject to 25% EU tariffs if quotas are breached in the near future. I wonder whether he will update the House on how discussions on that matter are going and how the Government intend to avoid that. This is particularly important given the wider issues facing the steel industry at the moment.

New clause 30, in the name of the Leader of the Opposition, relates to the transition from LIBOR to other reference rates, and specifically to reviewing the effects on taxation of replacing LIBOR. The new clause would require such a review to take into account the implications for tax revenues of the transition, and the effects on businesses, including those offering supply chain finance.

The new clause relates to clauses 128 and 129, which replace references to LIBOR in legislation with references to an “incremental borrowing rate”. The history of this, of course, relates to the long effort to move away from the use of LIBOR in financial markets. The need to do so arose out of the uncovering of attempts to rig LIBOR in the interests of various individuals in the financial services industry some years ago. Indeed, I believe that the Minister and I were colleagues on the Treasury Committee when all that was uncovered.

The uncovering of those practices exposed much that was bad about what was happening in parts of financial trading at the time, with activity being pursued in the interests of traders rather than customers, rates being rigged for the benefit of those traders and their institutions, and bank chief executives professing ignorance about what was going on inside their own companies. The ability to game the rate was exposed; the use of opinions on cost from submitters to the rate-setting process, rather than its always being based on actual trades, produced the possibility that tiny movements in LIBOR could benefit individual institutions or traders, often by very significant sums given the volumes of trades involved. Potentially, only a tiny movement in rates was needed to generate a very big profit.

However, making a decision to move away from LIBOR to alternative benchmarks based on actual transactions rather than the opinion of traders was, in a sense, the easy part. So far it has taken years; no wonder they are calling it the long goodbye. The difficulty is that LIBOR has been so widely used as a benchmark for contracts around the world. Indeed, the Bank of England estimates that LIBOR has served to underpin contracts worth some £300 trillion across the world and £30 trillion here in the UK. Even in these covid days, those are serious sums.

Moving away from LIBOR without dealing with that contract issue leads to the potential for contractual law disputes. If a deal was agreed based on one interest rate, how will it be affected by the move to another rate? That is not an abstract or unreal problem; it could affect mortgage rates, leases of buildings—all sorts of contracts. Indeed, the issue was highlighted only this morning in the Financial Times, in a story headlined “US lawmakers warned of litigation chaos over Libor”.

The Government have attempted to deal with this legacy contract issue through the Financial Services Bill, which is currently ending its proceedings in the other place. How successful that legislative effort will be remains to be seen. The very least we can say is that the reality of moving away from LIBOR has proved to be more complex than the decision in principle to do so. We may not have heard the end of this matter of transitioning away from LIBOR. That is why it makes sense to have a review of the implications, which is exactly what our new clause 30 calls for.

Clauses 128 and 129 deal with the tax implications of this change and replace legislative references to LIBOR with the term “incremental borrowing rate”. They also provide the Government with powers to make tax changes as a result of the discontinuation of LIBOR.

The Government estimate that the impact of all this on Exchequer revenues will be marginal. That could be right, but the sheer volume of contracts involved here suggests that the need for a review of the implications for tax revenue is real, and that is what our new clause 30 calls for. We believe that such a review should take specific account of the impact on businesses using supply chain finance. After all, that has been very much in the news recently, and it ought to be a field with which Ministers are by now familiar. Perhaps the Minister felt special when he got the call about supply chain finance, because it is not every day that someone gets a call from the former Prime Minister, but now we find that he was not the only one. In fact, there were three Ministers in the Department, one in the Department of Health and Social Care and the industry adviser in No. 10, all of whom got the call about supply chain finance. You could be forgiven for thinking that there are few people living west of the Caucasus who have not heard from the former Prime Minister about supply chain finance. After all that, it seems only right to consider the impact of this provision and on these companies. That is why we have included them in the new clause.

The inquiries on the broader issue will do their work. We may well hear more of this elsewhere, but, for the moment, as regards new clause 30, I look forward to the Minister’s response at the end of the debate.

[Andrew Jones (Harrogate and Knaresborough) (Con)]

It is always a pleasure to follow the right hon. Member for Wolverhampton South East (Mr McFadden), and it is a pleasure to speak in this debate. As I spoke twice yesterday and I am on the Bill Committee next week, I will keep my remarks a little short and focus on one measure that is important to my constituency.

I know that the Committee will appreciate that Harrogate and Knaresborough has a very significant hospitality and tourism sector. Using data from UKHospitality, we see that before the pandemic, there were 9,464 people employed by the sector. That puts us in the top 10% of constituencies across the country. The sector is not just a Harrogate and Knaresborough one; it is important to the whole of the York and North Yorkshire economy, accounting for over 75,000 jobs. If we look across the UK, we see that the sector accounts for 150,000 businesses and 2.4 million jobs. It is a huge number of people in a sector that has been one of the hardest hit.

As has been mentioned, among the tax measures in the Bill is the extension of the temporary VAT cut of 5% for the hospitality and tourism sectors. That reduction was first announced last July and was very well received by the industry, but this Bill extends that to the end of September and will then bring in a further reduction of a 12.5% rate for the six months to the end of March next year. This is very welcome, and the points that were made by both Front Benchers, my right hon. Friend the Financial Secretary to the Treasury and the right hon. Member for Wolverhampton South East, were absolutely correct.

This initiative understands the pressures that businesses will face. The hospitality sector may be starting again but it is effectively running on empty, having had months of either zero or very limited trading. If I may quote a local businessman, Mr Ian Fozard of Rooster’s brewery and taproom—[Hon. Members: “Hear, Hear!”] Mr Fozard is obviously well known here. He said that

“most businesses like ours need a sustained period of good trading to build back some reserves”.

Mr Fozard’s business is an excellent one and he makes a significant point. The industry needs a period of stability where it can rebuild. One challenge will be when businesses have been through the summer and they face the standard seasonal reduction but may not have built up the cash flow in reserve to see them through the leaner months. This initiative recognises that risk, so the continuity of support through the winter is welcome.

The sector is incredibly varied. We tend to focus on—indeed, the publicity tends to be about—pubs and restaurants, but there are also hotels and guest houses, and in Harrogate, we have the convention centre, which is a significant driver of visitors to the area. It has been a Nightingale Hospital for the last few months and while that is being deconstructed, the convention centre team have launched their restart plans, and I know that their good work is seeing the diary filled with bookings. However, my point is that this is a business-to-business sector, not just a business-to-consumer sector and, as this sector is diverse, so, correspondingly, is its supply chain. It has been very tough for the businesses in that supply chain. I know that, in my own constituency, some businesses in the supply sector will not be reopening, and businesses that have served the industry well for many years are at a crisis point.

I am sure that the safe reopening will release some pent-up demand. There are clear signs of that this week: we have all seen the news coverage and probably seen it in our constituencies, too. However, we should not expect the return of volume international markets any time soon and there will be some domestic customers whose confidence will need rebuilding before they engage with the sector again. For the conference industry, there will be the challenge of knowing just how much of that market will stay online having gone online over the past year. So this is a sector facing huge challenges. It is a sector that clearly interests our constituents and Members here, and it is important for employment, particularly of younger people.

Finance (No. 2) Bill

Pat McFadden Excerpts

2nd reading
Tuesday 13th April 2021 Commons Chamber

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

I would like to begin by echoing the tributes made from all sides of the House in recent days to the Duke of Edinburgh, Prince Philip. It is a testament to the endurance of his public life that you would have to be almost 80 years old to have any real memory of a time when both he and Her Majesty the Queen were not at the pinnacle of the monarchy. On behalf of my constituents, I would like to send Her Majesty and the royal family our deepest condolences at this most difficult time.

Turning to the debate, it is a pleasure for me to respond on behalf of the Opposition. I thank all Members on all sides of the House, who made very wide-ranging contributions today, and some of them, Madam Deputy Speaker, related to the Bill before us. We have heard excellent contributions on a wide range of issues, including the move away from diesel, climate change, local recovery bonds, the taxation of covid tests, those excluded from Government help schemes, the arts and cultural sector, the aviation sector, the Help to Grow scheme, freeports and regional inequality—or, as the Government call it, levelling up.

On the latter, we heard of the urgent need for action because of years of neglect. Now, I hate to pose an awkward question, but I have been scratching my head and I have to ask: who has actually been in power for the past 11 years? Who presided over that neglect? Who was it who cut billions of pounds from local authority budgets over the past decade? Who was it that abolished the regional development agencies that were responsible for regional development in the first place? Who was it that downgraded Sure Start, and attacked the opportunities and life chances of some of the lowest-income children in the country? I really think that we should be told who it was who presided over the neglect that has spurred the Government to these policies today. I admit that it is a neat trick to pretend that you have only been in power for a year, but the truth is that it has been 11 years. What the Government are now trying to do is fix their own mistakes to repair damage that they caused in the first place.

Now, I admit it must be a relief to the Treasury Ministers to attend the debate today and to be able to shelter on the Front Bench for a few hours, to get some respite from calls from David Cameron. They can tell him that they were in the Chamber and they had their mobiles switched off as he worked his way through the whole Department. If I am right, the Minister responding is one of the few people in the Treasury who has not yet received a call from the former Prime Minister, but he might still be working his way through the list. Right now in the Treasury there are no doubt officials cowering behind doors, hoping that the former Prime Minister does not have their phone number. If he does get through, they can give him the new excuse we heard today: that the new Government loan schemes on which he has been lobbying have nothing to do with the Treasury. Ignore all the press releases, ignore all the tweets, ignore the Instagram videos, ignore the invitations to “Ask Rishi”. It turns out that the case for the defence is that it is all somebody else’s responsibility. But that will not wash—it will not wash at all.

At the heart of the Finance Bill are the tax changes set out in the Budget. As we established during the Budget debates a few weeks ago, those tax changes turn on its head decades-long conservative orthodoxy, not just because tax rates are going up but because the expectation is that alongside rising tax rates will come rising revenues. The projections are set out in the Red Book on corporation tax, thresholds for income tax and the other measures laid out in the Bill.

The Red Book estimates and the Bill lay to rest the argument set out by Conservative politicians from Margaret Thatcher to George Osborne that cutting rates rather than raising them leads to an overall rise in revenues. Indeed, the argument advanced at the core of this Finance Bill—that corporation tax rates should rise and businesses should be compensated by an increase in investment allowances—is the exact mirror image of the argument used by the previous Chancellor to justify the cuts he made to corporation tax. At that time, we were told that all those reliefs and allowances were too complex and that they could be cut to help fund a cut in corporate tax rates; now, the opposite argument is being advanced. Osbornomics are officially buried by Rishnomics in this Finance Bill.

That is all, of course, at the level of policy and ideology. What about the practical level—the practical effect? The freezing of personal allowances will bring an extra 1.3 million taxpayers into the system over the next few years. I thought it might be helpful to illustrate the effect of some of the proposals on a particular constituency, so I picked one at random: Hartlepool. The proposals mean that 34,000 basic rate taxpayers in Hartlepool will face a tax increase before corporations have had to pay a single extra penny toward the costs of the pandemic. In Hartlepool, there are 11,732 households on universal credit. The decision to withdraw the £20 a week uplift from them later this year will cost them collectively almost £12 million extra over the following 12 months. That is what these changes mean in one constituency. That is what they mean to families around the country.

The Bill also sets out plans for the new system of investment allowances, which are related to the recovery loan scheme recently launched—I underline this—by the Treasury. The Treasury cannot escape ownership of this one. What will the Treasury system be to accredit lenders under the new recovery loan scheme? Will it just be for regulated lenders? How will it test the capital adequacy of the institutions involved? How will it avoid a repeat of accrediting for the scheme a lender who is on the brink of collapse?

Of course, the overall judgment on the Budget and the Finance Bill must be by the test of how it gets us through what is happening now and the foundations it lays for the future, and the Bill deals with only one phase of that. On the extension of many of the emergency measures put in place since the beginning of the pandemic, we called for many of those measures in the first place, and they are obviously necessary while we are still in the teeth of the fight against the virus. By that, I mean of course the extension of the furlough scheme, the help for the self-employed and so on. Those interventions cost considerable sums of money, but the social and economic cost of not doing them would have been far, far greater. Governments can act in times of crisis to help the country through. Indeed, if a Government did not do so, we would have to wonder what they were for. But in addition to that immediate crisis help, there is a longer-term rebuilding job to be done. We are going to need strong, job-creating growth if we are to recover from the past year. The economy will not come back exactly as it was before the first lockdown. The pandemic has exposed deep inequalities in society. It has shown the stark reality of what many key workers are paid. It has laid bare the vulnerabilities of our society and the very different circumstances of those who could work from home and those who had no choice but to go to work day after day, no matter the risk to themselves and their families.

In terms of other changes, the pandemic has been described as the “great acceleration”—10 years’ change crammed into one. The way we shop, work, pay for things, educate children, deliver healthcare and much else has been changed, probably forever. Technology and change apply to everyday life as never before. How do we make the most of these trends? How do we ensure that people are equipped for the economy that comes out of this pandemic and that these changes do not simply exacerbate existing inequalities? Those are the urgent questions facing politics today.

Expectations have been changed about what Governments can do, not only here but in the United States, as we have seen in recent weeks, and across the world. This will change the shape of the political argument in the future—not a return to the same old argument about tax and spend, but an argument instead about who can best equip the country for the future, who can rebuild the best and who can deliver the transition to greener jobs, heal the inequalities that have been exposed by the pandemic and help children to recover from the education that has been lost.

The Finance Bill is silent on those challenges, as was the Budget. That is why it is a job only half done. It puts tax increases in place for the next few years that hit family finances before corporations, and it does so with no plan for the recovery that the country needs or one to rebuild the public realm—the public square—to make it more resilient in the future. That is why we have tabled the reasoned amendment on the Order Paper. The second half of that job—what the country has to do—is still to come, and that will be where the argument over the best economic future for the country and how we truly recover from the events of the past year is played out.