(2 years, 9 months ago)
Commons ChamberI am grateful to the Minister and have a few questions for him, all of which relate to clause 1. The methodology for calculating synthetic LIBOR is the five-year average picked by the FCA. Were other possible methods considered? What impact would they have had on the interest rate?
Secondly, the Minister referred to the rate bouncing around: on one day it could be less than real LIBOR and on another day it could be more. I believe that the FCA has used the figure of 12 basis points. For clarity, is that a fixed-term difference going forward, or will synthetic LIBOR vary on a daily basis, just as real LIBOR can?
On Second Reading, we talked about mortgages. However, as the Minister rightly said, a far greater sum of money based on LIBOR is in the derivative markets. What estimate have the Government made of the Bill’s impact on those markets?
Paragraph 6 of new article 23FA, which we have touched on a few times, tries to limit or define the scope of legal action taken as a result of the move from LIBOR to synthetic LIBOR. How might that influence any attempt at judicial review? How confident is the Minister that someone could not try a judicial review of this attempt to close down the option of legal actions taken as a result of a Government-mandated move in financial benchmarks?
The Minister referred to the discussion of fall-back provisions on page 3 of the Bill. For clarity, does this mean that some contracts will not transfer to synthetic LIBOR but will transfer to something else, depending on whether there is a fall-back provision in the contract? If there is a fall-back provision and it is not synthetic LIBOR, what will it be? If there is a fall-back provision that could have a different rate from synthetic LIBOR, how will contracting parties decide which one to use? Will the fall-back rate, if such a thing is specified in a contract, automatically take precedence over synthetic LIBOR, or might there be room for argument about which alternative rate to use?
Finally, there is the question of timescale and how long this will last. The Minister talks about encouraging remaining contracts to move off what will now be synthetic LIBOR. Indeed he said that, if we have to, we could pass further legislation. Is there anything more that can be done, other than encouragement, or are contracts not moving away from LIBOR because it is a better rate and, ultimately, what people care about is the interest rate they pay? I wonder how temporary this will be. Are we kicking this can down the road with nothing other than encouragement for a group of contracts that have stubbornly stuck to LIBOR despite all the regulator’s enthusiasm? Is there anything between the Minister’s encouragement and future legislation that might change this situation?
I will not detain the House by repeating my comments on Second Reading. I am grateful to the Minister for his answers to a number of my questions, but one question he did not pick up, and on which I hope he can give some assurance, is what happens if something goes badly wrong with people’s mortgages. The small percentage of people who have mortgages covered by this legislation—although it could potentially be quite a big number of people—are now, through no fault of their own, quite literally staking their home on our getting this right. Although I appreciate that the Minister will not commit to a specific compensation scheme just now, will he at least give an assurance that the Government have not closed the door on that possibility should unforeseen circumstances lead to it being necessary?
I am also looking for clarity on the precise circumstances in which the administrator does or does not have immunity from legal action. The Minister has said the administrator is covered if it does something the law says it has to do, and it will not be covered if it does something it has chosen to do in a particular way. Does the administrator have discretion on the precise methodology it uses to calculate synthetic LIBOR, and can it exercise its judgment on the numbers it puts into the model? If the administrator has such discretion, nobody needs to sue it for using a synthetic LIBOR model; they can just sue it because of how it has carried out the calculation.
Given the nature of contracts of the value that the right hon. Member for Wolverhampton South East (Mr McFadden) mentioned, a slight change in the published rate can mean a lot of money. Every time the published rate is arguably a wee bit higher or a wee bit lower than somebody else thinks it might have been, one party will win and be quite happy, and the other party will lose and will potentially have a strong motivation to resort to legal action. Are administrators adequately covered against being sued simply because they have published a figure that says the current synthetic LIBOR rate is 1.2% rather than 1.25%? Are there grounds on which they might be sued because those 0.05 percentage points of difference in the published synthetic LIBOR rate either make or lose quite a lot of money?
It is a pleasure to serve under your chairmanship, Mr Evans.
The right hon. Member for Wolverhampton South East (Mr McFadden) and the hon. Member for Glenrothes (Peter Grant) have raised a number of questions arising from what I said. The Government are clear that we support this transition away from LIBOR by providing additional legal certainty for contracts relying on LIBOR past the end of this year. The provisions of the Bill are vital to using the synthetic rate in an orderly winding down of LIBOR, and they provide protection to consumers and the integrity of UK markets, but there are four or five elements that I will address now.
The hon. Member for Glenrothes mentioned compensation, and we do not anticipate that being an issue. As with all matters, the Treasury keeps things under review. We will continue to monitor what happens as a consequence of this methodology.
Both the right hon. Member for Wolverhampton South East and the hon. Member for Glenrothes mentioned legal action, and it is possible that judicial review could be raised against the FCA on the synthetic methodology it is prescribing for ICE. We think that would be extremely unlikely, given that there has been an active exercise of listening to representations on designing a methodology that has broad credibility. That is fundamental to the integrity of the process. There has been no attempt to develop a methodology in isolation or separate from the consultation with the market.
The right hon. Member for Wolverhampton South East asked about both the future timetable and what will happen with contracts that have fall-back clauses overridden by the effect of this legislation. This Bill provides certainty where a fall-back provision is triggered by a benchmark ceasing to be published or made available. Neither the designation of a benchmark under article 23A of the BMR nor the imposition of a synthetic methodology would trigger the operation of the fall-back provision. Where a contractual arrangement has a fall-back provision that is triggered by other means, this Bill does not affect or override the operation of that clause. For example, it will not override a fall-back triggered by an assessment of unrepresentativeness or a prohibition on the use of the benchmark, provided that the circumstances in which the fall-back was triggered are met.
(2 years, 11 months ago)
Commons ChamberThe right hon. Member raises a very fair point. If we pluck a sum of money out of the air, it could be a lot of money to one person and perhaps less to somebody else, depending on their wealth.
Let me return to the questions for the Minister arising from the amendment and the Bill. The second is the important question of where the decision to compensate the LCF investors leaves investors in other firms where regulatory failure is alleged. Where has the bar now been set for future compensation in the event of regulatory failure? The taxpayer cannot stand behind every investment loss. Some investors will make money and some will lose. That is in the nature of a market economy. However, the question of compensation arises when there is a clear regulatory failure, because that is considered to be a different matter. Having come up with this scheme, where do the Government now draw the line?
How can we be sure this will not happen again? There are two aspects to this question. The first is the role of the regulator. The FCA is going through a transformation programme designed to ensure that changes are made to prevent a similar thing from happening in the future.
There is clearly a need to specify which kinds of investment losses might be compensated, and which ones will not be. Given that the Financial Conduct Authority has outlawed the targeting of mini-bonds at retail investors, is that a clear indication that something was fundamentally flawed with all selling of those bonds, whether it was done by LCF, Blackmore Bond, or anybody else?
The hon. Gentleman makes a fair point. On how we can be sure that this will not happen again, and the transformation programme, it is to be expected that companies would go through such a programme, given the damning nature of Dame Elizabeth’s findings. There is also, however—and this is not just about this specific case—understandable public scepticism when a scandal happens, people talk about lessons being learned, there are some changes to management, and the organisation moves on. How do we ensure that, while understandable, such public scepticism is not justified in this case because something different is happening, and that we will not end up back here, some time in the future, debating another investment scam that was not spotted and acted on in time?
The second aspect to the question of how we can ensure that this does not happen again relates to legislative protections. This scam was promoted by a lot of online advertising. The online safety Bill is coming up, and at the moment paid-for advertising is excluded from that. Why should that be the case? Surely the LCF case shows that paid-for advertising must be included. As the Minister will be aware, there is a growing coalition behind the argument that the online safety Bill must offer greater protection against financial scams and fraud, and that is bound to be a major issue as the Bill goes through the House.
That issue is important, because consumers are being targeted every day with adverts, text messages, emails, and phone calls geared either to obtaining their financial details, or promising get-rich-quick schemes. As covid has pushed more of our lives online, it is imperative that legislation keeps pace with the increased use of online scams that are designed to strip people of their money. It is becoming more and more difficult for consumers to ascertain the difference between a genuine approach and a scam approach. We in this House have a legislative duty to keep pace with what organised criminals are trying to do.
(3 years, 2 months ago)
Public Bill CommitteesMy 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.
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.
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.
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?
(3 years, 2 months ago)
Public Bill CommitteesMy 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.
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.
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.
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?
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.
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.
I am pleased to speak in support of the amendment. There are two questions if the Government wish to reject it. Assuming that no one has any objection to the idea that somebody should keep an eye on what the Government are doing in response to the Gloster report—that would be a good idea—the questions are who should they report back to and when should they report back. Their response to those questions might provide the only grounds on which they could object to the amendment.
There can be no doubt that the Government must report back to the House of Commons and to Parliament. I know I might not look it—perhaps I do—but I am old enough to remember cases like Polly Peck, one of the great corporate scandals of earlier generations. In response to that, we had the Cadbury report that, in effect, invented the concept of corporate governance. It seems obvious now, but one of the key principles that came out of the report is that once the directors who are supposed to be in charge of a company have taken a decision for something to happen, they cannot just walk away. They have to put a process in place by which they, as the directors, individually and personally, can be satisfied that what they say should happen does happen.
The House of Commons in the UK Parliament is not a board of directors as such, but we still have to take responsibility—all 650 of us, individually and collectively—for making sure that, having had assurances from the Government that they will act either directly or indirectly through agencies such as the FCA, they will do things to sort out a £1 billion scandal. We are the ones who ultimately have to hold them to account for that.
I am not saying that a report or a statement to Parliament is the best possible way of holding the Government to account. Frankly, it is a joke of a holding to account, but it is the best that we are allowed in this place. That is why it is included in many of our amendments. Any argument from the Government that any way of reporting back on such vital recommendations that is anything less than regular statements to the full House of Commons and making themselves available to take questions from, if we are lucky, just 5% of all elected MPs, is just not acceptable.
Secondly, when should the Government report back? That is why I made a point of asking Dame Elizabeth whether six months from now—12 months from the original recommendations—is a reasonable time in which to expect significant progress. Dame Elizabeth made it clear that she cannot tell us about parliamentary procedure and all the rest of it, and I accept that. However, her view was clear that, in six months from now, it would be reasonable to expect there to be significant progress on a significant number of the recommendations. At that point, the House of Commons should get a report back from the Minister to explain what has happened and if it has not happened yet, when it will happen. Most importantly, he will explain why what has not happened has not happened. We have had far too many examples of Ministers giving assurances in good faith but of things not happening or, if they did happen, of their taking far longer than they should have done.
Time matters. None of us knows whether there is another London Capital & Finance already happening, and we heard from witnesses who are convinced that it is. There could be another Blackmore Bond, Basset & Gold or you name the corporate investment mis-selling scandal. It could be happening again right now. We do not know how many of them are on the go just now already swallowing up people’s pensions and savings. If the Minister is not prepared to commit to giving an update within six months, will he tell us what timescale he thinks is reasonable for us to expect real change? “In due course” is just not good enough for people who might be losing their investments now even while we dither and dally about what to do next.
(3 years, 2 months ago)
Public Bill CommitteesQ
Sheree Howard: I was not in the FCA at the time, but it was a very large assumption of remit. We have changed systems. We have implemented various programmes highlighted in Dame Elizabeth’s report on delivering effective supervision and effective authorisation programmes.
As I have already outlined, the financial services market is not sitting still; the FCA cannot sit still—hence the changes that are under way and will be a fact of life going forward. We are undertaking a significant programme to ensure that we invest in digital and data and have much greater access to the information, given the quantum of firms that we oversee.
Q
James Darbyshire: I don’t think it would cause administrative difficulties; it would just mean an additional area of coverage for the FSCS. The cost to levy payers—to the financial services industry—would potentially go up, depending on whether there were any failures involving mini-bonds.