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

Debate between Pat McFadden and Baroness Winterton of Doncaster

2nd reading
Tuesday 8th June 2021 Commons Chamber

[Lloyd Russell-Moyle (Brighton, Kemptown) (Lab/Co-op)]

Talking about the cost to the taxpayer, I wonder if my right hon. Friend continues to be shocked by the fact that a Member of this House, the hon. Member for Plymouth, Moor View (Johnny Mercer), received over £85,000 from subsidiaries that were mis-selling, like a company in my constituency that defrauded my constituents. That money has never been paid back, but that Member received money from the taxpayer, and actually we should be looking at ourselves—

[Madam Deputy Speaker (Dame Rosie Winterton)]

Order.

[Mr McFadden]

I am grateful to my hon. Friend, and I do think it ill behoves any Member, given the scale of the losses and given the necessity of the Government to bring in this Bill to compensate people for their losses, to profit from this either directly or indirectly. I think that should be clear to all of us.

The Government are legislating on this because of the litany of regulatory failures set out in the report on this issue carried out by Dame Elizabeth Gloster. These failures included failures to respond to repeated warnings from investors and potential investors, LCF repeatedly running promotions implying its products were regulated by the FCA, and failures of communication between different parts of the FCA, all in the end leading to this collapse and financial loss. Had the FCA acted earlier, far fewer people would have invested through this firm, losses would have been lower and the taxpayer would not be faced with the £120 million we are talking about today.

--- Later in debate ---

[Mr McFadden]

Many investors did invest because they thought that these mini-bonds were authorised by the FCA, and they were not. A big part of the problem here is having a regulated firm marketing unregulated products. If I am right, the hon. Member’s constituents may be eligible for the compensation authorised by the Bill.

Dame Elizabeth’s report makes it clear how badly the investors were let down by the regulator, and both the Government and the FCA have said that they accept the findings. I have a number of questions that I want to put to the Minister for his wind-up at the end of the debate. First, why is the level of compensation he has chosen 80% of the FSCS level? On what basis was that decision made? Secondly, how will this work practically? I understand that the Government want to avoid the involvement of claims management companies, and that is something I think we would all endorse. How will the Government do that and avoid repeated rounds of claims?

The Bill also gives rise to some important broader questions about policy. The failings identified were serious and substantial, and have to be addressed. The first of those broader questions is: when should compensation paid for by the taxpayer be paid and when not? The Minister quite rightly said that the taxpayer cannot stand behind every investment policy. It would be unfair on taxpayers to expect them to do so, and it would produce perverse incentives. After all, we all know that the value of investments can go down as well as up.

In the case of LCF, it was bonds that were being sold, and the advertising implied a guaranteed pay-out when such pay-outs could not, in practice, be guaranteed. Regulation is not aimed at enabling people to make reasonably informed choices and to understand the risks they are taking. Having made the decision to offer taxpayer-funded compensation in this case, when does the Minister believe it justifiable that the taxpayer should be asked to do that, and when does he not? What was the discussion in the Treasury about how to ring-fence this failure and this company from broader claims for financial compensation? There are calls for compensation quite regularly when investment failures happen. How confident is the Minister that the Treasury will not be subject to legal action from victims of other investment failings?

How confident is the Minister that the FCA can actually make the changes necessary to avoid a repeat of the findings set out in Dame Elizabeth’s report? Callers were phoning the FCA for three years before the company’s collapse. Appendix 6 of Dame Elizabeth’s report states that the FCA received 611 queries from consumers regarding LCF. That is not a random phone call at five o’clock on a Friday that can be missed; it is a pattern of people trying repeatedly to raise red flags and getting nowhere

Individual A said on 15 July 2016:

“This company is doing exactly what the pyramid scams are doing. What they’re doing is they’re paying the money out, the interest out from money which people are paying on the bond… In other words, it’s just a pyramid scam… they’re saying they’ve got charges on their property, security on them, assets on their property, of course they don’t have any assets. It’s all horrendous really, the whole thing”.

There was call after call like that, and they were not acted on. They were not passed up the line, partly because the mini bonds were not regulated. In fact, one caller was told by the FCA call handler that it was not a scam.

There was also the letter from individual financial adviser Neil Liversidge in 2015, three full years before the collapse of the company. He warned that LCF had one customer who was worth—bear with me on the language, Madam Deputy Speaker; I am quoting—

“the square root of bugger all”

and he tried to raise warnings about the practices and health of the company. It appears that that letter was lost.

One of the more damning findings in Dame Elizabeth’s report is that, even if the letter had not been lost,

“It is unlikely that it would have resulted in any, or any substantive, action or re-action by the FCA.”

So little faith did she have in the processes that she appears to have argued that it did not matter that that warning letter had been lost because it would not have been acted on. Imagine if the FCA had acted, in 2015 or 2016, when those reports were received, rather than only at the end of 2018. Another question for the Minister is this: what will the FCA do to improve its handling of reports like this?

Then, there is the so-called halo effect of regulated companies selling unregulated products. Being regulated by the FCA featured heavily in LCF promotions. The financial promotions team at the FCA did warn LCF to dial back on the advertising, but the pattern went on and on, and no one drew the conclusion that this was not just an advertising problem, but a problem with the content of what it was actually selling. Dame Elizabeth states in her report:

“A substantial proportion of the Bondholders said that they would not have invested in LCF had it not been for the fact that it was regulated by the FCA.”

How will the FCA avoid the difference between unregulated activity and regulated companies from being exploited in the future?

The Gloster report was also the subject of a well-publicised disagreement between Andrew Bailey, the Governor of the Bank of England, and Dame Elizabeth, about the nature of responsibility and accountability. Where do the Government stand on this issue? It was all played out before the Treasury Committee in several hearings. Is it the Treasury’s view that senior officials in leading regulatory bodies are responsible for the failing that happen on their watch, or should responsibility apply only to the organisation collectively?

Does the Minister agree with the statement in the report that

“It is difficult to see why an individuals’ willingness to take on challenging tasks in public bodies should absolve them from accountability”?

Or does the Treasury accept the statement from the Parliamentary Commission on Banking Standards quoted in the report that

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

These broader questions matter, because with ever more complex financial markets, the regulators have to be equipped to do the job—equipped through their leadership and their systems, but also through the resources at their disposal. Part of the backdrop to this is the FCA taking on responsibility for tens of thousands more firms after it took on the responsibilities of the Office of Fair Trading back in 2014. Is the Minister confident that it has the resources after the LCF collapse?

Let me turn to clause 2 and the fraud compensation fund. The Bill authorises a loan to be made as a consequence of greater than expected claims on that fund arising from the Dalriada case. It is estimated that the judgment in that case could result in claims of over £300 million. The loan will be funded by a levy on the pensions industry, to be paid back over the next 10 to 15 years. That comes on top of the levy to pay for the Financial Services Compensation Scheme rising sharply since the introduction of the Government’s pension freedom legislation in 2015. Back then, the levy was £300 million; this year, it will be over £1 billion pounds. That is a 48% increase on the previous year and more than triple the level of five years ago. Why does the Minister think the FSCS levy has had to increase so much since the pension freedoms legislation was introduced in 2015? Now we have a new fraud levy to boot.

Surely the right way to tackle this issue is to ask why more and more pensioners are being exposed to fraud and scams in the first place. Why does the Minister think that is happening? Why are more pensioners losing their money? When the previous Chancellor introduced the pension freedoms changes, he said that

“there will be free impartial guidance available to all.”

Six years on, the take-up of that advice is just 3%. Even when the Department for Work and Pensions made a targeted push to increase it, it only got up to 11%, so the vast majority of people using these freedoms are not using that service. Of the small number who take up the option, 72% say they do something different from their first inclination after receiving advice, so it is clear that such advice can help people to make a better decision, yet take-up is nowhere near the promise made at the time.

The promise of pension freedoms being matched with good, trustworthy financial advice has not been kept, and these levies, which will have to be paid by the pension schemes that have been nowhere near fraud and are trying to offer a good service to their members, are being put in place at least in part as a result of the Government’s own pension reforms, which have left more pensioners exposed to fraud and scams. That conclusion was endorsed by the Work and Pensions Committee in its recent report.

What unites both these clauses is people being subject to fraud, often through online advertising. There is a clear need for greater action on this. People are being bombarded on a daily basis with adverts for investments, some of which are scams and attempts at fraud. Financial innovation can be a great thing, but consumers need help in navigating this world, and they are currently being failed by a regulatory system that is lagging behind what is actually happening in the financial markets. There is an online harms Bill coming that, as things stand, does not include plans to crack down on financial crime. I urge the Government to think again on that. To proceed with that Bill without tackling online financial harm would be an enormous lost opportunity to protect consumers against this type of crime.

The answer is not just compensation when people lose money; it is to protect people against financial scams happening before they lose their money, to crack down on the fraudsters while they are peddling their scams and to stop these adverts reaching people in the first place. Not all thieves wear masks. It is possible to rob people of their money through misleading websites and illusory promises of financial gain. It is critical that the laws that we pass in this place keep pace with the innovations in fraud and financial crime that are taking place. For that to happen, it will take a lot more than the two clauses on compensation in this Bill.

[Madam Deputy Speaker (Dame Rosie Winterton)]

We now go to the Chair of the Treasury Committee, who has four minutes.

Financial Services Bill

Debate between Pat McFadden and Baroness Winterton of Doncaster

Report stage & 3rd reading & 3rd reading: House of Commons & Report stage: House of Commons
Wednesday 13th January 2021 Commons Chamber

[Madam Deputy Speaker (Dame Rosie Winterton)]

Before I call the shadow Minister, I should say that we have until 6 o’clock for this debate and a number of colleagues want to get in. I have introduced a five-minute time limit to start with, to try to accommodate some of the main people behind other amendments, but it is very likely that I will quickly have to take that down afterwards; I just warn colleagues that that may well happen.

I remind hon. Members that when a speaking limit is in effect for Back Benchers, a countdown clock will be visible on the screens of hon. Members participating virtually. For hon. Members participating physically in the Chamber, the usual clock in the Chamber will operate.

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

Madam Deputy Speaker, may I wish you, the Minister and the House a happy new year?

The Bill returns to the House at a very important moment for the country’s economy and our financial services industry. We have just come to the end of the transition period with the European Union, and we are of course in the teeth of the battle against the virus. Against a background like that, the business of legislating can seem even more prosaic than usual, and perhaps that is even more the case with a Bill such as this one. It is a mixed bag of measures dealing with everything from onshoring various EU directives to the length of the term of office for the chief executive of the Financial Conduct Authority. Some of it is a necessary consequence of our withdrawal from the European Union, and other parts look as though they have been sitting in the Treasury waiting for a legislative home, like policies hoping for a passing bus.

I want to focus on the amendments tabled in the name of the Leader of the Opposition and then turn to some of those tabled by my right hon. and hon. Friends. The first amendment I want to speak to is our amendment 1 on the UK’s net zero commitments. The Bill sets out, in schedules 2 and 3, a list of things that the regulators have to have regard to in the exercise of their new and expanded functions under the Bill. It talks of international standards and competitiveness, yet nowhere is there a mention of the overarching goal that will shape so much of our economy in the decades to come.

In this place, we have rows and arguments about all manner of issues, but sometimes the things that generate the most heat, if the Minister will pardon me the pun, are not always the biggest or most important issues. Conversely, just because an issue has bipartisan support does not make it less significant, and there is no doubt that the Climate Change Act 2008, as amended by the Climate Change Act (2050 Target Amendment) Order 2019, is one of the most significant pieces of economic legislation to pass in this country for many years.

To achieve our net zero goals will require wholesale change in many walks of life. The briefest of looks at the Committee on Climate Change’s report on how this should be done shows what the main areas will be. On energy, we need to find replacements for fossil fuels, we have to invest in the shift to hydrogen and we are still trying to make carbon capture and storage a practical reality. On transport, the transition to battery power will have to proceed at an ever-increasing pace. On housing, we need not only to build new zero-carbon homes, but to retrofit millions of existing homes with zero-carbon heating systems. Agriculture, food production and even the clothes we wear—all these things will undergo big change, and all of them will require significant financial investment.

The UK financial services sector has a huge role to play. In seeking a post-Brexit role, what better long-term mission could there be than empowering the change that we need to make to preserve the planet for future generations? This is not just my view—the Chancellor himself has said as much. In his statement on the future of financial services, given two months ago from the Government Dispatch Box, he not only announced the first green gilts, but said he wanted to see

“the full weight of…capital behind the critical global effort to tackle climate change”.—[Official Report, 9 November 2020; Vol. 683, c. 621.]

Yet this Bill, which empowers the regulators in so many other ways, is totally silent on that issue. The Minister says we might do it in the future. [Interruption.] He says from a sedentary position that we will do it in the future. He has an opportunity to do it today—he could just accept the amendment. What is the point of waiting until the future to do this, as he has indicated he will, when there is an amendment that does not seek to add any new commitments but simply to make this part of the remit of our financial services regulators?

There are many reasons, as my newly ennobled—if that is the correct word; newly honoured, perhaps—hon. Friend the Member for Wallasey (Dame Angela Eagle) said, to say no to amendments, but “not invented here” is one of the worst if the Government have indicated they are going to accept it.

The Government say they want the UK to be the centre for green finance globally, but their first legislative outing on this sector since we left the European Union says nothing about mandating the regulators of the industry to make that part of their mission. As I said, our amendment does not seek to add to the commitments on net zero that the UK has already made, which are already set out in legislation and enjoy the support of all sides of the House, but to make these part of the remit of the regulators that shape our financial services industry. There is already a move towards greater environmental investing from investment funds and from consumers who want to invest in this way, and there is a desire for these products, so why do the Government not back that up by making it part of the regulators’ remit?

We know that these commitments cannot be met without large-scale investment. To anyone who says to just leave it to the market if there is an investor desire, we also know that it cannot be done by the private sector alone. This will take both the private sector and the public sector working together and pulling in the same direction. It is in that spirit that we put forward the amendment. We ask for something that has bipartisan support, is in line with the post-Brexit goal for the sector as set out by the Chancellor himself and will make it easier for the country to achieve its commitments.

Further to that, we are also asking for something that the Minister said in recent minutes that the Government will do at some point anyway. We very much hope that, between now and six o’clock, the Government will reconsider and accept the amendment, which they said they agree with and will bring forward in some way themselves at some point.

Just two weeks ago, the House approved the post-Brexit trade and co-operation agreement, but for financial services this is basically a no deal agreement. The references within it do no more than repeat standard pledges of co-operation in every free trade agreement. The Prime Minister himself acknowledged that, for this sector, he did not achieve as much as he hoped. Indeed, within a few days of the agreement, £6 billion-worth of euro-denominated share trading shifted from London to European exchanges—an immediate response to the new situation.

Taxation (Post-transition Period) Bill

Debate between Pat McFadden and Baroness Winterton of Doncaster

Committee stage & Committee: 1st sitting & Committee: 1st sitting: House of Commons
Wednesday 9th December 2020 Commons Chamber

[The First Deputy Chairman of Ways and Means (Dame Rosie Winterton)]

Before I ask the Clerk to read the title of the Bill, I should explain that in these exceptional circumstances, although the Chair of the Committee would normally sit in the Clerk’s chair during Committee, I will remain in the Speaker’s Chair in order to comply with social distancing requirements, although I will be carrying out the role not of Deputy Speaker but of Chairman of the Committee. Chairs of the Committee should be addressed as such, rather than as Deputy Speakers.

I must also modify the call list slightly in the light of the selection and grouping of amendments by the Chairman of Ways and Means. I will call the right hon. Member for Wolverhampton South East (Mr McFadden) to open the debate by moving amendment 2; we will then follow the rest of the call list as published, starting with the hon. Member for Stone (Sir William Cash). I will call the Minister at the end to respond to the debate.

Clause 1

Duty on goods removed to Northern Ireland

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

I beg to move amendment 2, page 2, line 43, at end insert—

“(4A) The Treasury must publish guidance setting out its proposed approach to the reliefs, repayments and remissions referred to in subsection (3)(b) within four working days of this section coming into force.”

[The First Deputy Chairman]

With this it will be convenient to discuss the following:

Clause stand part.

Amendment 3, in clause 2, page 4, line 24, at end insert—

“(5) The Treasury must publish guidance setting out its proposed approach to the reliefs, repayments and remissions referred to in subsection (4)(a) within four working days of this section coming into force.”

Clause 2 stand part.

Clauses 3 to 4 stand part.

Amendment 1, in clause 5, page 7, line 44, leave out subsection (3).

This amendment is connected with NC1, which would make all substantive regulations under the Bill subject to the affirmative procedure.

Clause 5 stand part.

Clauses 6 to 12 stand part.

New clause 1—Regulations—

“Notwithstanding any other enactment, a statutory instrument containing regulations made under this Act, other than regulations made under section 11, may not be made unless a draft of the instrument has been laid before and approved by a resolution of the House of Commons.”

This new clause would make regulations made under the Bill (other than the commencement regulations in clause 11) subject to House of Commons affirmative procedure.

New clause 2—Treasury use of powers—

“(1) The Treasury must, within four working days of the day on which this Act is passed, publish a report setting out the timeframe within which it will use the powers to make regulations conferred by—

(a) section 40A(2) of TCTA 2018;

(b) section 40B(1) and (2) of TCTA 2018;

(c) section 30A(4) of TCTA 2018;

(d) section 30B(1) and (3) of TCTA 2018;

(e) section 30C(5) of TCTA 2018, and

(f) section 5(2) of this Act.

(2) The Treasury must publish an annual report setting out how it has made use of the powers referred to in subsection (1).

(3) Each report under subsection (2) must include an assessment of—

(a) what considerations the Treasury made when deciding to use its powers, and

(b) the impact of the regulations on individuals and businesses throughout the UK, and specifically in Northern Ireland.”

That schedule 1 be the First schedule to the Bill.

That schedule 2 be the Second schedule to the Bill.

That schedule 3 be the Third schedule to the Bill.

That schedule 4 be the Fourth schedule to the Bill.

[Mr McFadden]

As well as speaking to amendment 2, I will speak to amendment 3, which makes the same points, and say a word about new clause 2. All three have been tabled in the name of the Leader of the Opposition and those of my right hon. and hon. Friends.

Clause 1 sets out the new customs regime that will apply to goods moving between Great Britain and Northern Ireland—specifically those that are deemed to be at risk of entering the EU single market. The Northern Ireland protocol that the Government have signed up to requires such a regime as a result of their decision to leave the single market and the customs union. It will mean a system of paying customs duties for those who move such goods.

As yet, none of us knows whether a deal will be agreed, although we know that an important dinner is taking place in Brussels tonight. However, we welcome the announcement of a trusted trader scheme today, although it comes very late in the day. That scheme will remove some of the possible tariffs on goods that move from Great Britain to Northern Ireland in the event of a no-deal Brexit, but for other goods we are clear that we do not want to see additional costs for businesses and communities in Northern Ireland.

The House should note that Northern Ireland consumers have, on average, about half the discretionary income of consumers in the rest of the United Kingdom; the long and the short of it is that they simply cannot afford such additional trade tariffs on goods. There therefore needs to be a system for at-risk goods that do not leave Northern Ireland, in line with the agreement that Northern Ireland remains part of the UK’s customs territory and that customs duties should not apply to goods that travel between Great Britain and Northern Ireland if Northern Ireland is their end destination.

The protocol and the arrangements agreed yesterday by the Chancellor of the Duchy of Lancaster and his counterpart create new requirements for businesses to be set out in regulations. Clause 1 is specific about that, for example in new section 40B of the Taxation (Cross-border Trade) Act 2018, which states that the Treasury

“may by regulations provide”

for which goods the new duties will apply to, and make

“provision about reliefs, repayment and remission…checks, controls or administrative processes”

and other matters.

My broad point is that that is obviously a description of new arrangements that are not in place right now; that is why they are being introduced in the Bill. As I said on Second Reading, it would be better for the Government to acknowledge that this is a new regime with new requirements, instead of the pretence that everything will carry on exactly as it is.

As I also said on Second Reading, we only have three weeks to go. Businesses in Northern Ireland and those that do a lot of trade with Northern Ireland will be asking, “What does this mean for me? What processes do I have to go through? What do I have to pay? If the goods remain in Northern Ireland, will I be entitled to a rebate if I have paid? How will I claim that rebate? How will this system work?” Those are all legitimate questions about the new regime being introduced by the Bill and the regulations enabled by it. Amendment 2 asks the Treasury to reach conclusions and to publish answers on these matters in the coming days. Frankly, it is already too late to expect businesses to absorb more than 100 pages of legislation within a few weeks. But even if it is too late, we cannot afford more delay, which is why our amendment calls for the publication of guidance on this within a few days of the Bill coming into force.

I should stress that nothing in this amendment alters the regime that the Government are trying to bring in. Everything in the amendment is fully in line with the Northern Ireland protocol and with the commitments that the Government have made as part of that. We want to provide clarity for businesses as soon as possible, rather than leaving open-ended the time for these regulations to be published.

In response to my question at the end of the Second Reading debate, the Exchequer Secretary to the Treasury said with confidence that she was sure this could all be done by 1 January. I hope she is right and that any scepticism that all these arrangements will be completed in the three weeks between now and 1 January is unfounded. Let us hope that she is right. The amendment asks for the Government to outline precisely how these duties and tariffs, if they are necessary, will be rebated. Businesses will be asking that question and, quite reasonably, they will want an answer.

Will businesses be required to pay up front and then be reimbursed by HMRC, as envisaged in the Northern Ireland protocol? Is that what the Government have in mind? If so, the Minister should know that there are fears that such a rebate system could be hugely complex. Indeed, some fear that it is not fully built, but we are told that it will all be ready for 1 January. These are vital questions. As it stands, the Bill does not fully answer them, nor does it set out a timeframe in which they will be answered, which is why we have tabled amendments 2 and 3 to the Bill.

Finally, new clause 2 is an attempt to give both Parliament and the public some timetable—some road map—for the blizzard of regulations that are enabled by the Bill and to secure a report on their impact in the future. As I said, this is a new regime. The Bill legislates for something that we have not had to do before in the United Kingdom, and we should at least have the courtesy of reporting on how it is operating in the future. New clause 2 asks for both a timetable of the regulations and a report on how the new regime has operated. These are completely reasonable amendments. I hope that, in a spirit of generosity, the Government will find it within themselves to accept them, and I look forward to hearing the Financial Secretary to the Treasury wind up the debate.

[The First Deputy Chairman of Ways and Means (Dame Rosie Winterton)]

Sir William Cash is not here, so we go to Alison Thewliss.

--- Later in debate ---

[The First Deputy Chairman of Ways and Means (Dame Rosie Winterton)]

I believe the right hon. Member for Wolverhampton South East may wish to withdraw his amendment.

[Mr McFadden]

I point out to the Minister that he said guidance was published in October; he cannot be referring to the guidance referred to in clauses 1 and 2, which talks about the regulations under the Bill. However, on the basis of the whole debate, we will not press the amendment to a vote tonight, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 1 ordered to stand part of the Bill.

Clauses 2 to 4 ordered to stand part of the Bill.

Amendment proposed: 1, in clause 5, page 7, line 44, leave out subsection (3).—(Alison Thewliss.)

This amendment is connected with NC1, which would make all substantive regulations under the Bill subject to the affirmative procedure.

Question put, That the amendment be made.