Financial Conduct Authority

Ruth Cadbury Excerpts

Monday 1st February 2016 Commons Chamber

[Ruth Cadbury (Brentford and Isleworth) (Lab)]

First, I particularly wish to thank the hon. Member for Aberconwy (Guto Bebb) for securing this important debate on the future of the FCA, especially in the light of recent perceived failings, and for his work on the all-party group on the Connaught Income Fund, series 1, which has done so much good work, without, sadly, getting this resolved so far.

It is because of the failings of the FCA that I am speaking today. The failure to act on warning signs in the Connaught Income Fund, series 1, led to a scandal that cost investors about £130. That is an unacceptable loss on a supposedly low-risk investment. In 2011, a whistleblower from Connaught went to the then Financial Services Authority, and one would think that with such risky investments and large sums of money being involved, it would act swiftly to prevent further sums of money from being invested under misleading terms. But it took five months for it to act, and even then it did very little. The body’s warning to consumers that the Connaught Income Fund material was misleading was simply not good enough. Indeed, the fund continued to receive investors until it was suspended in March 2012, by which time around £70 million of additional investment had occurred. What we saw here was a regulator failing in its duty to consumers and not using the appropriate powers it had.

The scandal did not stop there. Following the collapse of the scheme, the APPG, under the stewardship of the hon. Member for Aberconwy, worked with the FCA for eight months or so, seemingly positively, before the FCA pulled out of talks without warning to do its own investigation “in the best interests of investors”. There was no explanation as to why, and there has been no transparency since.

Since then, the FCA has been unwilling to engage with parliamentarians and, instead, has insisted on carrying out its own investigation, leaving many of us, including our constituents who have been affected, wondering exactly what is going on.

Secondly, I am also speaking today to represent the interests of a constituent who has been unable to seek redress after they were mis-sold interest-rate hedging products, despite being what the FCA would term an “unsophisticated partner”. They were a director of a company and borrowed £1.3 million from Nationwide in a fixed-rate loan. Embedded in the loan was an interest rate hedging product—an IRHP—which was supposed to protect the borrower against adverse interest rate changes. The use of such a product was common between 2006 and 2008; all major banks used it.

In reality, the IRHP exposed my constituent to a huge amount of risk, incurring fees to the bank, none of which was explained to them even though they were deemed “unsophisticated customers”. There was a break clause in the FRL agreement, but the breakage cost was ruinous and, in some cases, the fees amounted to up to half of the value of the loan. Break fees were not agreed on beforehand. It was only when the customer wanted to change the terms of the loan that those fees emerged.

After the crash in 2008, interest rates went to zero and have been low ever since, but, thanks to the break fees, constituents were stuck paying fixed rates with no chance of restructuring. The banks have since admitted that IRHPs were mis-sold, and a redress scheme was negotiated between the individual banks and the FCA, the subsequent regulator. Approximately £3 billion was set aside, though far less than that has so far been paid out. However, this scheme was for stand-alone IRHPs and not embedded IRHPs. In the latter, the IRHP is part of the loan contract itself, and repayment is made in one amount that accounts for the interest on the loan as well as the interest-rate protection. This places it outside of the remit of the FCA as it is classed as a “commercial” loan. Many of these loans were sold to small and medium-sized enterprises, such as that of my constituent, which had no more understanding of the complexity of hedging products than an average consumer. The Financial Ombudsman has refused to investigate the case, as our constituents do not meet its definition of “consumer”, which means that they have considerably fewer means of redress than people who were sold stand-alone products.

The inability of the FCA to act in this case, and in many others, has resulted in real problems. My constituent is stuck on a fixed-rate loan in a zero-interest economy with no ability to restructure their loan. I understand that the majority of what I have covered tonight involves banking jargon, but the bottom line is clear: the FCA is currently not operating in the full interests of consumers and its conduct in the Connaught Income Fund fiasco and the mis-sold IRHPs are just two examples of many.

Like many Members across the House, I expect the FCA, as a regulatory body, to do its job, which is to regulate and to protect consumers. I support the motion, as the FCA in its current form is not fit for purpose, and I have no confidence in its existing structure and procedures. If the Government want the people of this country to have faith in the banking system, may I respectfully suggest that they act to address the sentiments of the wording of the motion tonight?

[Several hon. Members rose—]