Financial Conduct Authority Redress Scheme

Tessa Munt Excerpts

Thursday 4th December 2014 Commons Chamber

[Mark Garnier]

I am not sure that the FCA can justify it. The FCA is answerable to Parliament and to the Treasury Committee, and until such time as we can conduct a proper investigation into what it has been up to, how can anyone believe that this is a good system?

[Tessa Munt (Wells) (LD)]

Does the hon. Gentleman anticipate that the eventual outcome of this complete lack of transparency is that the FCA will have to revisit this whole process, as it has done relatively recently with payment protection insurance, because so many people have had a very poor deal?

[Mark Garnier]

The hon. Lady is absolutely right, and I shall return to that as I progress through my speech.

My first point is that there is little consistency between the banks in how they tackle the problems they have created. One of the FCA’s frequently asked questions is:

“Are the offers consistent between banks?”

Interestingly, its response reads:

“The independent reviewers report regularly to the FCA, both on the judgements they are making and how the banks are performing, and will regularly bring all the independent reviewers together to ensure consistency of approach. The FCA also collects data on the offers being made by each bank and we carefully consider any variances to ensure that the standards are being applied consistently.”

That in itself demonstrates that there is a huge amount of useful information that we are not getting a chance to see. It goes on:

“We also regularly select individual case studies to follow up with banks”.

The FCA is trying to be consistent, but cannot say that it is being consistent. We have heard on many occasions this afternoon about its not being consistent.

My example concerns not one of my constituents but someone else who came to see me and involves how the banks treat businesses that have gone into insolvency. Clearly, any insolvent business will have an insolvency practitioner winding up that business. It is a tragic time, but somebody has to come in and do it. In the event of an insolvency, the banks are involved both as a creditor, as they have lent money to the business in the first place, and as a debtor, as they owe redress and in many cases consequential losses to the business. Some banks behave quite well. HSBC is a reasonably good example and recognises that the insolvency practitioner is duty bound fairly to distribute the assets of an insolvent business to a wide range of creditors. To that end, HSBC will pay what is owed under the redress and consequential loss scheme into the insolvency practitioner’s funds and then put in a bid for what it is owed from the original bank loan. The insolvency practitioner therefore makes a correct and fair assessment of who is owed what, and in some cases HSBC will get back not just less than it lent but less than it would have got back had it done what RBS does.

RBS is a frequent flyer in this debate, so I shall have a go at it, too. I am told that RBS will offset what it owes by way of redress and consequential loss against what it is owed by way of repayment of the loan. Therefore, although it is still owed money by the bankrupt business, it is owed less than it otherwise would have been, and when RBS seeks to limit its losses at the expense of other creditors’ owed money, those creditors will lose money as a result of RBS’s mis-selling. That is just plain wrong.

It is also wrong that some loans have been left outside the redress scheme. Those who took on tailored business loans, otherwise known as hidden or embedded swaps, have had exactly the same financial problem but for a technical reason are outside the regulated arena. Under article 85 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, due to some pretty technical reasoning, if a loan looks like a duck, swims like a duck and quacks, it is in fact a donkey. Some pretty smart lawyers have looked at that and the inescapable fact is that the legislation was written in a way that allowed many businesses to be mis-sold swaps in an area that is unregulated.

The FCA’s frequently asked questions talk about these so-called commercial loans, stating:

“Commercial loans generally fall outside the regulatory remit of the FCA and we therefore cannot direct the banks to set up a review of these products”.

That might possibly be so, but is not the act of an FCA member’s selling any product to an unsophisticated customer a regulated activity that therefore falls under the FCA’s remit?

--- Later in debate ---

[Ian Swales (Redcar) (LD)]

I rise to join the chorus of thanks to the hon. Member for Aberconwy (Guto Bebb); we all owe him a great debt for his relentless spearheading of our efforts in this long saga. Only a handful of constituents have come forward to tell me that they have been affected by this problem, but I have a very strong feeling that they are only the tip of the iceberg. I think that there are a lot of business people out there who are frightened of their banks and of what might happen to their business reputation if they come forward, or who are so unsophisticated that they do not even know that they have a problem. I think that there are many affected businesses that we do not hear from.

Having said that, I have certainly seen the problem. I welcome what has been done so far with the direct redress scheme, but I still think that it has taken too long. During this period we have seen business collapses and even suicides, although not in my constituency. There are still huge issues remaining. Many Members have spoken of the problems with the consequential loss scheme, and I wish to add my voice to that.

I want to talk in greater detail about the banks’ behaviour and what they have done to my constituents. I will talk about one constituent, Mr Stephen Lilley, who operates a single retail shop in a seaside village. I am sure that he would not regard it as an insult if I described him as unsophisticated as far as these products are concerned. Indeed, such is their complexity that I regard myself as unsophisticated, despite being a qualified accountant.

[Tessa Munt]

It has always struck me that it would be completely logical to require bank staff and independent financial advisers to be qualified to a certain level in order to flog these things. Surely “unsophisticated” means anybody who does not have an equal qualification when buying one of these things.

[Ian Swales]

My hon. Friend makes an interesting point. I think that even small businesses, such as those mentioned by my hon. Friend the Member for Brecon and Radnorshire (Roger Williams), probably should have had independent financial advice to deal with their own banks, which is a completely unacceptable situation.

I think that Mr Lilley’s case has wider implications, although I could equally have used those of other constituents, such as Roy Myers, Martin Johnson and Peter Broom. Mr Lilley took out a loan for his business. He was asked to put up as security his house, his son’s house, the commercial property, a share portfolio and the goodwill of the business, which he did. It was a swap product with the additional liability of a credit line, which was not declared at the time. I think that we all know how complex these products are. It was a derivative product that was priced in US dollars and then converted back to pounds. Mr Lilley had unknowingly fully indemnified the bank for these facilities, including the credit line, which they were not aware of. They have, through a pro bono arrangement, had some very expert advice on their situation. I should say that Mr Lilley made it clear to his bank from the start that he wanted a simple, declining balance loan, but that was never offered to him. He was very keen to repay the loan and not to take out a long-term arrangement, but that is what he did.

Mr Lilley has now been offered an alternative product—a cap—by the independent reviewer. The expert whom Mr Lilley is using believes that it is a regulated product, but the independent reviewer is not regulated to deal with the product, so right from the start there is a question of legality about his being offered that alternative product. At a meeting with HSBC on 24 October, the independent reviewer admitted that he was paid by HSBC, which brings the independence into question. Until that date, Mr Lilley did not know that there was an additional credit line in place, although it is some years since the original arrangement. The failure to disclose that puts a real question mark over whether it was contrary to section 1 of the Fraud Act 2006. It has been impossible to ascertain when the credit line was put in place or by whom. Moreover, the relationship manager was, in effect, selling a regulated mortgage because domestic properties were involved, and they were not qualified or regulated to do so. There is a whole issue about the legality of what the banks were doing. Mr Lilley and his family turned out to be guarantors of the extra credit line, which was secured against their homes, and under an “all moneys” charge they would have full liability. They have consistently asked for information about this, but the bank has still failed to provide it.

On 21 August 2013, an adjudication was agreed, part of the terms of which were that the swap was cancelled. Today, well over a year later, the swap is still in place. This is a small business person running a single shop—a mom and pop business, as the Americans like to call it. He has had to lodge two homes, business premises and a share portfolio worth far more than the loan that he took out. Because of the way that the bank has structured these products, it will not release any of the collateral. Mr Lilley would like to get some of his share portfolio back to help finance the problems he has as a result of the loan, but the bank will not release it. That is because it is itself using the assets that have been lodged for wider purposes. There is an underlying scandal going on.

Mr Lilley’s loan agreement says:

“In the event of HSBC’s insolvency or default or that of any brokers involved with your transaction positions may be liquidated or closed without your consent. In certain circumstances you may not get back the actual assets which you lodged as collateral and you may have to accept any available payments in cash.”

That means: “Your home may be at risk if the bank does not keep up the repayments. Even if the loan is up to date, if the bank or any brokers become insolvent, the bank may call in your assets.” That is a very onerous condition. The bank can do this because in 2007 the FCA changed the client asset rules, which contain two important clauses. CASS 3.1.5 says:

“the firm is given a right to use the asset, and the firm treats the asset as if legal title and associated rights to that asset had been transferred to the firm subject only to an obligation to return equivalent assets to the client upon satisfaction of the client’s obligation to the firm.”

In CASS 3.1.7, the position becomes even clearer:

“the asset ceases to belong to the client and in effect becomes the firm’s asset and is no longer in need of the full range of client asset protection. The firm may exercise its right to treat the assets as its own by, for example, clearly so identifying the asset in its own books and records.”

That starts to explain why the banks are so reluctant to offer shorter-term products, or different products, as part of the redress scheme: it is because they are using these assets in their own balance sheets. Between 2007 and 2008, when the regulations changed, RBS added £700 billion of assets to its balance sheet—equivalent to about half the UK economy. I suspect that an awful lot of houses and businesses are on RBS’s balance sheet and people do not even realise it. As a major shareholder of RBS, the Treasury needs to examine this, particularly as the Bank of England is saying that it is more likely to let banks fail in future. Many people could find themselves losing businesses and assets they did not even know were part of a bank’s balance sheet.

The operation of the compensation scheme, the behaviour of the banks, and, importantly, as the hon. Member for Wyre Forest (Mark Garnier) said, the behaviour of the FCA and question marks over its independence, mean that the scandal is continuing. It really is time for the Government to conduct a truly independent inquiry.

Oral Answers to Questions

Tessa Munt Excerpts

Tuesday 11th March 2014 Commons Chamber

[The Financial Secretary to the Treasury (Sajid Javid)]

The hon. Gentleman is right to raise this issue. Lending to small businesses has been a matter of concern to this Government. There are potentially some issues of competition in the market, and that is why we welcome today’s update by the Office of Fair Trading on its SME market study. The funding for lending scheme has helped. It has increased net lending by the participating banks by more than £10 billion during its first phase, and I think we are right, in its second phase, to focus it on SMEs only.

[Tessa Munt (Wells) (LD)]

I am sure that Members of this House will welcome the overwhelming support in the European Parliament this morning in voting in favour of open public registers of company beneficial ownership and voting against exempting trusts from public disclosure. Will the Minister apply pressure to his colleagues to ensure that the Council adopts the same rigorous position as Members of the European Parliament?

[Mr Gauke]

We will look at that proposal. There is a need to ensure that systems that apply across the European Union have a proper understanding of how trusts work in the UK and some of the challenges that exist. Trusts are not companies, and there are more difficulties in dealing with them than there are in dealing with a public register for companies.

Tourism (VAT)

Tessa Munt Excerpts

Tuesday 11th February 2014 Westminster Hall

[Ms Ritchie]

I thank the hon. Gentleman for his helpful intervention. It is worth pointing out that Professor Blake used the Treasury’s model for the research that resulted in his recommendation that the focus of a VAT cut be on accommodation and visitor attractions.

I would like to make a little more progress. I would like the Minister to clarify whether the Treasury accepts the figures resulting from its modelling, and whether it contests that this measure would be revenue-neutral and bring a long-term benefit, in terms of tourism numbers, tax revenue and job creation. If the Minister has figures that dispute that, I think everybody would be grateful to see them.

I would like to set the issue in the EU context. Even if the Government concede that the cost would not be excessive, they frequently argue that if such a cut was granted to the tourism sector, every other industry would be queuing up to get a similar cut. That is simply not the case. The EU has already established that the tourism industry is one of very few labour-intensive services that would be eligible for a reduced rate of VAT. Strikingly, the vast majority of other EU member states, which appreciate the importance of the industry, have exercised that right, but not the UK. As was pointed out in a report by Deloitte in 2011, the UK is the only country in the EU that does not apply a reduced rate of VAT to some part of its tourism sector.

The UK is one of only four of the EU’s 27 member states that do not take advantage of the reduced VAT rate on visitor accommodation, one of only 14 that apply the full VAT rate to admissions to amusement parks, and one of only nine that apply the full rate to admissions to cultural attractions. Thirteen countries, including Ireland, also have a reduced VAT rate for restaurant meals. That is not a record of which the UK can be proud. We hear much from the Government about how they are constrained and restrained by Brussels; here is a perfect example of where the Government have the right to be flexible, but they have so far refused to exercise that right.

Other countries are a rich seam of information on the benefits of a cut. It is no coincidence that after such measures are implemented, countries tend to stick with them. If we compare Ireland and the UK, we see a tale of two Governments. The introduction of a 9% VAT rate for tourism-related business and services made 2013 the most successful year since the financial crisis for Irish tourism, with visitor numbers up 10% and more than 9,000 jobs created.

[Tessa Munt (Wells) (LD)]

The Minister will know of my passion for caravans, because there are so many in my constituency. I thank him for the work that he did last year to ensure that the proposed VAT rate on caravan sales was dropped from 20% to 5%, which has saved the industry in my area and other parts of the UK. I ask him to consider a tourism-related VAT cut in exactly the same vein. Holidaymakers’ loyalty to the UK, holiday businesses’ investment in the UK, and the passion for people felt by tourism staff, of whom I was one for a decade, deserve to be rewarded with a sensible approach to this issue.

[Ms Ritchie]

Yes, that is what many of us are saying. We are making a special plea to the Treasury for a sensible approach that ensures growth in our local economies.

In conclusion, to take the case of Ireland, north and south, the island is marketed as one area, but it has two different taxation regimes and two different rates of tax on tourism products, including both visitor attractions and accommodation. We believe that that needs to be synchronised in some measure. I hope that the Minister sees that there is a strong case for a VAT reduction for accommodation and attractions. It could subsequently be widened to include food served in pubs and restaurants, which forms an integral part of our wider tourism sector. That would send a strong message of support to the tourism industry and, importantly, enable it to compete on a more even basis with other European nations, which have almost unanimously introduced such measures. I know that the local tourism industry in Northern Ireland—particularly in my constituency, where wonderful work is already being done—would welcome it with open arms.

There are many MPs here from England, Scotland and Wales, and I know, having talked to some of them, that they would also welcome such measures to pump-prime and grow the local economy, and enable the tourism industry to invest in growth and jobs. This Government talk a great deal about creating growth in the private sector, delivering jobs and supporting local businesses. Here is a ready-made policy that could be implemented quickly and would deliver instant results. I hope that we have a full and frank debate about the issue, leading up to the Minister’s response and, hopefully, to some better news in the Budget report on 19 March.

Tomlinson Report

Tessa Munt Excerpts

Tuesday 17th December 2013 Westminster Hall

[Guto Bebb]

That is a fair point about timing. Another of my constituents was told that his bank charges would be increased to a weekly fee of £4,000. The letter informing him of that arrived on 21 December, just before his business closed for Christmas, which I am sure was enjoyable because of that letter. There was nothing to be done until the new year, because the business was closed. There is an issue there. To go back to the hotel I was talking about, as a result of the lower valuation, the business can show on paper that its bank charges over the following six months were £250,000 higher than they had been in the previous six months.

[Tessa Munt (Wells) (LD)]

I applaud the hon. Gentleman’s work in this area, and it is a joy to work with him. I want to mention a similar case involving a constituent who had a long-term arrangement with a bank. His business, which owns housing, has been told by the bank that it wants to finish his loan on 31 March, so he is required to sell the housing on 1 April. How can that be fair?

[Guto Bebb]

That is an issue on which the bank would have to respond, because my view is that clearly it is not fair.

I have a fourth and final example of businesses finding themselves in difficulty due to decisions taken by the bank. A company that contacted me recently had net profit of £272,000 on turnover of £3.5 million in 2008, net profit of £281,000 on turnover of £4.4 million in 2009, and net profit of £268,000 on turnover of £3.9 million in 2010. Those are all healthy figures. The company employed about 40 members of staff. In late 2010, however, an agreed overdraft facility with the bank was withdrawn, because a loan agreement under the EFG—enterprise finance guarantee—system was declined. The company was therefore put into GRG support, and the group proceeded to disallow a payment of £14,000 in corporation tax, on which basis the company found itself in difficulties and ended up going into administration. The final set of management accounts for the nine months before the company went into administration showed a net profit of £190,000. The company would argue that its difficulties were caused by the bank refusing the corporation tax payment, even though the final accounts showed a profit.

Such businesses feel extremely hard done by as a result of the way that the GRG and RBS have behaved towards them. My evidence could be described as anecdotal—I am more than happy to accept that—but it is important to emphasise that the cases highlighted in the Tomlinson report are the tip of the iceberg; they are not representative of an issue created by Lawrence Tomlinson himself. I have seen these issues in my constituency, and other Members have seen them in theirs.

Once businesses are in the GRG, the concern is that its attitude and behaviour is less than helpful. RBS argues that the whole purpose of the group is to put businesses back into health, but it is difficult to see how a business allegedly subject to cash-flow problems is helped by having an additional £250,000 in fees in a six-month period. Time and again, I have seen the fees charged by the bank go up when businesses go into the GRG, and they apparently bear no relation to the amount of work done in support of the business.

So-called independent reviews are forced on businesses by the bank, whether through a valuation, accountancy work or solicitors. Professional fees are charged to the business, but the instructions come from the bank and, often, the reports go to the bank first. We have to be concerned about that. Furthermore, the businesses often have no say whatever in who the reviewers will be. There is a question about the conflict of interest faced by those professionals: if they are being paid by a business, but instructed by the bank, surely they are conflicted in their work.

The other thing that I have seen time and again is payments by suppliers not being prioritised. There is almost never a case in which a payment to suppliers would be allowed if that took the business beyond the terms of its overdraft or facilities, and yet I have never seen a case in which charges due to the GRG have not been taken because they will take the business over its overdraft limit. That is a fair point to make, because if a business can go over its agreed limit in order to pay the bank charges, why on earth will the bank not allow a payment to a supplier if that supplier is crucial to the continuation of the business in question?

I have already mentioned a constituent of mine struck with a £4,000 weekly fee for the continuation of his banking facilities. To return to him, after three months of negotiation, the GRG agreed that it would accept £2,000 per week. There was no explanation as to why the fee was initially £4,000, or why £2,000 was now acceptable. I get the impression that the reason why it was £4,000 to start was that the bank thought that it could get away with it; the fee was subsequently £2,000, because the business put up a fight—its accountants and solicitors argued the case, as did the MP.

--- Later in debate ---

[Guto Bebb]

I would be extremely wary of using the word fraud. In my view, there has undoubtedly been systematic bad behaviour and I could speak at some length about West Register, which is part of RBS, and the way in which assets have been taken from businesses by the GRG and West Register—there is a conflict there. However, even with the privilege afforded by being in the House, I would be careful about using the word fraud.

[Tessa Munt]

Does the hon. Gentleman agree that we could summarise the matter in this way? Customers have trusted their banks over so many years and that trust has been built up through generations. People still think that they should trust their banks, but there is now a complete imbalance in that relationship, as a practice has grown up in which highly commercially minded organisations are managing personal money and business money. People are now not qualified to understand what they are being offered by their so-called friends, the business or relationship manager and their bank.

[Guto Bebb]

Undoubtedly. That imbalance is something I have highlighted time and again in relation to the issue of interest rate swaps. I do not think it is reasonable to assume that we are talking about two equal parties when one is a banking organisation that has the ability to pull someone’s livelihood away from them at the stroke of a pen.

To conclude, the attention focused today on the GRG and RBS reflects the fact that RBS was bailed out by the taxpayer to such a great extent. With that taxpayer support comes added scrutiny. We should not take our eye off the behaviour of other banks and there are issues within those banks, but the key point is that the bank that we are talking about today is supported by the taxpayer and so has an obligation to justify its behaviour, over and above what is expected of other banks.

--- Later in debate ---

[Natascha Engel]

Absolutely, and I will conclude later by saying that that means we really have to look at the whole banking sector. The Banking Commission has done a good job of starting to expose some of these malpractices, but they are very worrying. The issue does not affect just RBS, and it needs to be looked at more widely.

What is really worrying is that RBS would, arguably, not exist if not for the fact that it was bailed out, and is 80% owned, by the taxpayer. However, some of the practices exposed by Tomlinson represent a double whammy for the taxpayer. I can cite examples of RBS using the GRG to take money out of bank accounts that businesses had set up expressly to pay Her Majesty’s Revenue and Customs. The bank was, therefore, not just taking taxpayers’ money so that it could continue to exist, but taking money from accounts specifically set up to pay HMRC.

I started to get involved in this issue as a result of constituents coming to see me about interest rate swaps. One particularly big example involves a man who owns care homes, which are disproportionately affected by interest rate swaps. He was a solvent customer running a successful business, but RBS bullied him into taking on loans that included interest rate swaps. He wanted to refuse, but RBS bounced his cheques until he took the loans on. He is now involved with the GRG, even though it was expressly set up for severely distressed customers. He is not in severe distress now, but he soon will be, because the money he has to use to pay back the interest rate swaps RBS forced him to take on should be going into investing in his care home business. In addition, when RBS first forced him to take on the loan, the exit fee was £10,000. Only a few months later, it was £150,000. Given the amounts involved, we really need to start taking a serious look at what RBS is doing.

The hon. Member for Aberconwy was reluctant to use the word “fraud”, and I understand why, because it is a serious accusation. However, what I would like to hear about from the Minister is the reverse: what makes him confident that systematic fraudulent activity is not happening in RBS? I am focusing on RBS because that is what the Tomlinson report focused on, but also because RBS is more than 80% state owned. What makes him confident that the bank is not forcing people into the arms of the GRG, with the result that perfectly solvent businesses are not solvent any more, and asset stripping them at the same time? What makes him confident the bank is not taking huge fees from companies that bank with them, asset stripping them and making sure they can no longer exist properly?

[Tessa Munt]

On that point, the bank sold the business of one of my constituents, which was bought by another of the bank’s customers, who then found themselves in exactly the same situation as their predecessor. The bank therefore profited from not only the distressed sale, but what happened afterwards. Worse still, the sale happened as a result of interest rate swap mis-selling, but there is another interest rate swap agreement with the new company, so something that happened in 2005 happened again in 2007. Very often, these things are happening to the people who provide large numbers of jobs in our constituencies—the businesses that will provide the jobs and the growth.

[Natascha Engel]

Indeed. Those responsible are laughing all the way to the bank—ha, ha! The engineering of loan defaults allows a company to be put into the GRG. What we find, and what we see in the Tomlinson report, is that the lending is refinanced—companies are forced to refinance—and the bank gets far higher margins on the new loans. The bank also prioritises taking disproportionately high penalty fees from companies.

All of that is chipping away at small and medium-sized companies, which just want to get on with their business; they do not want to have to worry about what these massive organisations are doing. The banking sector is supposed to help people. Before the crash, banks were over-generous in flinging money at people; after the crash, they have become highly reluctant to lend even to perfectly good businesses. Where they do make business loans to companies, they are behaving, if not fraudulently, then at least appallingly badly, as I think we can all agree.

The all-party group’s investigation into interest rate swap mis-selling revealed not just the banks’ bullying tactics, but many cases that highlighted the imbalance between the size of the banks and the size of small and medium-sized enterprises, which the hon. Member for Wells (Tessa Munt) mentioned. We recently had a meeting with the Minister about that very issue. Can we really say that individuals have access to justice, when RBS—I repeat that it is mainly state owned—can call on some of the best legal minds in the country to support it against tiny businesses? I would say that those businesses do not have access to justice, and I would like the Minister to look at that.

To return to interest rate swap loans, which is where all this started, another problem is the foot dragging by the banks, which are looking into this, and which would say they are dotting the i’s and crossing the t’s; by the Financial Conduct Authority, which is also making sure it gets everything absolutely right; and by the Treasury, which is not putting enough pressure on the banks and the FCA to make sure this issue is dealt with swiftly. As we have seen, exit fees can go from £10,000 to £150,000 in only a few months, and interest rate swap mis-selling is costing businesses vast amounts, so every day matters, because all this money is going to the bank, not the businesses.

We cannot be confident—the Tomlinson report highlights this—that systematic fraud is not going on, perhaps in the wider banking sector, but certainly in RBS. I would really like the Minister, when he responds, to say what he is doing to make sure we can be confident that systematic fraud is not going on at RBS and more widely in the banking sector. I will conclude there, because I would like to give him as much time as possible to respond.

Women and the Cost of Living

Tessa Munt Excerpts

Tuesday 19th November 2013 Commons Chamber

[Tessa Munt (Wells) (LD)]

The Liberal Democrats are doing what they can to build a stronger economy and a fairer society. We recognise that households are under pressure, which is why we have taken action to try to support women with the cost of living.

The Lib Dems want to help women on low and medium incomes by letting them keep more of the salaries they earn. By April 2014, 1.5 million women—60% of the overall figure of 2.7 million people—will have been taken out of paying tax altogether by the rise in the tax threshold to £10,000. We are also giving a tax cut of more than £700 a year to more than 20 million lower and middle earners, the majority of whom are women. The Deputy Prime Minister is planning to put a further £100 back into people’s pockets through the workers’ bonus, which could increase the tax allowance to £10,500 by the next election.

[Sheila Gilmore]

The problem with the hon. Lady’s presentation of the issue is that it is very one-sided, because in order to pay for that tax cut there have been cuts to tax credits and other benefits, so on balance the lowest earners have lost, not gained.

[Tessa Munt]

I could not disagree more. The most important thing is that we raise the tax threshold so that those women who are working get the benefit of keeping the money they earn.

[Lilian Greenwood]

Will the hon. Lady give way?

[Tessa Munt]

I am going to continue.

We are creating more jobs for women, which is the best way of helping them with the cost of living. There are 427,000 more women in employment and almost 100,000 more women in self-employment since 2010.

We have helped create more than 1 million apprenticeships, of which more than half have been taken by women. We are taking steps to narrow inequality in the labour market. The proportion of female FTSE 100 directorships has increased by 50% since February 2011, and the gender pay gap has fallen from 20.2% in 2011 to 19.7% in 2012. That is small but undeniable progress.

The Liberal Democrat pensions Minister has helped women by introducing a new single-tier pension. Under the existing system, many women have lost out because the years they spent raising children were not properly counted towards their national insurance contributions. Under our scheme, those years will now count in full. That is so much fairer for women, who currently receive, on average, £40 less than men from their state pension.

We have helped drivers and consumers by freezing Labour’s fuel duty escalator for 41 months. At present, this is saving the average motorist about £7 every time she fills her tank, and it is likely to save her £10 a time by 2015. In my area, where there is little or no public transport, and in most rural areas in general, that, of course, directly affects women who spend a lot of their time needing to use a car, particularly to transport elderly parents or younger children around.

The Lib Dem policy of free child care has started to assist families of about 130,000 two-year-olds to become eligible for an early education place. As well as helping to improve living standards, our scheme will transform children’s life chances. The Deputy Prime Minister has announced that the scheme will double in size from September 2014. We recognise that looking at child care can be key to building a stronger economy.

[Mr Brian H. Donohoe (Central Ayrshire) (Lab)]

Perhaps the Minister will give the hon. Lady a glass a water to help her throat. May I just ask about pensions for young people today, and what will happen to them in the future? Child care today does not mean that those young people will get a pension tomorrow—in fact, quite the reverse.

[Tessa Munt]

I thank the hon. Gentleman for intervening. At least we are making sure that young people have a better chance to access a better education early on. Everybody knows that the money put into education early on can transform children’s life chances so much more dramatically. Those children will be the ones paying my pension and his, so it is important to concentrate on education.

For parents who wish to return to work and, through the Lib Dems, are given recognition and respect for choosing to do so—just as we respect parents who wish to stay at home and look after their children—the importance of good-quality child care is paramount. We know that child care is very expensive and is a problem for families. It was a problem for many years under Labour, and when I was bringing up my children under the preceding Conservative Government.

We are helping mothers with the cost of child care. We are providing 15 hours of free early education for all three and four-year-olds, which we will extend to 260,000 two-year-olds from next year. We are planning to introduce tax-free child care that, when fully implemented, will save a typical working family with two children under 12 up to £2,400 per year. In total, the coalition Government are investing about £1 billion a year in additional support for child care by 2016-17, including £750 million for the new tax-free child care scheme and £200 million in expanded support through universal credit.

The Lib Dems are wholeheartedly committed to shared parental leave, which creates more flexibility for parents, locks female talent into the labour market and will ultimately achieve a fairer balance for both men and women at home and in the work place. That Lib Dem priority for Government is one that we have delivered. Flexible working and shared parental leave is important in helping to create a fairer society, and the coalition Government have already implemented their commitment to extending flexible working to all parents with children under the age of 18. We now intend to extend the right to request flexible working to all employees.

The Lib Dems welcome the fact that in many modern families, child care is no longer the sole responsibility of the mother. Fathers and male partners play an increasingly vital role in raising children, and it is important that the Government should accommodate that by providing for shared parental leave. The system of maternity, paternity and adoption leave and pay that we inherited from the previous Government was inflexible and outdated. The coalition’s reforms will ensure that, for the first time, mothers can go on maternity leave or shared parental leave at the same time—during the first weeks after a birth—as fathers.

We are working hard to help improve living standards, but we cannot get away from the fact that they started to decline under the previous Government. It was a painful symptom of their disastrous economic record, and the fact is that they left us with an annual deficit of £160 billion.

To conclude, the Lib Dems are on record as saying that economic sustainability is important and that we want

“an economic system where the current generation can enjoy the fruits of its endeavours without relying for its living standards on a legacy of debt left to the next generation.”

That means that we have to deal with the huge financial crisis with which we are faced. That is why we are committed to the changes that we are making. The Deputy Prime Minister was campaigning on the effect of the current situation on women more than a year ago, before the Labour party focused on it. He said that

“despite rising since the 1960s, female employment has stalled over the last decade. It is, however, a problem we can no longer afford. Just as working women drove up living standards in the latter half of the 20th century, all the evidence suggests that living standards in the first half of the 21st century will need to be driven by working women once again and this absence of women from our economy is costing us dearly.”

Several motions on this issue have been passed at Liberal Democrat party conferences and we are committed to improving child care and extending free child care. We will face the next election with that commitment in our manifesto.

--- Later in debate ---

[Sheila Gilmore]

Indeed; the work incentives that were provided by tax thresholds, particularly to single parents, cannot be underestimated.

The hon. Member for Wells (Tessa Munt) brushed aside my intervention in which I said that the gains from raising the tax threshold had been more than cancelled out for the lowest-paid, but they have been. The argument is made that raising the tax threshold allows people to keep more of their earnings, instead of tax being taken away with one hand and paid back with the other. The problem is that the policy has not been even-handed. Some people have ended up worse off as a result of it. Those who used to benefit and have lost out are predominantly women.

[Tessa Munt]

Is the hon. Lady saying that she would return the tax situation to the way it was before or is she saying that this policy has no effect whatsoever?

[Sheila Gilmore]

The hon. Lady has told the House that the path onwards involves more raising of tax thresholds, regardless of who will or will not benefit from that. A further rise in tax thresholds, however, will do absolutely nothing for many who already earn below that level, particularly women who are part-time workers. How will that further generosity—which, as I have said, benefits more those whose earnings are in the upper brackets—be paid for? On the basis of the past three and a half years, presumably it will be paid for by yet more cuts to benefits and services that help a lot of women.

Trident Alternatives Review

Tessa Munt Excerpts

Wednesday 17th July 2013 Commons Chamber

[Mr Jones]

My position is very clear: I am working for a Labour victory at the next general election. But on the issue of continuous-at-sea deterrence, my answer is yes. Even though the report was commissioned by Her Majesty’s Government, its first line has the strange disclaimer:

“This…is not a statement of government policy.”

This must be the first time ever that the findings of a Government policy review have been abandoned at birth.

[Tessa Munt (Wells) (LD)]

Will the hon. Gentleman explain why today’s edition of The Times carries a headline that reads “Labour could cut Trident fleet after review suggests this would save £1.7bn”?

[Mr Jones]

I am not sure where that came from, first, because the figure that the hon. Lady cites is not correct—this would not be the first time that a newspaper had failed to do its sums—and, secondly, because we agree with what the Defence Secretary says. If changes in technology make the nuclear submarines more reliable, meaning that we can go down to three, we will consider that.

Many Labour Members have waited anxiously to see the report’s conclusion but, 26 months later, the review to make the case for the alternatives, which had the full weight of the Government’s resources behind it, presents us with no conclusions, makes no recommendations and does not even support adopting any of the alternatives put forward by the Chief Secretary. Only the Liberal Democrats could envisage an alternatives review that rejects all the alternatives. It is the equivalent of starting a journey to discover the ark of the covenant only to end up where we began with the conclusion that it does not exist.

The Liberal Democrats’ 2010 manifesto said:

“At a cost of £100 billion over a lifetime”

Trident

“is unaffordable, and Britain’s security would be better served by alternatives.”

If that was the case in 2010, given that those alternatives have not been identified in the review, surely it is not too much to ask that the Deputy Prime Minister and his Liberal Democrat colleagues admit that what they claimed in 2010 was wrong. One by one, each of the alternative platforms to Trident are rejected in the review. Heavy bombers, fast jets, low-orbit vehicles, land silos and maritime surface vessels are all discredited for not offering sufficient capability while costing more.

The review even dismisses the Liberal Democrats’ most favoured option of replacing Trident with nuclear-armed cruise missiles. Page 45 of the document states that cruise missiles

“offer a much reduced level of destructive and second-strike capability and an increased level of operational complexity”.

Page 6 states:

“Maintaining the same level of assurance that the UK deterrent can overcome an adversary’s defences is…likely to be harder with a cruise missile-based system.”

Page 8 points out that the cost of developing a nuclear-armed cruise missile would more than double the cost of Trident missiles and would take some 24 years. In support of that argument, the Deputy Prime Minister told Andrew Marr in 2010 that the UK

“could use Astute class submarines and use cruise missiles.”

It is true that they are alternatives but, as the report says, they are not only very expensive, but not very good.

The review totally discredits the Liberal Democrats’ previous policy decisions. In fact, some of the more ludicrous suggestions were not considered in the report because exploring them was deemed to be a waste of civil service time and energy. Page 16 dismisses some of those more wacky ideas, such as using helicopters, unmanned air vehicles or space-based platforms. Hand-held devices on the ground were also excluded

“as they would not meet several constraints, including in particular credibility and absolute range.”

The report is therefore credible, as even the most far-fetched suggestions put forward in the outer reaches of the Liberal Democrat world have been addressed.

Corporate Structures and Financial Crime

Tessa Munt Excerpts

Thursday 4th July 2013 Commons Chamber

[John Mann]

My right hon. Friend makes a valid and relevant point about criminal sanctions. The banks’ uniqueness is that they are the channel for funds. Because things are recorded in this technological age, it is straightforward for banks to investigate themselves and see what is going on, so the plea of ignorance by those at the top is inexcusable.

What my right hon. Friend and I are saying, and what I interpret the Financial Services Authority to be saying, is that responsibility must be taken at the top. Pleading ignorance is simply not good enough. We are talking not about small, missed operations but about huge major operations that funnel vast amounts of money. It is easy for banks to identify and track such operations, yet they choose not to do so. There seems to be a particular problem of huge reputational risk to the City of London because banks based in the UK have been those most often caught out. However, I have produced a document that demonstrates that this is not simply a UK problem. In recent years, every one of the top 50 banks in the world has had this problem and experienced prosecutions or ongoing investigations into prosecutions.

[Tessa Munt (Wells) (LD)]

I thank the hon. Gentleman for securing a debate on this subject. Does he agree that a board member should be made explicitly responsibly for each bank’s compliance? Anti-money laundering and due diligence provisions should be used effectively by the authorities to apply existing rules and ensure that people even go to jail if they have committed such crimes.

[John Mann]

The hon. Lady makes a valuable point about the importance of compliance and how that must take place at senior level. Everyone at senior level in a bank must take responsibility and be held accountable for the structures within it.

This is not simply a banking problem. Money laundering and some aspects of criminality are the biggest problems in terms of the volume of money involved, but there is also an issue of percentages and actuality of individual companies. Banks are not setting up opaque structures to create criminality; they are turning a blind eye while their structures facilitate criminality. Others are using weaknesses in corporate structure to create criminality.

Of the half a million companies that struck themselves off the UK corporate register in 2010, 40% had never filled in accounts with Companies House, and 33% had paid no corporation tax that year. If large numbers of companies are not submitting accounts and returns to Companies House, we have a fundamental problem. Our problem in dealing with this issue is demonstrated, rather ironically, if we look at the two Front Benches. The hon. Members present are excellently and diligently representing their parties, but one notes that they come from different Departments. That is part of the problem when it comes to Companies House, and I hope the Minister will clarify—we hope on behalf of the Government —who is responsible for Companies House and who should be holding it to account in Parliament.

Companies House is underfunded, under-resourced and perhaps under-specialised, and such opaqueness in our country has grown dramatically, allowing the creation of opaque corporate entities. That encourages criminality and discourages transparency for the general public, decision makers in Parliament and others.

On the impact of such actions, valid estimates indicate that Africa is losing twice as much in tax it cannot collect because of opaque corporate structures as it gets in development aid. In other words, if we cracked this problem, the amount of development aid required from the west to Africa would diminish dramatically because the tax base itself would be generating income, which is, of course, a key component of a vibrant democracy.

[John Mann]

Let me come on to that. In Davos in 2010, the Prime Minister said that he wished to “shine a light” on corporate ownership. In the Lough Erne declaration, the calls were for more transparency, more international co-operation and stopping firms shifting profits to avoid tax.

What needs to be done by Government in these areas? On transparency, it is essential that the Government follow up their G8 commitment and create a UK register of beneficial owners, making things transparent and traceable and deterring people from using this country for illegal purposes. All major countries—not least those in the G8 and the EU—need to collaborate. I note that Italy is already suggesting that it will not collaborate, and we need to tackle those countries that are suggesting that they will not co-operate even with the modest proposals emanating from the G8.

We need effective enforcement with, as we have heard, clear sanctions for law breaking; we need criminal sanctions; we need the collecting of fines. On the corporate structure, I suggest that raising the cost of setting up a company from the current £15 and hypoth—[Interruption]—and using that money explicitly and exclusively to ensure better regulation and policing. Hon. Members know which word I mean but I will not try to spit it out; we might be here for the rest of the afternoon. Hypothecating is the word. [Hon. Members: “Hear, hear.”]

Firms that have not filed up-to-date tax returns need much greater sanction for not doing so. The fact that so many choose not to do so and get away with it is a fundamental and major weakness. This is where this House needs to put its beady eye on what is going on at Companies House. Is it properly resourced? Are its powers great enough? Is it doing the job properly? I would suggest that out of those, at least two must be at issue; perhaps all three. We must get on top of this in the near future.

The question of tax liabilities and of how much liability and responsibility are needed for directors in relation to the law needs to be reconsidered. As a specific micro-proposal that I think could have a huge impact, it should be illegal for anyone to set up a bank account outside this country without informing HMRC and Companies House first. In other words, if people are using British corporate structure, we should stop letting them set up overseas operation without anybody knowing what is going on.

We need legislation relating to the Crown dependencies. I have made this point on many occasions and I will make it again briefly now. It is unacceptable that our taxpayers provide defence and legal structures for those countries when they have an opaqueness that, whatever tax system and regime they end up having, does not allow anyone to know what is going on. The football industry in this country provides a good example. In vast numbers of football clubs nobody, including the spectators and those who are owed money when the clubs go bust, has a clue who owns what bit and where and how. These major institutions are an example of how deep the problem has become and how we have failed to deal with it. We need to look to our regulations, such as those being introduced on banking, and think about how they can be applied to UK dependencies. Leaving them as they are is simply unacceptable, and it is becoming increasingly counter-productive for this country.

[Tessa Munt]

I thank the hon. Gentleman for giving way again. I wanted to draw it to his attention that the power has been used several times by the UK already to make the dependencies comply with other parts of regulation, so we could just require them to do what they should do. I would give as examples the banning of the death penalty, the rules on acceptance of homosexuality, and, on a slightly minor level, an acceptance that they should ban pirate radio.

[Madam Deputy Speaker (Dawn Primarolo)]

Order. The hon. Lady knows, because it is repeatedly pointed out to her by occupants of the Chair, that interventions must be brief. That was another very long intervention. I think she has made her point. While I am on my feet, may I also say to the hon. Gentleman that he has been speaking for quite a long time? This is a short debate and a lot of people want to get in, including, funnily enough, the hon. Member for Wells (Tessa Munt).

--- Later in debate ---

[Tessa Munt (Wells) (LD)]

As I said earlier, I thank the hon. Member for Bassetlaw (John Mann) for bringing this issue to everyone’s attention and for providing an opportunity for us to debate it this afternoon. He has already raised the effect that anonymous shell companies have on facilitating the corruption that keeps many poor countries poor. Hidden company ownership may be a particular problem. I welcome the efforts of the Prime Minister during his G8 presidency, particularly his calling on the EU and the G8 to work together to break through the walls of corporate secrecy and to ensure much more transparency.

Any move that can clean this whole business up will have a major impact on the world’s efforts to tackle poverty. If we are to commit regularly to having a substantial percentage—0.7%—of moneys being put into aid, we need to make sure that the money is used effectively and that there is a clean-up. It has been noted that a third of the world’s poorest 1 billion people live in resource-rich countries, but as a result of weak governance and widespread corruption, finances do not always reach Government accounts. In fact, many of those resource-rich countries have been looted by the very politicians who are meant to be running them and developing their economies.

It is primarily companies that are used to move dirty money. The World Bank reviewed 213 large cases of corruption between 1980 and 2010, more than 70% of which were found to have relied on anonymous shell companies. Companies registered in the United States topped the list, but the United Kingdom and its Crown dependencies and overseas territories came second.

It seems to be terribly easy to set up anonymous companies and trusts. It is very cheap to create complex corporate structures, and the practice of using “nominees” does not help at all. I hope that the Minister will emphasise the need to put beneficial share ownership into the public domain. A “many eyes” procedure would ensure that company ownership was subjected to continuous tests. I agree with the hon. Member for Bassetlaw that we should not just leave it to HMRC. Beneficial owners are individuals—living people, real-life human beings. We are not talking about yet another company and yet another trust.

The financial action task force, the intergovernmental body that sets global anti-money laundering standards and makes recommendations, has said that the system does not work, and that it is much too easy to avoid due diligence. In many countries, company service providers are all too willing to flout the law. A large number of the world’s major economies are ineffective in preventing companies from being misused by money launderers. Six of the G8 countries and 18 of the 27 European Union member states are listed as being “not compliant” or only “partially compliant” with the new recommendations on beneficial ownership.

Many countries do not require banks, lawyers or company service providers to identify beneficial owners of corporate clients. The penalty in the United Kingdom and the United States for having a fake identity in the form of a passport is up to 10 years in prison, yet anyone who is willing to pay a small amount—I think it is £200 or £300—can create a fake ID through a company and then use the company to hide behind, and the penalties for that are very small.

One way of preventing abuse of anonymous companies is for countries to require all information about beneficial owners, the names of all people behind trusts and foundations, to be put into the public domain. It is essential for such information to be public, rather than being accessible only to the police and other law enforcement agencies. There is no interrelationship between most of these countries, and they cannot carry out the necessary tests. If only HMRC or the police can gain access to our information when fraud is suspected, it will not be possible for us to check other countries’ systems, or for them to check ours.

It is cheap to put beneficial ownership into the public domain. It has been suggested that 99% of companies that are registered in this country are family companies or micro, small or medium-sized businesses. There is a clear relationship between the ownership of companies and individuals. Only 1% of companies registered in this country have a complex financial structure.

We have said that banks could be charged with greater duties to ensure that they are more compliant and rigorous in exercising their duties to ensure that money laundering does not take place, but they have a conflict in that they stand to make very big profits in accepting the business of rich and dodgy customers. Our anti-money laundering laws sound fairly stringent, but, as has been said already, they bear down heavily on smaller companies and it is the big, professional organisations that are trying to launder money through the system on a major scale and that can do that quite easily.

There is little personal responsibility from individual bankers—HSBC is a strong example. In 2012, it agreed to pay a record $1.9 billion fine levied by the US authorities after admitting that its anti-money laundering systems had failed; it laundered hundreds of millions of dollars at least for drugs cartels, terrorists and pariah states such as Mexico. The Senate sub-committee that carried out the investigation described HSBC’s cultures as “'pervasively polluted”.

During that time, over 47,000 people died in Mexico at the hands of drug traffickers, so it is important that we deal swiftly and effectively with such companies. The penalties could be toughened greatly. As I said earlier, we should make individual people on the board responsible for looking after that part of the business. However, I accept the point made by the hon. Member for Bassetlaw that every bank executive should be responsible and made liable for the damage that they cause and that there should be a rigorous system of penalties, which should include the option of imprisonment.

I do not want to go on too much longer. The most important point is that bringing in a public register of beneficial ownership will not involve a huge amount of red tape. The point has been made already that a number of individuals are clear that it would be easy for this country to make such a move. I cannot stress enough how important it is to small businesses to ensure that everyone gets a fair deal, that taxes are paid and that there is absolute clarity when money passes back and forth across the world.

Financial Products (Mis-selling)

Tessa Munt Excerpts

Wednesday 12th June 2013 Westminster Hall

[Bill Wiggin (North Herefordshire) (Con)]

I thank you, Ms Dorries; as always, I refer the House to my entry in the Register of Members’ Financial Interests.

I want to discuss the limitations set by the Financial Services Authority, now called the Financial Conduct Authority or the FCA, in respect of its June 2012 review of the mis-selling of financial products to companies by UK banks in 2005 and 2006, which I shall refer to hereafter as “the FSA review”.

The FCA now holds the compensation fund contributed to by the banks that were guilty of such practices. The fund was set up to provide recompense to small and medium-sized enterprises—SMEs—that were mis-sold certain financial instruments. I seek the Government’s support in challenging the FCA’s definition of a SME as contained in the limitations of the FCA review, so that all businesses and not just the smaller ones may be permitted support and assistance from the FCA in claiming compensation for being mis-sold financial products.

I also wish to challenge the limitation placed on the types of financial products that were part of the FSA review. In 2007, the FSA implemented new conduct of business rules, which derived from the EU’s 2007 markets in financial instruments directive. Under those rules, customers are afforded different levels of protection according to the category into which they fit.

The three categories are retail, which includes private individuals and smaller businesses not regulated by the FSA; professional, which includes larger firms, some of which are regulated by the FSA; and eligible counterparties, which includes financial institutions such as investment banks and stockbrokers.

Before 2007, the boundaries between retail and professional customers were significantly lower than they are now. Today, as a direct result of the 2007 rule changes, the banks are prohibited from selling many products they used to sell to their customers. Recognising, however, that we had insufficient legislation and protection for our businesses against the banks’ mis-selling of financial products back in 2005-06, I question why the FSA review protected only some and not all of those affected.

I suggest that the limitations set by the FSA fly in the face of logic and reason, and wrongly exclude a number of organisations from deserved recompense. I therefore ask the Minister to require that the FCA increase the scope of the compensation fund. We should afford protection to all affected companies, regardless of their size and of which financial products they were mis-sold. Quite simply, if they were mis-sold anything, they should be entitled to the protection of the FSA review, and compensated accordingly by the FCA.

In June 2012, the FSA issued a statement regarding the banks’ mis-selling of financial products. The statement reads as follows:

“The FSA has today announced that it has found serious failings in the sale of interest rate hedging products to some small and medium sized businesses (SMEs). We believe that this has resulted in a severe impact on a large number of these businesses. In order to provide as swift a solution to this problem as possible we have today confirmed that we have reached agreement with Barclays, HSBC, Lloyds and RBS to provide appropriate redress where mis-selling has occurred.

The banks will move to provide redress directly for those customers that bought the most complex products. They have also agreed to stop marketing interest rate structured collars to retail customers.

Interest rate hedging products can protect bank customers against the risk of interest rate movements and can be an appropriate product when properly sold in the right circumstances. During the period 2001 to date, banks sold around 28,000 interest rate protection products to customers.

These products range in complexity from comparatively simple ‘caps’ that fixed an upper limit to the interest rate on a loan, through to the more complex derivatives such as ‘structured collars’ which fixed interest rates within a band but introduced a degree of interest rate speculation.

Over the past two months the FSA has conducted a review of these sales. We have reviewed a significant amount of documentation from the firms (including sales files, customer complaints and taped conversations). We have also talked to over 100 customers who have come forward.”

In its investigations, the FSA found a number of poor sales practices by the banks, including poor disclosure of exit costs; failure to ascertain customers’ understanding of risk; non-advised sales straying into advice; over-hedging, which is where the amounts or the duration did not match the underlying loans; and rewards and incentives being a driver of the practices.

In its statement, the FSA concluded that

“not all businesses will be owed redress”,

which means that only SMEs, and only those SMEs that were sold interest rate hedging products, were entitled to redress. Those conditions left certain businesses, simply because of the number of employees they had or the amount of turnover they generated, being declared by the FSA as “sophisticated investors”, and not entitled to redress via the FSA, or the FCA in its new form.

For the FCA, a sophisticated investor is an organisation that is bigger than an SME, but I suggest that the term must surely apply to a person, firm or organisation that has a degree of sophisticated knowledge or understanding of financial products, and that the level of sophistication cannot be determined merely by size.

From information provided to me by a constituent, the FCA’s definition of an SME—a “non-sophisticated investor”—which has been agreed with the banks, is that it is an organisation with an annual turnover of less than £6.5 million, a head count of fewer than 50 and protected assets of less than £3.26 million. If a company cannot satisfy two or more of those criteria, it is considered outside the FCA’s scope for the compensation fund.

The definition hardly covers all SMEs, especially when we consider that they are differently defined by the Companies Act 2006. Under that Act, a medium-sized company is defined as having fewer than 250 employees—considerably more than 50—and a turnover of less than £12.9 million.

Furthermore, under European Commission guidelines adopted on 1 January 2005 with a view to harmonising the Europe-wide definition of an SME, there is a third definition whereby a medium-sized company is defined as having fewer than 250 employees and an annual turnover of less than €50 million, which is the equivalent of £42.5 million and therefore considerably larger than the figure in the FSA’s definition.

The FSA created its own definition of an SME with no public consultation and no logic or reason behind it, and in a way that seems to contradict legislation and EU guidelines. Perhaps it was influenced by the banks—perhaps not.

[Tessa Munt (Wells) (LD)]

We are talking about the very sector that has been hit hardest by the mis-selling of interest rate swap agreements. All we seek is growth, most of which will come from small and medium-sized businesses, so does the hon. Gentleman not agree that that group of companies and organisations should be given the best assistance possible, so that they can get out of these appalling agreements and carry on with their businesses?

[Bill Wiggin]

I partly agree, but I would like to see justice for all companies, irrespective of their number of employees or the size of their turnover. As a former banker, I know that the degree of sophistication needed to understand these complex products is extremely high. If companies were not properly educated into the deals they were doing, why should the FSA pick one particular group to protect? I agree with the emphasis on SMEs as a very important sector, but they are not the only sector.

We know that many businesses were mis-sold different types of financial product. In many cases, they were mis-sold products that were even more complicated than the interest rate hedging products covered by the review, but because they were mis-sold a different and more complex type of product, they, too, are not entitled to redress via the FCA compensation fund. Could it be that companies outside the FCA’s definition of an SME, such as my constituent, that were mis-sold complex financial products have suffered even greater financial losses than those that have redress available to them?

In the FSA statement of last June, Martin Wheatley, managing director of the conduct business unit, said:

“For many small businesses this has been a difficult and distressing experience with many people's livelihoods affected. Our work has focused on ensuring a swift outcome for these businesses that form such an important port of the economy.”

That was rather what my hon. Friend the Member for Wells (Tessa Munt) said.

Surely all businesses, large and small, form an important part of our economy. For my particular constituent, whose case I will cover in detail, the effects of the banks’ negligent malpractices were unquantifiable. It is almost impossible to predict how the company might have grown, how many more people it might have employed and how its development might have impacted on the local economy of Herefordshire had it not lost in excess of £2.25 million over just a few months, which it spent five years paying off. Because it had more than 50 employees at the relevant time and was doing well in turnover during the relevant period, it did not get access to the justice to which others were entitled from the compensation fund.

Despite my constituent’s company being clearly recognisable as a medium-sized enterprise under the Companies Act definition, it falls outside the FCA’s unique version of what constitutes an SME. I suggest that it is not alone, and that it is time that the floodgates were opened to provide redress to all organisations that have been the victim of bank malpractice, regardless of their size and of what they were mis-sold.

I think that we would all agree that the FSA review was necessary to bring order to the banks, to create accountability for past negligence and malpractices and to provide deserved recompense for those that had been misled and badly advised by the banks. However, it is now time to do more.

My constituent’s is a privately-owned, limited company, called allpay Ltd. Entrepreneur-led and owned, the company rapidly evolved from a groundbreaking idea in the 1990s—the owner re-mortgaged his house to get the business off the ground—and has now become one of Herefordshire’s biggest success stories. It was the first company to use magnetic swipe cards to collect payments for Departments, local authorities and registered social landlords cheaply, efficiently and safely. It now offers several bill payment solutions, and processes nearly £5 billion of central and local authority and RSL payments every year. The business deserves recognition and reward for its services to the public sector, its innovation and its creation of hundreds of jobs in the most rural county in England. The company is still growing.

In 2005-06, allpay was the victim of mis-selling by its bank, HSBC. Originally, allpay asked HSBC to advise it on the very type of product that was covered by the FSA review, but it was ultimately mis-sold something significantly more complex: three multi-callable range accrual interest rate swaps—products that, although speculative in nature, were sold as hedging by the bank.

The company had banked with HSBC for many years and felt that it could trust the bank to recognise its needs and understand which products were suitable. It was required to sign HSBC’s private customer terms and conditions, which confirmed that it did not rely on advice from the bank, but fully understood the risks as it was a sophisticated customer. The word “sophisticated” was not defined.

There is no evidence that allpay was made aware of the risks, yet HSBC continued to present more complex products for sale. The beauty of the bank’s sales pitch was to offer differing products—some suitable, but with a price attached, and some unsuitable, with a slight additional return and a purchase price of zero. The bank relied on an unsophisticated customer not to spot the unlimited risk associated with the free products should there be an adverse rate movement.

Under the terms of the agreement, allpay initially received from HSBC the difference between the interest rate that was first set and LIBOR on a notional sum, provided that LIBOR remained below 5.5%. We are all aware of the LIBOR manipulation scandal, and it is impossible to suggest that my constituent’s company was not one of its indirect victims.

The agreement was for five years. HSBC, not allpay, had an option to terminate the agreements at the end of each quarter; allpay had no documented exit route. It did not realise that at the time, because in no way was it ever a sophisticated investor with any degree of sophisticated financial knowledge about its entering into something akin to betting on a horse—in essence, gambling on LIBOR rates staying at a certain level. At the time, my constituent’s company entirely misunderstood the risks. Furthermore, even when it explicitly asked HSBC, allpay never received an explanation about the level of compensation that the company would have to pay if the bet was lost.

To go back to the FSA’s investigation of bank behaviour, there were several findings. It found poor disclosure of exit costs, and my constituent told me that allpay had no contractual right to exit and that no exit costs were stated. It found that there was a failure to ascertain customers’ understanding of risk, and I know that HSBC failed to explain the risks to allpay. It found that non-advised sales strayed into advice, and allpay told me that it asked for advice on hedging products but was ultimately sold something more risky. It found that rewards and incentives were a driver of such practices, and in this case the rewards for the employees who carried out the sale were significant. Therefore, despite ticking all the boxes looked into by the FSA review, my constituent still has no form of redress.

Ultimately, the horse did not win: my constituent’s company lost more than £2.25 million and overnight, with a change in the LIBOR rate, found itself haemorrhaging almost £5,000 a day—£35,000 a week or £455,000 a quarter—in interest. That was completely unsustainable, and would be for most businesses for any period. Worse still, those figures were the least amounts payable: if interest rates moved further from the agreed price, they could easily double, treble or more.

My constituent’s company was left in a very difficult position—completely over a barrel—facing certain insolvency and the probable loss of hundreds of jobs. The managing director attempted everything that he could: he threatened, begged, cajoled and applied to exit out of an agreement that had no exit clause. It cost the company dearly, not just in the interest payments made, but in additional costs of £1.5 million to cover the bank’s lost income. Ironically, HSBC provided the loan for the exit payment that it agreed to take.

My constituent’s company was advised to sue the bank for negligence, but by that time it did not have the resources to take on HSBC in expensive and lengthy High Court litigation. It asked the FSA to consider allpay in its review, but the request was refused due to its size at the relevant time and the type of product it was mis-sold.

The company asked HSBC for recompense. Appallingly, HSBC ignored it and responded to its correspondence only when I stepped in to offer my support. HSBC’s in-house lawyer finally engaged with my constituent’s company and entered into some dialogue, eventually inviting my constituent from Hereford to its offices in Canary Wharf on a “without prejudice” basis to discuss a settlement. The meeting was a waste of time: it lasted no more than 30 minutes, and it appears that HSBC dragged my constituent to London essentially to be told to get lost. The bank made it clear that it will discuss the matter further only if it is compelled to do so by the FCA, and if the case is brought within the review.

In March, the hon. Member for Dundee West (Jim McGovern) queried why other products were excluded from the FSA review. A constituent of his was mis-sold a fixed-rate tailored business loan and was excluded from the review. I understand that my right hon. Friend the Secretary of State for Business, Innovation and Skills is ready to press the FCA to extend the review’s remit, which I wholeheartedly support. An extension of the scope of the original FSA review is necessary.

The decision to limit the scope of the FSA review was perverse, because it did not take into account the categories into which companies fitted and what definition they met, nor the fact that companies, through no fault of their own but entirely due to a banking institution, were mis-sold a financial product and suffered significant financial loss. There is no logical explanation for the exclusion from redress of companies due to their size or to the type of product that they were mis-sold.

I appreciate that an extension might open the floodgates to a wave of new claims against other banks and trigger a significant increase in their provisions for mis-selling liabilities, which have already more than doubled to £2 billion, but the banks might just learn a lesson. I hope that the Government will support all affected businesses of whatever size, ensure that the banks are called on by the FCA to provide compensation for their malpractices and that the FCA is compelled to extend the scope of the review.

--- Later in debate ---

[Sajid Javid]

Yes, I can bear that in mind. My hon. Friend makes a characteristically good point. Throughout this debate, he has raised a number of important issues, but I hope that he accepts that the FCA is an organisation that needs a degree of strong independence so that it can make robust decisions and not be influenced for the wrong reasons.

[Tessa Munt]

Will the Minister consider this particular situation? If a company has gone into administration because of the mis-selling of an interest rate hedging product, it is by definition excluded. If it is in administration, only the insolvency practitioner can represent the interests of that company, but the insolvency practitioner is often appointed by the bank and is extremely loth to sue the bank for redress, and if it does, it has a direct interest, which means that there is a conflict of interest in that sort of situation. The company can never get redress because, effectively, the company owner has gone down the pan—his house will be gone and so on. It is an appalling situation. Will the Minister address that point for me?

[Sajid Javid]

The hon. Lady raises an important point. The issue of insolvency, insolvency law and our approach to that is, as she will know, looked at in great detail by the Department for Business, Innovation and Skills. Given the connection between that issue and the one we are discussing, I will make sure that my right hon. Friend the Business Secretary is aware of it and responds accordingly.

Let me reiterate that the Government take extremely seriously the abuse that has taken place in many cases and I am determined that these wrongs will be put right. I want to see a quick solution to the mis-selling of interest rate hedging products to allow those businesses to continue to operate and contribute to the ongoing recovery of the UK economy. Once again I congratulate my hon. Friend the Member for North Herefordshire on securing this debate.

Oral Answers to Questions

Tessa Munt Excerpts

Tuesday 11th September 2012 Commons Chamber

[Danny Alexander]

The hon. Lady will also know that the substantial increases in the personal allowance are putting more money in the pockets of people on low incomes who are working hard. We protected the lowest-paid public sector workers from the impact of the pay freeze, and she will also know that out-of-work benefits went up by 5.2% this year.

[Tessa Munt (Wells) (LD)]

Returning to the high cost of petrol, diesel and heating oil, I am sure the Chief Secretary is aware that in the past few days FairFuelUK has published a statement from a whistleblower alleging that the oil commodity trading market is being rigged in a similar way to LIBOR. Will he confirm that he will back the call for a wider investigation and inquiry into the UK oil trading market by the Financial Services Authority or the Bank of England, whichever is more appropriate?

Banking Competition

Tessa Munt Excerpts

Thursday 12th July 2012 Westminster Hall

[Tessa Munt (Wells) (LD)]

I meant no discourtesy by not being here earlier; I had another meeting. I wish purely to echo the concerns expressed by my colleagues. Although tradition requires that, as I am Parliamentary Private Secretary to the Secretary of State for Business, Innovation and Skills, my right hon. Friend the Member for Twickenham (Vince Cable), I should not necessarily contribute fully to this debate, my enthusiasm for it and for the whole subject is without bounds, which is why I backed the request for this debate.

The Liberal Democrats have been warning for a long time that banks are precariously large and inadequately regulated. I found myself reading an Adjournment debate initiated on 19 June 2000 by my right hon. Friend, in which he discussed the Cruickshank report. It is good to see that the Government are now making moves in the right direction.

Many of the headline issues that I would have mentioned have been brought up by my colleagues. For example, people do not transfer from bank to bank; banks are still too big to fail; there are barriers for entering and exiting the banking market; and the market is concentrated into fewer providers, with little choice for consumers and customers, because of various things that have happened over the years.

I should like to highlight some concerns of my constituents in rural Somerset. The situation is such that everybody must have a bank account. Those who work have to be paid through a bank account, and those who do not work and may need some assistance from the taxpayer with their everyday costs therefore need to have a bank account to receive any benefit or help that they get. The move to universal credit will require larger numbers of people to have basic bank accounts. I am concerned that those bank accounts—that sector of the market—may be concentrated in a few ethical banking organisations, particularly the Co-operative bank and credit unions. I should declare that I hold a Co-operative bank account. I made a positive decision to switch to the Co-op, mainly because I felt that it was an ethical bank. However, it should not carry an undue burden in helping people who need more assistance with their banking than others.

The restrictions that are being placed by various banks on the features and functionality of basic bank accounts make it much harder for people to access their own cash, particularly in a rural area, where they may have to travel eight or 10 miles to find a free cash point. I am particularly concerned about that. The ATM network is creaking slightly. Certain parties withdraw from offering free ATM services, meaning that others have to carry a greater burden. I am acutely aware of that issue and we, as a Government, might want to deal with it. We should try to ensure that more people have access to their own cash. I am glad that a number of banks are now issuing £5 notes in their cash machines. That is particularly helpful in my constituency for people who need to use small sums and want to keep complete control over their cash flow. However, only a certain number of banks are helping to bring such elements together. We should consider carefully how they might be developed and how we might ensure greater fairness across the whole market.

The portable account number mentioned by the hon. Member for South Northamptonshire (Andrea Leadsom), who called the debate, is a fantastic solution. We do that with our phones and all sorts of things, and it would be helpful if people could switch their accounts much more smoothly.

I do not wish to add more—otherwise, I shall find myself in trouble. I hope I have expressed adequately my concerns and those of my colleagues.