The Financial Secretary to the Treasury (Mr Mark Hoban)
I congratulate the hon. Member for Wells (Tessa Munt) on securing a debate on this important topic. The fact that there are 40 Members here tonight demonstrates the widespread interest across the House in what has happened to Crown Currency Exchange. I am glad to have the opportunity to explore the collapse of Crown Currency Exchange and touch more broadly on how foreign exchange services are regulated.
I share the hon. Lady’s concern about the impact of the failure of Crown Currency Exchange. I have enormous sympathy for the 13,000 people who have been affected by its collapse. They are honest, hard-working people who have been hit hard and, in some cases, the losses have been considerable. I welcome the work of the administrators in investigating the issues surrounding Crown’s collapse, and their efforts to recover as much money as possible for the consumers affected. The administrators have written to the creditors, and have held a creditors’ meeting to discuss their proposals. They will continue to review Crown’s trading operation, its financial position and the conduct of its directors. I look forward to receiving the administrators’ report, so that the Government can consider what lessons can be learned from it and assess what might need to be done to protect customers in future.
Crown Currency Exchange operated an online bureau de change—put simply, it bought and sold currency over the internet, which is quite normal in modern day currency exchanges. However, what separated Crown from other operators was that it was among a minority of companies whose customers paid for their foreign currency weeks or months before they were due to receive it. Some other aspects of its operations were also unusual. It offered much better rates than those on the high street and enticed customers by offering special deals purporting to be from cancelled contracts that did not exist. It did not hedge its exposure to foreign exchange rate changes, so it was at risk if sterling moved against it, and it took payment in full and in advance, for up to a year before delivery. In addition, it did not accept payments by debit or credit card. Crown’s business model was an outlier, which posed risks to the firm and, as we know, to consumers. The way in which Crown operated meant that consumers lacked protection because they were unable to pay by debit or credit card.
I do not wish to prejudge the causes of Crown’s failure. The administrators’ final report, which is expected in a few months, will go over that in detail, and look at the conduct of the company’s directors. Let me touch on the regulatory questions raised by the failure. As we have heard, Crown Currency Exchange was registered by the Financial Services Authority as a small payments institution, which means that it managed payments from one person to another. Such institutions may handle the remittances from migrant workers to be sent home to their families, or they may offer an internet service for making payments in competition with the banks.
European legislation—the payment services directive—provides for light touch regulation of small payments institutions. That was the case with Crown, which had some reporting obligations to the FSA. However, the FSA was not required to exercise any prudential regulation, such as oversight of capital requirements over Crown; it was required only to oversee its payments. Buying and selling foreign currency is not a regulated activity, so Crown’s foreign currency sales were not regulated by the FSA. The regulatory requirements relating to foreign currency sales are limited to quoting rates clearly, which the FSA oversees, and complying with money laundering legislation, which Her Majesty’s Revenue and Customs oversees. The money laundering rules are designed to fight terrorism and crime, not to protect customer deposits. That is why neither the FSA nor HMRC was in a position to investigate or address any problems with the business model of Crown Currency Exchange.
Mr Dominic Raab (Esher and Walton) (Con)
A number of my constituents have also lost money in this case. I recognise the limited remit of the FSA, but should it have registered CCE when, as I understand it, one of CCE’s directors had a criminal conviction? Was that an example of maladministration, or will that be reviewed?
Mr Hoban
Often in these cases—I do not want to go into detail on this—the FSA is dependent on disclosure by directors. As the hon. Lady said, the FSA does not have the power to access criminal records to enable it to find out whether directors’ disclosures are accurate.
The question that we need to address is why foreign exchange services are not more tightly regulated. Traditionally, buying and selling currency is the same as buying and selling any other commodity, whether it is gold and silver or food and drink. With the exception of Crown, this kind of trading has been, and remains, a low-risk business. It is something that millions of us do day in, day out, whether at the post office, in banks or at bureaux de change, without a problem. But Crown’s business model was different, and what should have been straightforward transactions led to substantial losses for its customers. I accept, of course, that Crown has inflicted substantial losses on customers. The Government are anxious to learn the lessons from this failure and to take what action may be needed, including regulatory changes.
Mr Dennis Skinner (Bolsover) (Lab)
A lot of people have lost money, including people in my constituency and loads of others. Does the Minister think that, as in the case of Equitable Life, it would be a good idea to make sure that the financial ombudsman has a look at this case?
Mr Hoban
It is not a matter for the ombudsman—it is for the administrator to decide what further actions are needed. As I said, the problem is that the nature of this business was such that it fell outside the regulatory perimeters. It is not covered by the Financial Ombudsman Service or the financial services compensation scheme, so there is a distinction between this case and the one to which the hon. Gentleman refers.
Mr Hoban
I should like to make some progress, as there are important points that I want to make by the time I finish in seven minutes’ time.
I want to reassure hon. Members that I am anxious to protect customers and that we should learn lessons from this. I would point out, however, that there are 1,480 businesses operating as bureaux de change in this country, the vast majority of which are retail outlets dealing with customers face to face. The majority of these firms are not taking payment in advance or entering into forward currency contracts. They do not expose their customers to the kind of risks that Crown appears to have done.
Mr Hoban
No, I am going to continue.
The regulation of these businesses, including capital requirements, would impose costs on them and on their customers, so we must be sure that the benefits of regulation outweigh the cost to consumers. I assure hon. Members that we are looking at the other companies to see if any are operating in the same way as Crown. We have not yet identified any, although the investigation is still ongoing. I undertake that the Government will seek to learn the lessons from Crown’s failure, once we have all the facts, and take whatever action is appropriate.
Mr Hoban
Let me continue for a bit longer.
I recognise that there are innocent victims at the heart of this, but because Crown’s activities are not regulated by the FSA, its customers are not covered by the financial services compensation scheme. Crown did not accept credit card or debit card payments, so its customers are not covered by the protection they offer, and I am afraid that they are therefore awaiting the outcome of the administration process. I believe that it is vital that consumers understand their rights and what products and services are covered by the FSCS. I welcome the fact that the FSCS is launching a campaign in the new year to raise consumer awareness and encourage them to seek more information on what is and is not covered by the scheme. However, I also believe that there is a responsibility on companies to be up front with their customers about the protection that is available if something goes wrong, particularly where the business is complex, as was the case with Crown.
Tessa Munt
Exactly what purpose is served by registering a small payments institution with the FSA? Given that the FSA makes it perfectly clear that it denies any regulatory involvement with small payments institutions, of which there are 547, I am not entirely sure for what one is paying £500.
Mr Hoban
The hon. Lady makes an important point, but the reality is that this activity falls outside the regulatory perimeter of the FSA. The reason these businesses are registered with the FSA is that when the payments services directive was introduced, there had to be somewhere for these businesses to be registered, so the decision was taken to register them with the FSA. That decision was taken not by this Government, but by the previous Government. The hon. Lady is right that that situation leads to some confusion for consumers. The reality is that such businesses were not regulated by the FSA. The same applies to the other 1,500 bureaux de change that operate under this model.
Nick Smith
I thank the Minister for giving way. Given the scale of the issue with 13,000 people having been affected, will the Minister tell us more about the role of Barclays bank?
Mr Hoban
Barclays had a limited relationship with Crown. It did not lend money to Crown, but simply provided it with a bank account. It raised a number of questions with Crown, but the answers gave no cause for concern. It acted simply as Crown’s bank and had no engagement in the business.
Mr Russell Brown
I could ask the Minister when he believes that my constituents will receive money and how much, but I want to come back to the fact that the company was classed as a small payments institution, despite its turnover putting it in a category that meant it should have been regulated. Is he in a position to instruct the FSA to look at the more than 500 other companies that are small payments institutions to see whether they fall into a regulated category?
Mr Hoban
When the €3 million figure is exceeded, a company should be regulated, but that figure refers to the average monthly payment transaction. A company can therefore be turning over €36 million a year and still fall below the threshold for registration.
To conclude, I agree with the hon. Lady that the collapse of Crown Currency Exchange has hit 13,000 innocent victims and that, in some cases, the losses have been substantial. We all agree that that should not happen again, that we have to learn the lessons from Crown’s failure and that we must take all the steps necessary to ensure that consumers are better informed about the risks that they take and the rights that they have. We will be able to determine the action to be taken by the Government or the regulators only once we have received the report. We will look at the costs and benefits of regulation. I remind the hon. Lady that in last week’s debate on the retail distribution review, she pointed out the risk that more regulation poses to businesses.
We must ensure that there is proper regulation for consumers. We must learn the lessons from Crown to ensure that we put the right protection in place for consumers, given the risks involved. I assure hon. Members who take an interest in this matter that I will keep them up to date with what is happening with Crown. I recognise from the number of hon. Members present in the House tonight how important—