Contingencies Fund Advance: National Savings and Investments
John Glen Excerpts(5 years, 3 months ago)
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The Economic Secretary to the Treasury (John Glen)
HM Treasury and the Chief Secretary to the Treasury have agreed additional resource DEL funding of £40,500,000 for National Savings and Investments to respond to covid-19 issues, build greater operational resilience and prepare for a major retendering event.
Parliamentary approval for additional resources of £40,500,000 will be sought in a supplementary estimate for National Savings and Investments. Pending that approval, urgent expenditure estimated at £40,500,000 will be met by repayable cash advances from the Contingencies Fund.
[HCWS674]
Bilateral Loan to Ireland
John Glen Excerpts(5 years, 3 months ago)
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The Economic Secretary to the Treasury (John Glen)
I would like to update Parliament on the loan to Ireland.
In December 2010, the UK agreed to provide a bilateral loan of £3.2 billion as part of a €67.5 billion international assistance package for Ireland. The loan was disbursed in eight tranches. The final tranche was drawn down on 26 September 2013. Ireland has made interest payments on the loan every six months since the first disbursement.
On 7 December, in line with the agreed repayment schedule, HM Treasury received a total payment of £407,852,313.75 from Ireland. This comprises the repayment of £403,370,000 in principal and £4,482,313.75 in accrued interest.
In October, as required under the Loans to Ireland Act 2010, HM Treasury provided the latest statutory report to Parliament covering the period from 1 April to 30 September 2020. The report set out details of future payments up to the final repayment on 26 March 2021. The Government continue to expect the loan to be repaid in full and on time. The next statutory report will cover the period from 1 October 2020 to 31 March 2021. HM Treasury will report fully on all repayments received during this period in the report.
[HCWS673]
Operations of the UK's Counter-Terrorist Asset Freezing Regime:1 April 2020 to 30 June 2020
John Glen Excerpts(5 years, 3 months ago)
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The Economic Secretary to the Treasury (John Glen)
Under the Terrorist Asset-Freezing etc. Act 2010 (TAFA 2010), the Treasury is required to prepare a quarterly report regarding its exercise of the powers conferred on it by Part 1 of TAFA 2010. This written statement satisfies that requirement for the period 1 April 2020 to 30 June 2020.
This report also covers the UK’s implementation of the UN’s ISIL (Da’esh) and Al-Qaeda asset freezing regime (ISIL-AQ), and the operation of the EU’s asset freezing regime under EU Regulation (EC) 2580/2001 concerning external terrorist threats to the EU—also referred to as the CP 931 regime.
Under the ISIL-AQ asset freezing regime, the UN has responsibility for designations and the Treasury, through the Office of Financial Sanctions Implementation (OFSI), has responsibility for licensing and compliance with the regime in the UK under the ISIL (Da’esh) and Al-Qaeda (Asset- Freezing) Regulations 2011.
Under EU Regulation 2580/2001, the EU has responsibility for designations and OFSI has responsibility for licensing and compliance with the regime in the UK under Part 1 of TAFA 2010.
EU Regulation (2016/1686) was implemented on 22 September 2016. This permits the EU to make autonomous Al-Qaeda and ISIL (Da’esh) listings.
Attachments can be viewed online at: http://www. parliament.uk/business/publications/written-questions-answers-statements/written-statement/Commons/2020-12-14/HCWS645/.
[HCWS645]
Covid-19 Support Schemes: Ineligible People
John Glen Excerpts(5 years, 3 months ago)
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The Economic Secretary to the Treasury (John Glen)
It is a pleasure to serve under your chairmanship, Ms Rees. I congratulate the hon. Member for Twickenham (Munira Wilson) on securing the debate, and I thank the 14 Back-Bench Members for their contributions—I listened very carefully to each—which spoke powerfully to the many cases of hardship that I recognise exist throughout the country.
I acknowledge the article written by the hon. Member for Twickenham for The House magazine today, and the briefing by ExcludedUK, which was made available yesterday for the debate. I have looked at that carefully and shall take back the three-stage approach, and we will continue to see if we can move forward. I recognise that there is a sensitivity about Ministers standing up and listing all the measures that have been put in place so far, so I will go through some of that only briefly, but I will then move on to the context and rationale behind some of our decisions, and address some of the points that have been raised.
Clearly, the pandemic has profoundly affected the lives of countless people. As a Government, we have a moral obligation to protect jobs, livelihoods and our country’s economic capacity, a point that has been made and acknowledged by many Members during the debate. We have spent £280 billion on what has been one of the most comprehensive responses, including the job retention scheme, which protected 9.6 million jobs; the self-employment income support scheme, which provided grants to 2.7 million people; affordable loans for businesses, which we have adapted over time; extra help through the welfare system; bespoke interventions for different industries, such as the £1.57 billion for the creative industries; as well as other support, such as income tax time-to-pay arrangements, payments to those asked to self-isolate and grants for businesses required to close.
We have striven, as a Government, to provide support for as many individuals and businesses as we can, as rapidly as possible. That has meant taking some difficult decisions, however. I will set out the rationale for some of those decisions, particularly in relation to the self-employed, before moving on to how we have adapted our support schemes so far.
To give some context, when we designed those schemes, we had to keep some guiding principles in mind. First, the help must be targeted at those most in need. To achieve that, we obviously had to set clear rules. That is why we have said that those eligible to claim from the self-employment income support scheme must have made profits of no more than £50,000 from self-employed activity. I recognise that for those on the upper side of the £50,000 cut-off, that must feel unfair, but we did have to draw a line somewhere, and wherever we had drawn it, we would have had the same challenge.
According to HMRC data, those in that category had an average income of between £100,000 and £200,000. We have also said that support from that scheme must go to people whose main income is from their self-employed trade. That is why we also said that to claim, workers should make at least half of their income from self-employed activity. HMRC analysis shows that typically for those who make less than 50% of their income from self-employed sources, their profits are on average between £1,800 and £3,500 per year. That strongly suggests that self-employment is not their primary income source.
I now come to the second principle that we have used, which is the need to balance the Government’s duty to support individuals with our responsibility to protect taxpayers. Colleagues will be aware of the wide concern about fraud that continues to be, rightly, something that is raised in Select Committees and by those commentating on what we have done. To verify claims through the self-employment income support scheme, we needed to use data from an individual’s tax returns, and that means using returns from the year 2018-19. That has meant that people who became self-employed in 2019-20 have been unable to access the scheme, because HMRC does not yet hold complete tax return data to check their details.
We are listening closely to individuals who pay themselves through dividends, but that presents another challenge, which is that there is no practicable way of distinguishing between dividends derived from an individual’s own company and those from other sources.
I know that the past months have been very difficult for many people in the groups that I have mentioned, but I want to stress that we have not taken a dogmatic opposition position to any particular group and we continue—
Peter Grant
I am grateful to the Minister for letting me intervene. It is patent nonsense to suggest that we cannot tell the difference between shareholders who are directors of a small company and shareholders who are anonymous investors in a big company that they know nothing about. Companies House holds all those records. Why, nine months later, have HMRC and the Treasury made no attempt to do a data-matching exercise between what HMRC holds and what Companies House holds?
John Glen
I thank the hon. Gentleman for his intervention. Of course, one of the challenges that we had to come to terms with was the need to deliver a scheme as quickly as possible, and to as many people as possible, within the context of a finite number of individuals who could verify that data. Short of introducing a scheme whereby people would need to manually go through and verify those different data sources—
John Glen
The hon. Gentleman shakes his head, but that, practically, was the challenge that we, working with officials, had to overcome. We had to make a judgment as to how to reconcile those two realities.
I want to reiterate that we are not adopting dogmatic opposition to any particular group, or contribution or idea that could move this forward. We need to protect the taxpayer, but that has not overridden our determination to provide support and we will continue to think about how we can improve the way the schemes that I have mentioned are targeted.
We have adapted already. We extended the cut-off point by which workers needed to be on their company’s payroll to be eligible to be furloughed, allowing more workers to receive those payments, and that potentially includes freelancers paid through PAYE. Some workers may be able to benefit from the recent changes that allow employers to re-furlough workers who left their jobs between 23 September and 30 October. And since July, employers have been able to bring back previously furloughed workers while still claiming from the Government for any hours not worked. We have adapted the self-employment income support scheme to help new parents who have taken time out of work, along with self-employed armed forces reservists, who were previously not covered.
I would like to add that people who are ineligible for one scheme may still be able to get support from one of the many other sources that I mentioned earlier, and that was not an exhaustive list.
I recognise that many people in the groups that we have talked about today fully intend to continue in their current jobs. However, we are investing to help those who decide to seek new opportunities. My right hon. Friend the Chancellor of the Exchequer recently announced a £2.9 billion restart programme, which will provide intensive and tailored support to help people to find work.
I listened to the range of contributions from constituents across the country. It is very, very challenging for us to provide support for every single group that is struggling at this time, but I reiterate our willingness to continue to work with groups, including IPSE, the relevant APPG, the FSB and others, that bring forward proposals. My right hon. Friend the Financial Secretary to the Treasury is engaged in many of those conversations. As we move through into the new year, we will continue to look at the new schemes.
Our overriding goal has been to provide as much support as we can to people and businesses, and as rapidly as possible. We acknowledge that we have not been able to help everyone in the way that we would ideally want to, but that has not been a wilful disregard for their situation; it is based on the challenges of verifying. It is not attributing any blame to them either. We have succeeded in supporting millions of people and businesses through this intensely difficult time, and we will continue to do our very best until we have beaten coronavirus.
Financial Services Bill (Eleventh sitting)
John Glen ExcerptsThursday 3rd December 2020
(5 years, 3 months ago)
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Stephen Flynn
Then I will do that—thank you. It is a pleasure to see you in the Chair once again, Mr Davies. It is probably accurate and correct that the new clauses are grouped together, because they are quite similar in scope, particularly when considering the wider issue of divergence. I will come back to that.
New clause 28 seeks to provide an impact assessment before disapplying European Union rules or applying rules different from those of the EU. That is incredibly important, because it goes to the core of what the Bill is about in relation to our leaving the European Union. Only a few day ago, the Governor of the Bank of England highlighted that a no-deal Brexit could of course lead to a worse economic situation than covid. We need to be in a position to assess the reality of what the Government seek to do. That should apply in the case of no-deal, a good deal—as far as the Government see it—a bad deal or a “Boris deal”.
We should compare what we could have had with what we get. We should be open and transparent with the public about that. The Government talk about wanting to take back control and parliamentary sovereignty; let us take that back to the people as well and show them that the Government are being open and transparent with everything that is put forward. That is particularly important in a Scottish context because—lest we forget—the people of Scotland did not vote for Brexit, and they do not want it to happen, so it is incumbent on the UK Government to provide that clarity to them, particularly on such important matters.
If the Government are proud of the actions that they are taking and seek to go down a different path, they should be willing to follow up on their actions and be open and transparent, not shy away from that.
That takes me on to new clause 36, which would do something very similar to new clause 28, but rather than looking at the potential impact of future decisions, it would provide for an annual review of the decisions that had been taken. That, as the right hon. Member for Wolverhampton South East said, is, in the context of equivalence, incredibly important, particularly if we are to see the UK diverge from the European Union in any way, shape or form. As we have heard, the Chancellor has guaranteed equivalence to the European Union, so it will have access to the UK markets, but of course there is not a similar agreement in place for us. Conservative Members would, understandably, argue that that is the EU’s fault and that the EU should be delivering that for us, but, as I said on Second Reading, who can blame it when this is a Government who simply cannot be trusted, a Government—lest we forget—who are willing to break international law?
Irrespective of that, we should all be concerned about the reality of not having equivalence in place and what that could lead to. We have made and heard suggestions that it could mean, ultimately, divergence in relation to MiFID—the markets in financial instruments directive. It could mean divergence in relation to the wider insurance regulatory framework. I appreciate that there are arguments both in favour and against in that regard, but we need always to be mindful of what we are seeking to diverge from in relation to our wider relationship with the European Union. I appreciate that it will ultimately be in the gift of the Government to do these things, but they should surely have some concerns about the actions that they will be taking.
I go back to the comments that I made about new clause 28. If the Government are proud of the actions that they take and have taken, they will be willing to accept both new clause 28 and new clause 36 and to put their money where their mouth is and be open and transparent with the people of Scotland and the people of the United Kingdom that their decisions have not been ones that have had disastrous consequences for the economy of the UK. I suggest that if they do not accept the new clauses, that is because they know the damage that they are going to do.
The Economic Secretary to the Treasury (John Glen)
What a pleasure it is to serve under your chairmanship once again, Mr Davies. These new clauses seek to place requirements on the Government to make various reports related to the UK’s withdrawal from the EU and the subsequent evolution of our financial services regulation.
New clause 2 deals with equivalence, which is an important mechanism for managing cross-border financial services activity. I can well understand hon. Members’ interest in that. However, the obligation that the new clause would impose on the Government—essentially, to report on the status of the EU’s considerations about UK equivalence—is beyond the Government’s power and therefore not something that the Government can agree to do.
The right hon. Member for Wolverhampton South East rightly referred to my right hon. Friend the Chancellor’s speech on 9 November, in which he made clear that we have made equivalence decisions—17 of the 30 that we have to make. We have co-operated very fully with the EU in terms of a timely response to the 17 questionnaires. Again, we cannot determine how it responds. Equivalence assessments are an autonomous process, managed separately from trade negotiations. That applies in the case of the EU, and where the EU chooses to grant the UK equivalence, that will be done in accordance with its own decision-making process. EU equivalence determinations are unilateral and do not require the UK’s agreement. Those decisions will be published and readily available to all, including UK parliamentarians.
I can reiterate today the Government’s commitment to operating an open and transparent approach to equivalence as the Chancellor explained in his speech on 9 November. Our overall approach is outlined in the recently published guidance document on the UK’s equivalence framework. That document makes it very clear that transparency will be one of the key principles of our equivalence framework.
As part of this, the Treasury will provide Parliament with appropriate information about the operation of the equivalence framework. After the end of the transition period, future equivalence decisions will be made by regulations laid before Parliament, giving Members the opportunity to consider and scrutinise the Treasury’s decisions as part of the UK’s normal legislative process.
As I said, the Chancellor recently announced a package of equivalence decisions following the completion of our assessment of the EU, where we took a thorough but proportionate outcomes-based assessment against the criteria in legislation. As the EU has confirmed publicly, there are many areas where it is not prepared to assess the UK at the current time. In the absence of clarity from the EU, we have made decisions to provide clarity and stability to industry, supporting the openness of the sector and to help to deliver our goal of open, well-regulated markets.
Alison Thewliss (Glasgow Central) (SNP)
I very much support what the right hon. Member for Wolverhampton South East says. It is important that we look at this in the round, and particularly at the newer technologies coming into force that we will need as part of our economy going forward.
John Glen
I very much appreciate the sentiment behind the new clause. The right hon. Member for Wolverhampton South East set out all the different areas of focus involved in financial services, taking me through all our different calls for evidence and ongoing pieces of work—there are a number of others, too. However, the new clause is unnecessary.
Only a few weeks ago, the Chancellor made a statement to Parliament on the future of the UK financial services sector. Indeed, Miles Celic from TheCityUK described it as an “ambitious vision” for financial services. Across the range of different elements that the right hon. Gentleman set out, a lot of activity is ongoing. Indeed, a number of consultations are out at the moment. As the Chancellor stated, we are at the start of a new chapter for the industry, and our having an open, green and technologically advanced industry that serves the consumers, communities and citizens of this country and builds on our existing strengths, including our world-leading regulatory system and standards, was the essence of that vision. The UK will remain the most open and competitive place for financial services in the world by prioritising stability, openness and transparency.
The Chancellor set out new proposals to extend our leadership in green finance, including by taking the key step of introducing mandatory requirements for firms to disclose their climate-related risks within five years, making the UK the first country to go beyond the “comply or explain” principle. He also announced plans to implement a green taxonomy and, subject to market conditions, to issue the UK’s first ever sovereign green bond next year. He set out his intention that the UK will remain at the forefront of technological innovation, to provide better outcomes for consumers and businesses.
The UK’s position as a global and open financial services centre will be underpinned by a first-class regulatory system that works for UK markets. The Government already have several reviews under way, including the future regulatory framework review and the call for evidence on Solvency II, to highlight two. We also have the FinTech review, which will report early in the new year. That is the Government’s strategy for financial services now that we have left the European Union.
I hope that I could not be accused, as the City Minister, of being unwilling to come before the House to provide updates on the Government’s work relating to financial services, whether in the Chamber, Select Committees—I think I have made about 12 appearances now—or in Westminster Hall, or of doing that infrequently. The Chancellor and I will continue to provide updates at the appropriate times in the normal way.
Having considered the issue carefully, I ask the right hon. Gentleman to withdraw the new clause.
Mr McFadden
The Minister is right to refer to the Chancellor’s statement on 9 November, which was called a vision. While it touched on the green finance things the Minister mentioned, it did not touch on many of the things that I mentioned. He is also right to say that lots of reviews are going on. While it may be unfair to say that that is the problem, there is nothing that really brings them together with clarity about where we are going. I will not press the new clause to a vote today, but we may return to it, so I beg to ask leave to withdraw the clause.
Clause, by leave, withdrawn.
New Clause 5
Regulation of lead generators for debt advice and debt solution services
“(none) In section 22 of the Financial Services and Markets Act 2000 (regulated activities), after subsection 1A insert—
‘(1AA) An activity is also a regulated activity for the purposes of this Act if it is an activity of a specified kind which is carried on by way of business and relates to—
(a) effecting an introduction of an individual to a person carrying on debt advice and debt solution services, or
(b) effecting an introduction of an individual to a person who carries on an activity of the kind specified in paragraph (a) by way of business.’”—(Mr McFadden.)
This new clause would empower the FCA to regulate activities such as paid search and social media advertisements, including the impersonation of reputable debt management charities.
Brought up, and read the First time.
Alison Thewliss
I rise to support the new clause. It is typical of the eagle-eyed way that the right hon. Gentleman has approached this Bill that he found this particular loophole. I am not sure which of his pots he thinks the Government might think it falls into, but it is a sensible, minor change. The Government would do well to take it on now or bring it back at a later stage. We want to protect people who have fallen into that situation in every way we can. We all know that there are vultures on the internet who want to cut a share of that and exploit people. The new clause is a sensible and reasonable way of addressing that and I commend it to the Minister.
John Glen
I take this issue very seriously. I recognise the work of StepChange and I note the letter from Marlene Shiels, chief executive officer of the Capital Credit Union and her support for this. She makes a significant contribution to the Financial Inclusion Policy Forum that I chaired just last week.
The Government are taking strong steps to ensure that lead generators do not cause consumer harm. As the right hon. Member for Wolverhampton South East said, lead generators identify consumers in problem debt and refer them to debt advice firms and to insolvency practitioners. That can help consumers access appropriate debt solutions and support their recovery on to a stable financial footing. However, I readily recognise the risk that unscrupulous lead generators could act contrary to their clients’ interests. To mitigate that risk, debt advice firms and insolvency practitioners are already required to ensure that any lead generators they use are compliant with applicable rules to prevent consumer harm in the market.
Under Financial Conduct Authority rules, that includes ensuring that lead generators do not imitate charities or deliver unregulated debt advice, and that they are transparent with clients about their commercial interests. As such, the FCA, as the regulator of debt advice firms—and the Insolvency Service, as oversight regulator of insolvency practitioners—already influences lead generators’ impacts on consumers.
New clause 5 would not materially improve the FCA’s influence over lead generators. Its scope would be incomplete, applying only in respect of lead generators’ referrals to debt advice firms, not to insolvency practitioners. The Government have already issued a call for evidence on whether changes are needed to the regulatory framework for the insolvency profession and will publish a response next year. In the light of our recognition that the matter needs a focus and that work is being done on a response, I ask the right hon. Gentleman to withdraw the motion.
Mr McFadden
I am happy to do that. I just appeal to the Minister to try to find a way that he is comfortable with of closing the loophole. I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 6
Duty of care for financial service providers
‘(1) The Financial Services and Markets Act 2000 is amended as follows.
(2) In section 1C, after subsection 2(e) insert—
“(ea) the general principle that firms should not profit from exploiting a consumer’s vulnerability, behavioural biases or constrained choices;”
(3) After section 137C insert—
“137CA FCA general rules: duty of care
(1) The power of the FCA to make general rules includes the power to introduce a duty of care owed by authorised persons to consumers in carrying out regulated activities under this Act.
(2) The FCA must make rules in accordance with subsection (1) which come into force no later than six months after the day on which this Act is passed.””—(Mr McFadden.)
This new clause would introduce a duty of care for the FCA which would strengthen the FCA’s consumer protection objective and empower the FCA to introduce rules for financial services firms informed by that duty of care.
Brought up, and read the First time.
John Glen
I thank the hon. Ladies and the right hon. Gentleman for their speeches, to which I have listened carefully. I will try to address fully the 10 new clauses that have been tabled. In essence, they relate to the effectiveness of the FCA’s oversight; that is the substantive point behind them.
The lead new clause is new clause 6, which has two functions. Subsection (2) requires the FCA to have explicit regard for vulnerable consumers when discharging its consumer protection objective, and subsection (3) introduces a statutory requirement for the FCA to make rules requiring authorised persons to adhere to a duty of care when providing a product or service.
UK financial services firms’ treatment of their customers is governed by the FCA in its principles of business, as well as specific requirements in its handbook. The FCA’s principles for businesses require firms to conduct their business with due skill, care and diligence, and to pay due regard to the interests of their customers and treat them fairly. The FCA already has recourse to disciplinary action against firms that breach the principles.
The FCA has already announced that it will undertake work to address potential deficiencies in consumer protection, in particular by reference to its principles for businesses. Although the coronavirus pandemic has caused the FCA to reprioritise its resources and delay certain pieces of work, including the next formal stage of this work, delaying these initiatives has ensured that firms are able to focus on supporting their customers, including the most vulnerable, during this difficult period.
I draw attention to the second purpose of new clause 6, alongside new clauses 38 and 39, which require the FCA to introduce a duty of care. A number of other amendments here also relate to the duty of care.
The Government believe that, as the FCA is already taking steps to ensure that consumers are treated fairly and financial services firms are obliged to exercise due care and regard when offering products, services and advice, a statutory duty of care requirement is not necessary. I have already set out a number of actions that the FCA is taking to ensure that customers are properly protected.
On new clause 39 in particular, the Government believe that the scope, which applies to all financial services providers, is inappropriately broad. For example, it is unclear whether that would include persons exempt under the exemptions order, which includes entities ranging from central banks to any employer offering a cycle-to-work scheme. Furthermore, there is no indication of the territorial scope of the financial services provider. Assuming that the duty of care would apply only to actions being done within the UK, the vagueness is still likely to lead to enforcement difficulties if a provider is based outside the UK.
Finally, it is inappropriate to apply the provisions to all financial services providers as no assessment has been made, in relation to unauthorised firms, of the extent to which the existing common law and other consumer protection legislation is or is not sufficient to achieve the right level of consumer protection. For example, where providers are subject to supervision or oversight by other professional bodies, as is the case with professional firms, it is unclear how this proposal would interact with the remit of those bodies who may be better placed to assess matters relevant to duties of care.
New clause 40 would require the Treasury to review at least once a year the case for instructing the FCA to introduce a duty of care for all financial services providers. The Treasury will of course keep this question under consideration. However, it is disproportionate to set this requirement in statute. I have already set out the actions that the FCA is taking to ensure that customers are properly protected.
I want to pause here and note that I have enormous respect for the perspectives of the hon. Member for Walthamstow on this issue. I do not have her encyclopaedic knowledge of dinosaur names, but I do respect her engagement on the issue. I have engaged very closely with the FCA. I recognise that she is still dissatisfied with where things have got to and she makes some reasonable points, on which I am happy to continue the dialogue, but there have been significant changes in recent months with respect to the work that is going on—that is live at present. I suspect she will not be satisfied, but let me carry on and then we can see where we get to at the end of this.
On new clause 41, the Government believe that the FCA, as the independent conduct regulator for the financial services industry, is best placed to judge the merits of a duty of care for the financial services industry. It would therefore be inappropriate for the Treasury to instruct it to impose a duty of care on authorised firms, although that dialogue is ongoing.
On new clause 42, the FCA has already published a feedback statement following its discussion paper on duty of care last year. The FCA will also publicise the findings of its upcoming work on how to address potential deficiencies in consumer protection. Therefore, the Government view is that it would be unnecessary at this point for the Treasury to report on the FCA’s position on the need for a duty of care.
The Government believe that there are sufficient protections in place without expanding the FCA’s statutory consumer protection objective or introducing a statutory duty of care, but I reassure members of the Committee that we will continue to work closely with the FCA to keep this issue under review—I am not saying “No, never.”
New clause 15 would require the FCA to have explicit regard to the prevention of consumer detriment, including the promotion of unaffordable debt, when discharging its consumer protection objective. The Government believe that the FCA, as the UK’s independent conduct regulator, is best placed to judge how to protect financial services consumers from detriment, including that which arises from the promotion of unaffordable debt. The existing legislation accounts for the prevention of consumer detriment as a result of section 1C(2)(e), which outlines
“the general principle that those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate having regard to the degree of risk involved…and the capabilities of the consumers in question”.
Stella Creasy
I am conscious of time, but approximately 1 million households that could ill afford it have lost out on about £1 billion of compensation from Wonga and QuickQuid. Does the Minister really believe that under the existing regime that he is defending, there has been sufficient recognition of what it means to consumers when it goes wrong, and that there is no need for change?
John Glen
There is ongoing work and ongoing evolving action by the FCA. The Government have taken strong steps to prevent problem debt from occurring and to support those who fall into it. We want to make sure that people have the guidance, confidence and skills to manage their finances. That is why we established the Money and Pensions Service last year to simplify the financial guidance landscape, to provide more holistic support for consumers, and to give free support and guidance on all aspects of people’s financial lives. I welcome the publication of its UK strategy for financial wellbeing, which will help everyone to make the most of their money and pensions.
I have already mentioned the role played by the FCA’s principles of business. Further to that, the FCA has recently concluded a consultation on guidance for firms on the fair treatment of vulnerable customers. The protection of vulnerable customers and consumers is a key priority for the FCA. Although many firms have made significant progress in how they treat vulnerable consumers, the Treasury and the FCA want the fair treatment of vulnerable consumers to be taken seriously by all firms so that vulnerable consumers consistently receive fair treatment. I think that was the key point made by the hon. Member for Walthamstow.
Despite those preventive measures, I recognise that many people still fall into problem debt. Professional debt advice plays a vital role in helping people to return to a stable financial footing. That is why in June the Government announced £37.8 million of extra support, which brings the budget for free debt advice to more than £100 million this year. From May, the Government are delivering the first part of the new breathing space scheme, as discussed in Committee, for problem debt. That gives eligible people a 60-day period in which fees, charges and certain interest are frozen and enforcement action is paused.
We discussed on Tuesday the importance of the statutory debt repayment plan, as part of the debate on clause 32. The Government believe that sufficient protections are in place without expanding the FCA’s statutory consumer protection objective. However, I reassure the hon. Lady that the Government will continue to work closely with the FCA to keep that issue under review.
New clause 18 would introduce a duty on the FCA to launch investigations in situations where there is suspected regulatory failure as a result of inaction or a lack of effective action by the FCA, but that is already covered by section 73 of the Financial Services Act 2012. That section imposes a duty on the FCA to investigate where it appears to the FCA that events have occurred that, among other things, indicate
“a significant failure to secure an appropriate degree of protection for consumers”
either by the FCA or otherwise, and where those events might not have occurred but for a serious failure in the regulatory system, or operation thereof, established by FSMA 2000.
Further, section 77 of the 2012 Act enables the Treasury to require the regulators to conduct investigations in cases of suspected regulatory failure in circumstances where it does not appear to the Treasury that the regulators are already doing so, for example under section 73. The section 77 powers are broader than those set out in section 73, in that the Treasury can require the regulators to conduct an investigation into relevant events where it considers that it is in the public interest to investigate them. In addition, section 77 investigations can consider aspects outside the regulatory system as established by FSMA, which allows a comprehensive review to be undertaken in the public interest. Those existing powers ensure that, in cases where section 73 does not apply, a mechanism remains to ensure that investigations can be conducted in the public interest.
If I understand new clause 21 correctly, it reflects the ongoing concerns of the hon. Member for Walthamstow that she has raised in Parliament previously, specifically about circumstances where a firm fails but compensation is owed to a consumer. While I am sympathetic to these concerns, the Government believe that the FCA, as the independent regulator, is best placed to judge the resources that authorised firms need to maintain in order to carry out regulated activities.
I should explain that the FCA is already required by schedule 6 of the Financial Services and Markets Act 2000 to consider whether a firm’s resources are appropriate to the activities it carries out. It is obliged to take into account the nature and scale of a firm’s business, as well as the risk to the continuity of the services it provides to consumers, and must consider whether the business is to be carried on in a sound and prudent manner, with particular regard to the interests of consumers. The legislation also already requires the FCA to consider how a firm’s potential liabilities might impact the resources it should hold. The Government therefore believe that this new clause does not add anything further to the FCA’s requirements that already exist in legislation.
Once again, I would mention the FCA’s principles for businesses, which already require firms to maintain adequate financial resources and organise their affairs with adequate risk management. The FCA has recourse to take disciplinary action against firms that breach these principles. Therefore, the Government believe that there are sufficient provisions in place to ensure consumers can access compensation where they have suffered detriment.
Finally, I turn to new clause 23. I should first note that the launching of any consumer redress scheme is a significant undertaking, and it is right and proper that the process be open and transparent. The new clause proposes making amendments under section 404A of the Financial Services and Markets Act 2000, referred to as FSMA, which provides the FCA with rule-making powers for consumer redress schemes.
However, the existing legislation already sets out a number of requirements governing the actions of the FCA, including provisions to ensure that its actions are transparent. Rules made under section 404 by the FCA are subject to a formal public consultation before a scheme is put in place. The FCA also publishes a policy statement explaining its decision and the rationale for the provisions in any proposed scheme. That consultation also includes any decision to appoint a competent person, and the scope of the competent person’s responsibilities, which are documented in the policy statement. Finally, it is right that any scheme is monitored and assessed, to ensure that it has delivered its intended outcomes. Given the importance and impact of consumer redress schemes as good regulatory practice, the FCA would as a matter of course monitor the progress of the scheme as it is implemented, which would include assessing the scheme against its stated objectives.
Introducing a statutory requirement for a process that the FCA already undertakes introduces an additional and unnecessary hurdle. I appreciate that there is a desire to ensure that the regulators are properly accountable to Parliament, and I reassure members of the Committee that such an accountability mechanism already exists. As part of the requirements under FSMA, the FCA must already provide an account of its activity to the Treasury on an annual basis, and that account is shared with Parliament.
I regret that I have spoken for some time, but this is an important set of questions, and some more will come up later this afternoon. I hope I have satisfied the Committee, and therefore I ask the right hon. Member for Wolverhampton South East to withdraw the new clause.
Mr McFadden
I want to press new clause 6 to a vote.
Question put, That the clause be read a Second time.
Financial Services Bill (Twelfth sitting)
John Glen ExcerptsThursday 3rd December 2020
(5 years, 3 months ago)
Public Bill CommitteesRead Full debate Financial Services Bill 2019-21 View all Financial Services Bill 2019-21 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 3 December 2020 - (3 Dec 2020)
The Economic Secretary to the Treasury (John Glen)
It is a pleasure to serve under your chairmanship, Dr Huq. Before I respond to the hon. Member for Erith and Thamesmead, I would like to recognise her award last night as newcomer of the year by the Patchwork Foundation; I congratulate her on that success.
The hon. Lady asked a number of specific questions about suspicious activity reports, or SARs, and I have those answers for her. Before I come on to them, it is important that we contextualise this new clause in the great success that is the UK’s FinTech sector, with 600 propositions, 76,500 people working in the industry and £4.1 billion of venture capital money put into it just last year. The Government remain committed to supporting the sector, trying to maintain the UK’s leadership position in this market and making it the best place to start and grow a FinTech firm.
I am pleased to say that assessments have cited the UK’s strong Government support, access to skills, robust domestic demand and flexible regulator as particular strengths. It is a priority for the Government to maintain the UK’s strength as a FinTech destination and continue fostering innovation. That is why the Chancellor asked Ron Kalifa OBE to carry out an independent review of the sector. The review will make practical recommendations for Government, industry and regulators on how to support future growth and adoption of FinTech services.
The Government are conscious of the challenges that face the FinTech sector under the current suspicious activity reporting regime, in particular with respect to defence against money laundering SARs, sometimes known as DAML SARs. The volume of DAML SARs received by the NCA has grown substantially, with more than 60,000 received in 2020. Electronic money institutions—EMIs—are the largest contributor to that increase, with such companies accounting for four fifths of the increase in these requests. As the hon. Lady rightly pointed out, that has resulted in increased pressure on limited law enforcement resources. This year, £172 million was denied to suspected criminals as a result of DAML requests, up 31% on the previous year’s £132 million and more than three times the £52 million from 2017-18. It would be useful for the Committee to know that the Government are working closely with law enforcement to further resolve the current anomaly with regard to account freezing orders.
The Government are supportive of the objective to equalise treatment of banks and FinTech firms in the Proceeds of Crime Act 2002. Of course, that legislation could not take account of FinTechs. Under the economic crime plan, the Treasury and Home Office, along with law enforcement, have been working with the FinTech sector to identify and implement solutions to the challenges that the provisions of the Proceeds of Crime Act create. Progressing those solutions remains a priority, and we are committed to reforming the suspicious activity reporting regime as part of the wider programme of economic crime reform. It is a significant area in which banks and financial institutions urgently need to see reform, and it requires a collaborative effort between the Treasury, the Home Office and private sector actors.
While the Government agree with the intent behind new clause 8, it is drafted in such a way as to create inconsistencies with definitions set out within the wider statute book. Specifically, the insertion of references to electronic money institutions into the definition of “deposit taking body” in the Proceeds of Crime Act introduces scope for confusion as to the status of electronic money institutions in wider financial services legislation, such as the Financial Services and Markets Act 2000. Electronic money institutions are not classified as “authorised deposit takers” for the purposes of that Act.
The Government agree with the principle that the treatment of e-money institutions should be equalised with banks in those two specific areas. However, as the Committee will be aware, financial services legislation is complex, and it is important to work through these things carefully, to ensure that the legislation operates as intended and avoids any unintended outcomes. This new clause does not adequately consider interactions with other pieces of legislation. I recognise that that is a technical matter. The Government are aligned with the intent, so I have asked my officials to work—and, indeed, I have been working myself—with colleagues across Whitehall, particularly in the Home Office, to identify a way of addressing this issue that is consistent with the broader regulatory framework for these firms. I intend to provide the House with an update on Report. Given that commitment, I ask the hon. Lady to withdraw the new clause.
Abena Oppong-Asare
I beg to move, That the Clause be read a Second time.
If agreed to, new clause 9 would be good for the country and at the same time would tackle widespread concerns about multinational enterprises exploiting the way national systems interact in order to minimise the total amount of corporation tax they pay. It would help create greater transparency around the taxation of multinational companies, achieving those objectives by requiring the Treasury to report on a regular basis to Parliament on its progress in pursuit of international action on public country-by-country reporting by relevant bodies.
Let me say at the outset that those outcomes are what we want to see. Labour’s aim in tabling new clause 9 is to use the Bill as an opportunity to help make the UK a world leader in financial transparency. I appreciate, as the Minister mentioned earlier, that financial legislation is complex, but we hope that on this occasion we will be able to receive cross-party support, as I believe we are all united in our desire to have far greater transparency.
The Government currently have the power to require multinational enterprises to publicly report their tax payments on a country-by-country basis, but so far they have resisted using that power. As I mentioned earlier, there is widespread concern about how multinational enterprises successfully exploit the way national systems interact in order to minimise the total amount of corporation tax they pay. New clause 9 is one way of tackling that. It is quite simple: it just requires public country-by-country reporting of the amount of tax multinational enterprises pay in each country where they have operations.
Schedule 19 of the Finance Act 2016 introduced a requirement for UK-headed multinational enterprises, or UK sub-groups of multinational enterprises, to publish a tax strategy. Paragraph 17(6) gives the Treasury the power to require those tax strategies to include country-by-country reports of tax paid. However, while the Government do not appear to disagree with the principle of country-by-country reporting, we still have not seen the full use of powers to require that. They say they want international agreement on public reporting first.
I am sure the Minister agrees that there has been recent pressure on the Government to use the power in the Finance Act 2016 to introduce public country-by-country reporting. It was most recently discussed during the passage of the Finance Bill this year. On Report, on 1 July, the right hon. Member for Barking (Dame Margaret Hodge) tabled new clause 33, which would have required a tax strategy published by a group liable for the digital services tax to include any relevant country-by-country reports. At the time, new clause 33 received cross-party support, including from our own shadow Chief Secretary to the Treasury, my hon. Friend the Member for Houghton and Sunderland South (Bridget Phillipson), and Conservative Members such as the right hon. Member for Haltemprice and Howden (Mr Davis), the hon. Member for Thirsk and Malton (Kevin Hollinrake) and the right hon. Member for Sutton Coldfield (Mr Mitchell). I echo the comments made by the shadow Chief Secretary to the Treasury, who said:
“For years, the Opposition have urged the Government to commit to country-by-country reporting on a public basis…the way in which they have held up progress at an international level, has been a source of deep frustration to those of us who want to see far greater transparency around the taxation of multinational companies.”—[Official Report, 1 July 2020; Vol. 678, c. 367.]
The right hon. Member for Sutton Coldfield said:
“The new clause would allow Parliament, journalists, campaigners and civil society to see clearly whether these businesses are paying their fair share of taxation. If the Government accept the new clause, that would, as the hon. Member for Houghton and Sunderland South suggested, make the UK a world leader in financial transparency.”—[Official Report, 1 July 2020; Vol. 678, c. 369.]
There are companies already undertaking voluntary country-by-country reporting. For example, SSE—one of the largest electricity network companies in the UK—has been awarded the fair tax mark for the fourth year in the row. It provides a shining example of how this could be done. We are seeing companies doing this on a voluntary basis, and the new clause would ensure that all companies do it and that it is not a difficult process.
The Government have made quite a big deal about wanting to be a global leader next year—it is not just me saying that; those are the Government’s words—particularly post Brexit and with our presidency of the G7. If the Government genuinely want to show global leadership, should they not be at the forefront of pushing these kinds of measures, rather than passively waiting for an international agreement to be reached? This is a perfect time to implement this provision. It would be great if we could get just one amendment through on this occasion.
The new clause would require the Government to publish an annual report to Parliament on their progress towards the international agreement, including whether they intend to use the power in the Finance Act 2016 to require public country-by-country reporting and publish tax strategies. We would welcome the Minister taking this opportunity to give us the latest update on progress towards the international agreements on public country-by-country reporting, including what specific discussions the Government have had with international partners and whether the Government anticipate any progress on this matter in 2021.
John Glen
New clause 9 would require the Treasury to publish and lay before both Houses of Parliament an annual report that outlines its progress towards international action on public country-by-country reporting, and provides an update as to whether it intends to expand the existing tax strategy reporting requirement to include country-by-country reports of financial services companies. As the hon. Lady has acknowledged, the Government have championed tax transparency through initiatives at the international level, including tax authority country-by-country reporting and global standards for exchange of information, and through domestic action such as the requirement for groups to publish tax strategies.
In relation to public country-by-country reporting, the Government continue to believe that only a multilateral approach would be effective in achieving transparency objectives, and avoiding disproportionate impacts on the UK’s competitors or distortions regarding group structures. Different global initiatives to increase tax transparency and to help protect against multinational avoidance continue to be discussed in the international forums, such as the OECD, in which the UK is an active and leading participant. However, although the Government will continue to be clear and transparent about our broad objectives in this area, it would not be appropriate for the Treasury to provide a detailed report each year assessing the status and evaluating the progress of fast-moving, complex discussions that typically take place between countries on a confidential basis, nor do we think it appropriate to approach that from the narrow focus of financial services as the new clause suggests.
Although the Bill makes specific amendments to the scope of country-by-country reporting required in order to reflect the changes to the prudential regimes, the question of whether corporates should be required to publish country-by-country reports as part of their tax disclosures is a wider question that is relevant to large multinationals operating in all industry sectors, not just those in regulated financial services sectors. For those reasons, I ask the hon. Lady to withdraw the new clause.
Abena Oppong-Asare
I beg to ask leave to withdraw the clause.
Clause, by leave, withdrawn.
New Clause 10
FCA recommendation to remove a self-regulatory organisation: Ministerial statement
“(1) When the FCA makes a recommendation that a self-regulatory organisation be removed from Schedule 1 to the MLR pursuant to Paragraph 17 of the Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017, the Treasury must make a statement to Parliament.
(2) The statement must be made within four weeks of the recommendation being made.
(3) The statement to Parliament must set out—
(a) the Government’s response to the FCA’s recommendation;
(b) the likely impact on the sector of any action the Government is proposing to take, including—
(i) the impact of the organisation retaining its Anti-Money Laundering supervisory responsibilities if the Government decides not to remove the organisation from Schedule 1 to the MLR; and
(ii) where the Government intends to place an organisation’s Anti-Money Laundering supervisory responsibilities if it decides to remove the organisation from Schedule 1 to the MLR; and
(c) where applicable, a timescale for the removal of the self-regulatory organisation from Schedule 1 to the MLR.
(4) For the purposes of this section, “MLR” means the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.”—(Abena Oppong-Asare.)
This new clause would require the Treasury to report to Parliament on its response to any recommendation by the FCA that an organisation have its anti-money laundering supervisory responsibilities removed, including the impact of either accepting or rejecting any such recommendation.
Brought up, and read the First time.
Abena Oppong-Asare
I beg to move, That the clause be read a Second time.
New clause 10 would be good for consumers. At the same time, it would improve the ability of our crime prevention agencies to do the job that we all want them to do—namely, to crack down on criminal activity and, in this case, money laundering. Our aim in tabling the new clause was to take the opportunity offered by the Bill to address technical deficiencies in the anti-money laundering regime. Again, I hope that we will receive cross-party support for our proposal, as I believe we are all united in a desire to clamp down on money laundering.
Tackling money laundering has a strong international aspect, but the Government need to ensure that we have clear and effective anti-money laundering measures within the UK. The intergovernmental Financial Action Task Force was founded by the G7 in 1989 to design and promote policies to combat money laundering around the world. In the EU, FATF standards are implemented by way of money laundering directives, which are designed to establish a consistent regulatory environment across member states. As I said, there is clearly a strong international aspect to the work, but it is the responsibility of the UK Government to implement effective measures in this country. Implementing new clause 10 would certainly help to address that.
There are concerns about fragmentation. Indeed, that is a long-standing concern about the UK’s anti-money laundering supervisory regime. In the UK, there are, in the accountancy and legal sectors, 22 different professional bodies with responsibility for monitoring compliance by their members with anti-money laundering measures. The EU’s fourth money laundering directive made it clear that bodies that represent members of a profession may have a role in supervising and monitoring them. As I said, however, the supervisory landscape in the UK has been criticised for being highly fragmented.
In 2015, that was recognised by the Government in the “UK national risk assessment of money laundering and terrorist financing”, the first such assessment, which highlighted the challenge of having a large number of supervisory organisations. Advocacy organisations such as Transparency International, which gave evidence to our Committee a few weeks ago, have long criticised the fragmented nature of the UK’s anti-money laundering supervisory regime.
In 2018, the Government created a new office within the Financial Conduct Authority to improve standards among professional supervisory bodies—the Minister will probably mention that—but concerns have been raised about its effectiveness. For example, the Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017 gave the FCA the role of ensuring that the anti-money laundering work of the professional supervisory bodies was effective. That would be done through the new office within the FCA, the Office for Professional Body Anti-Money Laundering Supervision. The 22 professional bodies that OPBAS regulates are named in schedule 1 to the 2017 regulations.
However, a Treasury Committee report from last year, entitled “Economic Crime - Anti-money laundering supervision and sanctions implementation”, concluded that it was not clear how the Treasury would respond to an OPBAS recommendation to remove a professional body’s supervisory role. In particular, the Treasury Committee said that there was not an adequate indication of where the Treasury would move a body’s supervisory responsibilities if it was stripped of them. It concluded that the lack of preparation created a risk that a supervisor might become “too important to fail”. That is quite concerning to me. The Committee recommended that the Treasury publish within six months a detailed consideration of how it would respond to a recommendation from OPBAS.
In their “Economic Crime Plan 2019-22”, which was published in July last year, the Government committed to meeting the Treasury Committee’s recommendation by publishing
“a detailed consideration of the process for responding to an OPBAS recommendation to remove a professional body supervisor’s status as an AML/CTF supervisor, including managing changes in supervisory responsibilities, by September 2019.”
In a letter to the Chair of the Treasury Committee dated 17 October last year, the Economic Secretary to the Treasury set out in a few paragraphs the Treasury’s response to an OPBAS recommendation. The letter provided little extra information and cannot be taken to constitute the
“detailed consideration of the process”
promised in the economic crime plan.
In September this year, the Royal United Services Institute noted:
“OPBAS are working with HM Treasury on designing a process in the event that a supervisor is removed from the Schedule 1 list of approved supervisors. This work is nearing completion, but has been delayed to autumn 2020 by the Covid-19 situation.”
In short, the Government committed to publishing a detailed consideration by September last year but still have not done so. It is now December 2020, so it has been more than a year.
Labour’s new clause seeks to underline the importance of the Treasury having a clear and credible response to OPBAS recommendations. For OPBAS’s role to be as effective as possible, it is crucial that its ultimate sanction must have credibility, so the Treasury must be clear of its response to a recommendation from OPBAS to remove a professional body’s supervisory responsibilities. Our new clause attempts to formalise the process of a Treasury response by committing the Government to publishing their response within four weeks of an OPBAS recommendation to remove an organisation from schedule 1. The response must make clear what the Government intend to do and, crucially, the impact of their decision either to leave an organisation on schedule 1 or to remove it.
We would welcome a commitment from the Minster today—this is my third time trying, with a third new clause—on when the Government will finally publish their
“detailed consideration of the process”
for responding to OPBAS recommendations to remove a professional body supervisor from schedule 1. This is also an opportunity for the Minister to set out the Government’s intended approach to complying with the FATF standards after the end of the transition period, and whether the Government intend to meet or exceed future EU money laundering directives. For that reason, the new clause really must be added to the Bill to help the Treasury finally to meet its obligations.
John Glen
The Government are committed to ensuring consistently high standards across the UK’s anti-money laundering supervision system, and the FCA’s Office for Professional Body Anti-Money Laundering Supervision—known as OPBAS—is a key part of that. It works with the 22 professional body supervisors to address any weaknesses identified in their supervisory responsibilities. When OPBAS has identified deficiencies in professional body supervisor oversight arrangements or practices, it has taken robust action, including by using powers of direction. OPBAS will continue to take such action with supervisors when appropriate, to ensure that consistent high standards of supervision are achieved.
Regulation 17 of the regulations that establish the role of OPBAS ensures that there is a clear route to removal if OPBAS has significant concerns about a supervisor’s effectiveness. As the hon. Lady pointed out, following the Treasury Committee’s economic crime inquiry, I wrote to the Committee to set out the process by which the Treasury would respond to a recommendation from OPBAS for such a removal. That covers each of the points that have been included in subsection (3) of the proposed new clause.
The removal of a professional body supervisor would be a highly significant decision; the Treasury would carefully consider any recommendation and, if approved, would work with other professional body supervisors, OPBAS and the statutory supervisors to ensure the continuation of anti-money laundering supervision for the affected professional body supervisor’s members. That would also require the agreement of a transition period before the removal of the professional body supervisor from schedule 1 of the money laundering regulations. It could not just be done abruptly without due recourse to what interim measures or further successor measures would need to be put in place.
It is essential that any recommendation is given due consideration and planning before a decision is announced, and the introduction of a four-week statutory deadline from the issuance of a recommendation would place that at risk. If a decision has not been reached, any enactment or publication of details of the recommendation would be inconsistent with regulation 21(2) of the OPBAS regulations, which prohibits such publication.
While any recommendation for removal would be treated with urgency by the Treasury, the length of the process would be dependent on the circumstances. We therefore believe that it would be wrong for a statutory deadline to be placed on reaching an effective outcome. In the event of OPBAS’s recommending the removal of a professional body supervisor, a notice would be placed on gov.uk once a decision on removal had been reached and, if necessary, plans would be agreed for the transition of affected businesses. I therefore ask the right hon. Member for Wolverhampton South East and the hon. Members for Erith and Thamesmead and for Manchester, Withington not to press the new clause.
Abena Oppong-Asare
I beg to ask leave to withdraw the clause.
Clause, by leave, withdrawn.
New Clause 16
Consumer credit: extension of FCA rule-making duty
“(1) Section 137C of the Financial Services and Markets Act 2000 shall be amended as follows.
(2) In subsection (1A), substitute
‘one or more specified descriptions of regulated’
for ‘all forms of consumer’.”—(Stella Creasy.)
This new clause would extend the responsibility of the FCA to make rules with a view to securing an appropriate degree of protection for borrowers against excessive charges to all forms of consumer credit.
Brought up, and read the First time.
John Glen
I would like to sincerely thank the hon. Member for Walthamstow for her tireless work in this area—she does not look too happy that I have said that, but I sincerely mean it. I recognise the contributions she has made to cap the cost of payday lending. That has made a significant difference, and although we differ on some elements, my vigilance is seriously minded towards these problems, and I will try to respond in full to the points she has made.
As the hon. Lady knows, the Government have given the FCA the power to cap all forms of regulated credit, and the FCA can do so if it thinks it is necessary to protect consumers. I note that her new clause seeks to require the FCA to use this power for all forms of consumer credit and that the retained reference to “high-cost short-term credit” appears to limit its application, but I will proceed on the basis of the intention behind the new clause.
Government legislation has previously required the FCA to use this power, leading to the 2015 cap on the cost of payday loans, and Government will consider further action as circumstances require. However, the Government do not encourage regulatory intervention where there is no clear case for doing so. That can increase the costs to business, which are usually passed to consumers, or lead to products and services being commercially unviable, reducing consumer choice.
While the Government imposed a requirement on the FCA in legislation to use its capping powers for payday loans, the context for that intervention was very different from the current consumer credit market. The Government legislated only after agreement between the FCA and Government that the cap was necessary, in response to the well-evidenced harm that was occurring in the payday lending market, which the hon. Member for Walthamstow has done a massive amount of work to promote awareness of. Introducing this duty on the regulator ensured that its efforts were focused on implementing the cap quickly, rather than spending time and resources on making the case for a cap in the first place. Following this successful intervention, the FCA independently implemented a similar price cap on rent-to-own products in March 2019 in response to the FCA finding evidence of consumer detriment as a result of excessive charges.
The FCA keeps the issue of capping the cost of other types of credit under constant review. There is not an equivalent case today that necessitates this action. Therefore, we should not legislate to force the FCA, as the independent and expert regulator, to implement a cap. As can be seen from the payday and rent-to-own markets, in some cases price caps can be effective in protecting consumers from the most egregious harm. However, a blanket cap would not take into account the idiosyncrasies of the breadth of consumer credit products on the market and could give rise to unintended consequences.
Let me turn to new clause 17. This amendment speaks to the exemption under article 60F of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. That exemption covers interest-free loans, repayable in no more than 12 instalments, within no more than 12 months, used for the financing of specific goods and services. It allows businesses such as gyms and sports season-tickets providers to avoid the burden of FCA regulation for offering deferred payment terms for the goods and services they provide. It also catches many everyday transactions, where the supplier of goods or services issues an invoice and affords a period of time to pay.
The exemption is important in allowing low-risk day-to-day business activity to be undertaken without firms needing to be authorised by the FCA or to comply with consumer credit regulation. However, the Government are alert to the specific concerns about buy now, pay later products that utilise this exemption. I know that the hon. Member for Walthamstow is concerned about the way in which those products are advertised, as she set out this afternoon, and the risk of borrowers unknowingly building up problem debt.
An interest-free credit, unregulated, buy now, pay later product, as it is inherently lower risk than other forms of borrowing, can provide a lower-cost alternative to help people buy the products they need and can be a useful part of the toolkit for managing personal finances and tackling financial exclusion. However, despite the potential benefits and the fact that we are yet to see substantive evidence of widespread consumer harm, the Government and the FCA are aware that risks are associated with those products, as with any type of borrowing. Therefore, the former interim chief executive officer of the FCA, Chris Woolard, is urgently undertaking a review into change and innovation in the unsecured credit market.
The Government welcome the review. I have spoken with Chris Woolard about it, and he attended the financial inclusion forum in the past few weeks. A key focus of the review is on areas of growth from non-traditional providers of credit, which includes unregulated, buy now, pay later products, which the hon. Lady described. It will assess both the supply and the demand sides of the market, cover the customer journey and engage with the main providers to better understand business models and how customers interact with such firms. The FCA has also commissioned consumer research to help inform its understanding. I recognise that particularly vulnerable groups of consumers seem to be using such products more.
The review is due to present its conclusions early next year, in a few months. If it concludes that there is the potential for significant harm occurring as a result of those exempt products, the Government will assess the options for how to address that best, and whether they would be proportionate to counter such harm.
I will now turn to new clause 22. As I noted previously, the Government have fundamentally reformed regulation of the consumer credit market, giving control of the area to the FCA in 2014. That more robust regulatory system is helping to deliver the Government’s vision for a well-functioning and sustainable consumer credit market that can meet consumers’ needs. The Government have given the FCA strong powers to protect consumers, and the FCA assesses whether a firm’s business model is in a consumer’s interest as part of the authorisation process.
In 2017, the FCA confirmed that, in its assessment of firms’ business models, it considers how each firm makes money. That allows the FCA to identify any economic incentives that a firm might have to cause harm to consumers and to take appropriate mitigating actions.
In its August report on re-lending by high-cost lenders, the FCA set out clearly the potential issues around re-lending. The report identified ongoing concerns about the business practices of some of those lenders, which it deemed to be breach of FCA rules and principles for business. More importantly, the report reiterated the FCA’s expectations that firms should treat their customers fairly. It made it clear that it expects firms to review their re-lending practices so that they can properly assess affordability; further, that any re-lending firms undertake is sustainable and will not give rise to borrowers entering into problem debt; and, finally, that the customer’s full financial position should be taken into consideration when making those re-lending decisions.
While the hon. Member for Walthamstow is right that re-lending can cause consumer harm, it is clear that the FCA understands the issues and is acting where necessary to protect consumers’ interests. As I have set out, the FCA will consider consumer interest in relation to a firm’s business model during the authorisation process, and will monitor the market through its supervision process, reminding firms of their obligations and intervening where necessary. I therefore ask that the hon. Member for Walthamstow withdraw the new clause.
John Glen
The change proposed under this new clause to allow Select Committees to require the FCA to launch investigations in situations where there is suspected regulatory failure would mirror powers that are already available to the Treasury. As I set out earlier, section 77 of the Financial Services Act 2012 enables the Treasury to require the regulators to conduct investigations in cases of suspected regulatory failure in circumstances where it does not appear to the Treasury that the regulators are already doing so under, for example, the regulators’ power in section 73 of that Act.
The Treasury has used those powers to require the PRA and FCA to launch investigations where it considers that appropriate. As Members are aware, the Treasury Committee had the opportunity to scrutinise the investigation that was carried out into the Co-operative Bank in 2018, and it made a number of recommendations that were accepted by the PRA.
I am therefore confident that investigations under existing section 77 powers are useful in holding regulators to account, ensuring proper scrutiny of them and conducting investigators in the public interest. In determining whether an investigation is in the public interest, the Treasury will also consider the views of the relevant Select Committee in reaching its decision.
The Government agree that Parliament should play an important strategic role in interrogating, debating and testing the overall direction of policy for financial services. The Treasury is confident that proper mechanisms exist to allow the Treasury Committee to scrutinise and comment on investigations, as is right and proper. Ultimately, there is nothing to stop a relevant Select Committee launching its own investigation into an issue, calling witnesses, gathering evidence and making recommendations. That is a decision for the Committee.
Stella Creasy
Earlier today, we talked about the fact that the Treasury instructed the FCA to get involved in the debate around payday lending. Indeed, it went into companies such as Wonga and QuickQuid and set out redress schemes. We know that they were ineffective because it ended up with the ombudsman getting involved, and it was only then that those companies went into administration because it was revealed how much they owed to our constituents. In circumstances such as that, where no doubt there would be difficult conversations about what role the Treasury and the FCA played in the process, who watches the watchmen? Who would instruct that inquiry? At the moment, that inquiry has not happened, so we do not know why that redress scheme did not work. There is no sign that the FCA wants that. Is the Minister saying that he would instruct that so that we can get to the bottom of why the redress scheme did not work? If it did not, it seems rather apposite to have an independent third party that could look at issues such as that on behalf of consumers.
John Glen
I am very happy to look at that particular case. The point I am making is that there is a mechanism to compel the FCA to investigate, and the Treasury does not do that in isolation from the its wider accountability to Parliament, individual Members of Parliament and the Treasury Committee. I am very happy to examine the point that the hon. Lady has made and I will look at it carefully, but that provision exists. Frankly, I cannot and would never expect to act in isolation and without accountability to Parliament. Given the powers available to the Treasury, which can be used in that context, and the opportunity for scrutiny by Select Committees, I ask that this new clause be withdrawn.
Stella Creasy
If the Minister is saying that he is going to instruct a redress investigation, I will happily withdraw the new clause. I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 21
Assessment of risks of consumer detriment
“(1) Schedule 6 of the Financial Services and Markets Act (2000) is amended as follows.
(2) After paragraph 2D(2)(c) insert—
‘(d) the risks of consumer detriment associated with the firm’s business model and the likelihood for compensation claims from consumers.’
(3) After paragraph 2D(3), insert—
‘(3ZA) When assessing whether the firm has appropriate financial resources to meet the risks of consumer detriment and the likelihood of compensation claims from consumers, the Financial Conduct Authority must ensure that, at all times, firms hold sufficient financial resources to meet any likely compensation claims from customers in full.’”—(Stella Creasy.)
This new clause would ensure that the FCA considers the likelihood of consumer detriment arising from the firm’s business model prior to, and following, authorisation, and that firm’s hold sufficient financial resources to meet potential compensation claims from customers in full.
Brought up, and read the First time.
Question put, That the clause be read a Second time.
John Glen
The new clause proposes to create a new criminal offence, for FCA-regulated persons only, of facilitating economic crime and of failing to prevent economic crime.
In recent years, the Government have taken significant action to improve corporate governance and culture in the financial services industry. Following the financial crisis we introduced the new senior managers and certification regime. The regime is now in place for all FCA-regulated firms, and it requires firms to allocate to a specific senior person a senior management function for overseeing the firm’s efforts to counter financial crime. If there is a failure in a firm’s financial crime systems and controls, the FCA can take action against the responsible senior manager where it is appropriate to do so. That enforcement action includes fines and prohibition from undertaking regulated activities.
As well as creating the senior managers regime, through the Money Laundering Regulations 2017 and subsequent amendments, the Government have recently strengthened the anti-money laundering requirements that financial services firms must adhere to. Failure to comply with these requirements can be sanctioned through either civil or criminal means. Recent FCA regulatory penalties related to firms’ anti-money laundering weaknesses include a £102 million fine for Standard Chartered in April 2019 and a £96.6 million fine for Goldman Sachs in October 2020.
I hope that recent action demonstrates to the Committee that the Government are committed to upholding a robust framework that deters and sanctions any corporate criminal activity in the financial services industry. It is only right that we challenge ourselves on whether we need to go further, and I listened very carefully to the right hon. Gentleman. Regardless of our tenure, the Government must always take that responsibility seriously.
In 2017, the Government issued a call for evidence on whether corporate liability law for economic crime needed to be reformed. It is fair to say that the findings of the call for evidence were inconclusive. As such, the Government’s response to the call for evidence determined that a more comprehensive understanding of the potential options and implications of reform was needed. As the right hon. Gentleman acknowledged, the Government have therefore tasked the Law Commission to conduct an expert review on this issue.
Through the Bribery Act 2010 and the Criminal Finances Act 2017, the Government have demonstrated we are open to new “failure to prevent” offences. These offences, however, were legislated for because there was clear evidence of gaps in the relevant legal frameworks, which were limiting the bringing of effective and dissuasive enforcement proceedings.
Before any broader new “failure to prevent” offence for economic crime is introduced, there needs to be strong evidence to support it. It will also be important that any new offence is designed rigorously, with specific consideration given to how it sits alongside associated criminal and regulatory regimes and to the potential impacts on business. The scope of who a new offence applies to must also be holistically worked through.
The Law Commission’s work will take some time, but it is clear that we are zoning in on that aspect of the problem. In the light of that response, I ask the right hon. Gentleman to withdraw the new clause.
Mr McFadden
I am happy to withdraw the new clause today, but I suspect the Minister might meet a very similar amendment later in proceedings on the Bill. I beg to ask leave to withdraw the clause.
Clause, by leave, withdrawn.
New Clause 26
Legal protections for retail clients against the mis-selling of financial services
‘(1) Regulation 3 (Private Person) of the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 is amended as follows.
(2) In paragraph 1(a), after “individual”, insert “, partnership or body corporate that is or would be classified as a retail client”.
(3) In paragraph 1(b), leave out “who is not an individual”, and insert “not within the definition of paragraph 1(a)”.
(4) For the purposes of this regulation, a “retail client” means a client who is not a professional client within the meaning set out in Annex II of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU.’—(Stephen Flynn.)
This new clause seeks to give retail clients greater legal protections against the mis-selling of financial services products.
Brought up, and read the First time.
Stephen Flynn
New clause 26 seeks to give retail clients greater legal protection against the mis-selling of financial services products, and new clause 27 seeks to give small businesses greater legal protections against the mis-selling of financial services products. I want to make a couple of quick remarks on that matter.
I do not need to tell hon. Members how important small businesses are. They make up three fifths of employment, and half the turnover in the UK private sector goes through small businesses. Those are telling figures. What is more, just 36% of small businesses use external finance; indeed, seven in 10 would rather forgo any growth than take on external finance. That is an important point that the Government must reflect on.
As they deliberate on why that may be the case, I will provide some additional information. There is a history of mis-selling, which causes small businesses a great deal of concern. Although regulation has been tightened, gaps remain. For example, small businesses complained earlier this year about the mis-selling of interest rate swaps. The FCA found that 90% of those businesses did not have a clue what that meant in reality, and it went on to talk about the dialogue between sophisticated and unsophisticated businesses in that regard.
The ultimate issue is that small businesses did not know what they were getting themselves into, and I think that is telling. No one wants that situation to arise, now or in the future. I encourage the Government to take heed of that and, therefore, agree to both new clauses.
John Glen
The Government are committed to ensuring that the interests of individuals and businesses that use financial services are protected. With the creation of the conduct-focused Financial Conduct Authority in 2013, we have ensured that those interests continue to be placed at the heart of our regulatory system and given the priority that they deserve.
The Government have given the FCA a strong mandate to stop inappropriate behaviour in financial services, and it has a wide range of enforcement powers—criminal, civil and regulatory—to protect consumers and businesses alike. That means taking action against firms and individuals that do not meet appropriate standards.
These new clauses, which have been tabled by the hon. Members for Glasgow Central and for Aberdeen South, seek to broaden the scope of parties that can seek action for damages related to mis-selling of financial services. The changes are unnecessary, however, because businesses already have robust avenues for pursuing financial services complaints. The Government are committed to ensuring that we do not unnecessarily push up the cost of borrowing for small businesses by creating additional legislative burdens.
In April 2019, the remit of the Financial Ombudsman Service was expanded to allow more SMEs to put forward complaints, and that covers 97% of SMEs in the UK. An enterprise that employs fewer than 50 people and has a turnover that does not exceed £6.5 million is entitled to bring a complaint to the FOS. If that complaint is upheld, the FOS can make an award of up to £350,000 in relation to acts or omissions that took place on or after 1 April 2019.
Moreover, SMEs will also have access to the business banking resolution service, an independent non-governmental body, which will provide dispute resolution for businesses. It will serve two purposes. First, it will address historical cases from 2000, which would now be eligible for the FOS but which were not at the time, and which have not been through another independent redress scheme. Secondly, it will address future complaints from businesses with a turnover of between £6.5 million and £10 million.
Given the robust avenues that are available to businesses for pursuing financial services complaints, I hope the Committee will agree that the new clauses are not necessary, and I respectfully ask the hon. Members not to press them.
Stephen Flynn
I beg to ask leave to withdraw the clause.
Clause, by leave, withdrawn.
New Clause 29
Review of Impact of Scottish National Investment Bank Powers
“(1) The Chancellor of the Exchequer must review the effect of the use of the powers in this Act in Scotland and lay a report of that review before the House of Commons within six months of the date on which this Act receives Royal Assent.
(2) A review under this section must consider the effects of the changes on—
(a) business investment,
(b) employment,
(c) productivity,
(d) inflation,
(e) financial stability, and
(f) financial liquidity.
(3) The review must also estimate the effects on the changes in the event of each of the following—
(a) the Scottish Government is given no new financial powers with respect to carrying over reserves between financial years,
(b) the Scottish Government is able to carry over greater reserves between financial years for use by the Scottish National Investment Bank.
(4) The review must under subsection 3(b) consider the effect of raising the reserve limit by—
(a) £100 million,
(b) £250 million,
(c) £500 million, and
(d) £1,000 million.” —(Alison Thewliss.)
This new clause requires a review of the impact of providing Scottish Government powers to allow the SNIB to carry over reserves between financial years beyond its current £100m limit.
Brought up, and read the First time.
Alison Thewliss
I beg to move, That the Clause be read a Second time.
New clause 29 would require a review of the impact of providing the Scottish Government with powers to allow the Scottish National Investment Bank to carry over reserves between financial years beyond its current £100 million limit. As Members may know, the Scottish National Investment Bank has been firmly established as a public limited company and has a proposed mission to focus the bank’s activities on addressing key challenges and creating inclusive long-term growth, including
“supporting Scotland’s transition to net zero, extending equality of opportunity through improving places, and harnessing innovation to enable Scotland to flourish.
It will provide patient capital—a form of long-term investment—for businesses and projects in Scotland, and catalyse further private sector investment.”
The bank’s first investment, announced the other week, was £12.5 million to the Glasgow-based laser and quantum technology company, M Squared, to support the company’s further growth in Scotland, which speaks to the bank’s proposed core missions.
The Scottish National Investment Bank will help to tackle some of the biggest challenges we face in the years to come, delivering economic, social and environmental returns, but currently there is a slight barrier, in that the Scottish Government can only roll over £100 million of their annual reserves. We are asking for the UK to look at increasing that to allow the Scottish National Investment Bank to get on with the job that it is set up to do.
As the Committee can see, the new clause asks the Government to introduce an impact assessment—because that is what we can do in this Committee; we can ask for reports and impact assessments—looking at increasing the Scottish Government’s reserves by £100 million, £250 million, £500 million or £1 billion for business investment, employment, productivity, inflation, financial stability and financial liquidity. We need the Government to come on board with that and provide some help to us. It is a huge and important project, so much so that the UK Government seem to be copying it by having an investment bank.
We would like to have an infrastructure bank for Scotland that can meet Scotland’s needs and priorities. It is desperately important that we do that. The bank will learn from banks such as KfW in Germany, which was set up after the war by the UK, and then we learned nothing from it ourselves. We want to be able to get on and do this and invest in Scotland’s future, but unfortunately we need the Government’s co-operation at this point to do that.
John Glen
The UK Government are committed to supporting investment across the whole of the United Kingdom. Indeed, at the spending review, we confirmed our intention to establish a new infrastructure bank in the UK that will help to support infrastructure projects across the whole of the UK, including in Scotland. I was therefore pleased to see the Scottish Government launch their Scottish National Investment Bank on 23 November.
The new clause seeks to establish a review process for considering whether the Scottish Government’s reserve flexibility should be increased and expanded for use by the Scottish National Investment Bank. We have already agreed significant financial flexibilities with the Scottish Government as part of the Scotland Act 2016 and their fiscal framework, which provide unprecedented policy levers to shape Scotland’s economy, including a £700 million Scottish reserve. The Scottish Government are able to manage the Scottish National Investment Bank through those existing arrangements if they choose to prioritise that.
Furthermore, we have agreed to undertake a review of the Scottish Government’s fiscal framework. That will include an independent report, jointly commissioned with the Scottish Government, next year in 2021, followed by a renegotiation of the fiscal framework in 2022. I therefore think in light of that information that the hon. Member might consider withdrawing the new clause.
Alison Thewliss
I am not going to withdraw it. The Minister has an absolute cheek, and he knows it. We were working on the bank for quite some time, and it has opened its doors and is already lending money while the UK Government are still only talking about their bank. Help us do the job and help us make sure that we can make this work for Scotland’s future, because, frankly, we do not trust the UK Government to do that for us, and we have good grounds for that.
When the UK Government invested in things in Scotland before, we ended up with things such as the Skye bridge, for which we were paying well over the odds. When Scotland is able to invest in things, we build bridges such as the Forth replacement crossing—sorry, the Queensferry crossing—which is an excellent bridge for us all to use in the future. I will press the new clause to a vote.
Stephen Flynn
I will be incredibly brief. Again, both new clauses 31 and 32 are about oversight and scrutiny. I have absolutely no doubt that Conservative Members will want to take back parliamentary sovereignty and ensure that this place has oversight of the Government’s actions.
John Glen
I think I have previously detailed my response to new clauses 22 and 26 why it would not be appropriate for Parliament to scrutinise all regulator rules made in relation to those two specific measures. These new clauses go further, and would require all rules made by the Financial Conduct Authority in relation to anything within this Bill to be approved by Parliament before the rules can be made, and would prevent the FCA from exercising its powers effectively. New clause 31 would make the FCA’s rule making subject to parliamentary approval. New clause 32 prevents the FCA from making rules under the Bill until two new parliamentary Committees are established. The same arguments that I made previously are relevant here: new clause 31 would apply a higher level of parliamentary scrutiny—to the FCA only—when making rules in areas covered by the Bill. That would mean that those areas were inconsistent with other areas of financial services regulation not covered by this Bill or within the remit of the Prudential Regulation Authority, which will retain the existing scrutiny requirements.
Parliament would need routinely to scrutinise a large number of detailed new rules on an ongoing basis. That is very different from the model that Parliament has previously put in place for the regulators under the Financial Services and Markets Act 2000, where it has judged it appropriate for the regulators to take these detailed technical decisions where they hold expertise.
Turning briefly to new clause 32, although I note that Select Committees of both Houses already have the option to scrutinise the regulators as they see fit, it is naturally for Parliament to decide how best it wishes to scrutinise financial services regulation. However, I do not believe that it is appropriate to make the introduction of an investment firms prudential regime, or any of the other changes enabled by this Bill, subject to the establishment of new parliamentary Committees. Nor do I believe it is for the Treasury to make regulations related to the establishment or functioning of parliamentary Committees. As the right hon. Member for Wolverhampton South East pointed out in an earlier sitting, that is a matter for the House to decide.
I would like to reassure the Committee that I am committed to ensuring appropriate accountability and scrutiny around new rules for our financial sector. That is why I recently published a consultation document on the review of the future regulatory framework for financial services. This review seeks to achieve the right split of responsibilities between Parliament, Government, and the regulators now that we have left the EU. It seeks views, including those of all parliamentarians, on how we can best scrutinise and hold the regulators to account, while respecting and safeguarding their independence. I look forward to engaging with hon. Members on that subject but, given what I have said, I suggest that they might consider withdrawing the new clause.
Stephen Flynn
I am not surprised, but I am disappointed. I would like press new clause 31 to a vote.
Question put, That the clause be read a Second time.
Alison Thewliss
I will be brief. It is important that the Government take their obligations under the Paris climate change commitments and the UN sustainable development goals seriously. I did not know when we tabled these new clauses that my son would be studying the sustainable development goals at his school this week. It would be very good if the Government took the sustainable development goals quite as seriously as the primary 6 pupils I know.
John Glen
It is clear that this new clause is similar to other amendments. We have discussed the issues in relation to Basel and PRIIPs measures, and new clauses 33 and 34 would mean that they would apply to a Bill as a whole. As I have set out in previous responses, we are committed to meeting international obligations and strongly support the aims of the Paris agreement and the sustainable development goals. That will mean a combined effort across the whole economy, especially with the involvement of financial services. As the Chancellor set out in his statement, they will be at the heart of that effort. We are pursuing world-leading standards, and ahead of COP26 the Prime Minister’s COP26 finance adviser, Mark Carney, will advise the Government on embedding climate considerations into every financial decision.
These new clauses would require the provision of an assessment of the impact of the Bill, specifically on the UK’s ability to meet its commitments to the Paris agreement and sustainable development goals. We published in June 2019 a voluntary national review, setting out in detail our progress towards those goals, and a comprehensive account of the further action to be taken, and we remain committed to supporting the implementation of those goals. We therefore cannot support these new clauses, as we believe that we are held to account through other mechanisms. That is probably all I need to say. I suggest that the clause may be able to be withdrawn on that basis.
Alison Thewliss
I am happy to do so. I beg to ask leave to withdraw the clause.
Clause, by leave, withdrawn.
New Clause 35
Money laundering and overseas trustees: review
“(1) The Treasury must, within six months of this Act being passed, prepare, publish and lay before Parliament a report on the effects on money laundering of the provisions in section 31 of this Act.
(2) The report must address—
(a) the anticipated change to the volume of money laundering attributable to the provisions of section 31; and
(b) alleged money laundering involving overseas trusts by the owners and employees of Scottish Limited Partnerships.”—(Alison Thewliss.)
This new clause would require the Treasury to review the effects on money laundering of the provisions in section 31 of this Act, and in particular on the use of overseas trusts for the purposes of money laundering by owners and employees of Scottish Limited Partnerships.
Brought up, and read the First time.
Question put, That the clause be read a Second time.
John Glen
I am grateful for the enticement to be generous, but I was quite generous on new clause 8. I gave some positive indications about the intentions of the Government, and I look carefully at everything that is said by Members from across the Committee. I am very engaged with the mutual banks and with the co-operative sector generally, which I will say more about in a moment.
This amendment aims to remove the restriction which prevents co-operative societies holding withdrawable share capital from carrying out the business of banking. I share the interest of the hon. Member for Walthamstow in how the mutual model of financial services can add much-needed diversity and competition to the sector. Treasury officials and I have had constructive conversations with individuals seeking to set up regional mutual banks, and I look forward to continuing those. I will not mention their names, because they are going through different regulatory processes, and I am told that that is sensitive and so I should not do so. I try to help them.
Ensuring that banks hold the appropriate capital is critical to a stable and functioning financial system. It is therefore important that we consider any legislative changes in this area. I have thought about the amendment, and there are several immediate concerns about the potential risks to financial stability and consumer protection, which the Government have a duty to consider.
I will set out our most pressing concerns. As the global financial crisis highlighted, sufficient regulatory capital is needed by financial institutions as a source of resilience and to ensure losses can be effectively absorbed. To ensure capital fulfils this function, capital held by banks must always be readily available to absorb losses, which cannot be the case where investors can withdraw capital. Enabling co-operative banks to hold withdrawable share capital, as this amendment intends, could place consumer deposits at risk, create an inconsistent regulatory regime between co-operative and non-co-operative banks, and cause risks to the stability of the financial system, if it led to banks being inadequately or inappropriately capitalised.
I have had representations from the prospective regional mutual banks sector that they would seek to use this amendment to issue additional tier 1 capital instruments, or contingent convertible bonds. These are complex instruments that would need further thought to ensure they fulfilled their purpose within the legislative framework for co-operatives. It is also unlikely that the ability to raise additional tier 1 capital would be very beneficial to regional mutual banks currently, given they are at the early stages of their development where raising core equity capital is the priority.
I also note that the activity of deposit taking, in the form of withdrawable share capital that co-operatives and community benefit societies carry out under the present legislation, is subject to certain exemptions from regulatory requirements, which are applicable to other institutions carrying out business activities. These may no longer be appropriate if they were generally allowed to carry out the business of banking.
In conclusion, the Government believe that the fundamental issue is that it is not appropriate for deposit takers to rely on withdrawable share capital. In any case, certainly a measure like this would need further consideration of the legislative and regulatory implications rather than being introduced by way of amendment. I will continue to look carefully at these matters with the sector, but in the context of what I have said I ask the hon. Member for Walthamstow to withdraw her amendment.
Stella Creasy
I am so sorry to hear that the Minister is still listening to Marley rather than Bob Cratchit about the true spirit of Christmas. This is legislation from the 1800s. It is about £400 worth of share capital. It is outdated and needs a little more Christmas cheer. The Minister said that he would commit to working with the sector to get this amendment right, and if amended this Bill could be great. I think I will push the new clause to a vote—if nothing else, to put on the record that there are those of us who understand that co-ops want to move into the 21st century—and wish everyone a merry Christmas at the same time.
Question put, That the clause be read a Second time.
Mr McFadden
On a point of order, Dr Huq, I would like to thank you and Mr Davies for your chairmanship during the proceedings, and the Clerks from the Public Bill Office for helping all of us with our amendments in recent weeks. I would like to thank my colleagues on the Opposition side of the Chamber; I believe we approached this in the right spirit. We set out at the beginning the way we would approach it and I think that is the way that we have carried through: trying to improve the Bill, to give it proper scrutiny and to try to point to some kind of future direction for UK financial services as we come to the end of the transition period. Some of us here are Front-Bench Members and this is part of our terms of appointment, so, with their indulgence, I would particularly like to thank my hon. Friends the Members for Wallasey and for Walthamstow, who I believe both brought considerable experience and value to our proceedings.
I would like to thank the Minister for his patience and forbearance. We did not set out to torture him, I promise, but I appreciate that for him, taking through a Bill like this is a substantial piece of work, and I am grateful to him for the spirit in which he responded to amendments, questions and so on as we went through. Finally, I thank the Back Benchers on the Government side. For the most part they took a rather passive approach to the proceedings. There is a mixture of experience and new MPs on that side. To the new MPs in particular I will say that I hope the last three weeks have been an important part of their learning about what it means to be a Government Back Bencher.
John Glen
Further to that point of order, Dr Huq, I thank the right hon. Member for Wolverhampton South East for the courteous and constructive way in which he led the Opposition scrutiny of the Bill. I thank all members of the Committee for their contributions. I looked carefully at all amendments, and I did not categorise them in buckets. I thank you, Dr Huq, and your colleague Philip Davies, and the team of Clerks, as well as my officials from the Treasury, who sit silently at the end and do a great deal to support me and the much wider team back in the Treasury who have helped to prepare the Bill. Clearly, we shall now move on to its further stages, and there is more work to do. I thank my hon. Friend the Member for Macclesfield for his support, in particular, as well as my hon. Friend the Member for Montgomeryshire, who has given me enormous support throughout.
Alison Thewliss
Further to that point of order, Dr Huq, I thank you for your time in the Chair, and Philip Davies as well. I want to thank colleagues for their contributions, the Clerks for all their assistance, and the Treasury officials, who were good about meeting us ahead of the proceedings. That was really useful. I thank our team of researchers, Scott Taylor and Linda Nagy, who have been great in providing support to us. I also thank those who sent evidence to the Committee. That was extremely useful for briefings, and we were grateful.
The Minister said earlier that he was not saying no or never; I live in hope that some time he will say mibbes aye. We might get there, yet. I said on Second Reading that we would bring forward constructive amendments and the Government would ignore them, and that turned out to be what happened, but we hope that on Report perhaps some of the good Opposition suggestions, made with the best intentions to make things better for all our constituents, will be taken on board. I thank the Minister for his work on the issue.
Oral Answers to Questions
John Glen Excerpts(5 years, 3 months ago)
Commons ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Kevin Hollinrake (Thirsk and Malton) (Con)
The Economic Secretary to the Treasury (John Glen)
As of 15 November, the bounce back loan scheme has supported nearly 1.4 million businesses with facilities totalling over £42 billion. This includes the extra amounts received from our bounce back loans, which have been topped up to a higher amount, providing further help to businesses that are in need of monetary support.
Kevin Hollinrake
The scheme has been a huge success, but according to research by the all-party parliamentary group on fair business banking and Funding Xchange, about 250,000 businesses were locked out of the scheme because they banked with non-bank lenders and the banks that have liquidity to provide funds in this way either closed to new customers or have no appointments left until the end of January, when the scheme closes. What action is my hon. Friend taking to address this very important issue?
John Glen
The Government cannot force lenders to open to new bank customers for bounce back loans, but we have repeatedly encouraged lenders to open when it is operationally possible for them to do so. Indeed, nine lenders have managed to open to new customers for a period, and two are currently open, although for limited services. Their efforts, combined with the fact that accredited lenders account for a very high proportion of business in personal current accounts, mean that the vast majority of businesses should be able to get a bounce back loan through their existing relationship. Following the decision by the Chancellor to extend the scheme to 31 January, there are now two and a half months left to apply for a loan, after which we will be introducing a new guarantee scheme.
Mr Pat McFadden (Wolverhampton South East) (Lab)
This weekend, we will mark Small Business Saturday, when we all have the opportunity to praise the work of the fantastic small businesses that contribute so much to our local economies and have been through a tough time this year. Bounce back loans have helped small businesses, but because of the ongoing pandemic, they have, by definition, also left some businesses with debts that they may not be able to pay. What is the Government’s estimate of the likely rate of default on bounce back loans, and what further support can the Government give to small businesses whose trading conditions will continue to be severely impaired for months to come?
John Glen
The right hon. Gentleman rightly praises the work of small businesses up and down the country, and I echo his sentiments. He asks about the provision we have made for the future of bounce back loans. Those who have taken out the loans will not be starting to repay, because there is an interest-free period until May next year. Indeed, we have decided to extend the time to pay for up to 10 years. Clearly, we keep these matters under review and are very sensitised to the burdens that small businesses face. That is why, as the Chancellor said earlier, we have introduced a number of measures in addition to the bounce back loans to support small businesses at this time.
Meg Hillier (Hackney South and Shoreditch) (Lab/Co-op)
The Minister talked about the default issues on the loans but also about extended payback. Has he or the Treasury done a calculation about whether that will reduce the up to 80% expected potential for default on the payback of these loans, which obviously businesses need but will hit taxpayers very dearly?
John Glen
There have been a range of estimates due to the considerable challenges in verifying data. What I would say is that our priority has been to protect as many businesses and jobs throughout with this intervention. We have always considered the fraud risks and the need to maintain a sense that the loans need to be paid back, but the Cabinet Office and the British Business Bank are continuing to work on that mitigation strategy, where we have a mandatory system to detect multiple applications. The default risk is an evolving picture that we will keep very close to.
Chris Grayling (Epsom and Ewell) (Con)
James Sunderland (Bracknell) (Con)
The Economic Secretary to the Treasury (John Glen)
The Government recognise the extreme disruption that the pandemic has caused to business, employment and the nation’s economy, and our goal remains to protect people’s jobs and livelihoods. That is why we have provided one of the most comprehensive and generous packages of support, worth £280 billion.
James Sunderland
I commend the Treasury on what it is doing at the moment to support businesses across the UK. Is the Treasury willing to extend the VAT cut to the hospitality, leisure and personal care sectors, and will it perhaps encourage businesses to pass on that VAT saving to consumers?
John Glen
The temporary reduced rate of VAT was introduced on 15 July to support the cash flow and viability of more than 150,000 businesses and protect 2.4 million jobs in the hospitality and tourism sectors, and it will run now until 31 March next year. This obviously comes at a considerable cost to the Exchequer, and while we keep all taxes under review, there are no plans to extend it further. Although the Government want businesses to pass on the benefit to customers if they can, obviously decisions on prices are ultimately for businesses rather than the Government.
Stephen Timms (East Ham) (Lab)
Elliot Colburn (Carshalton and Wallington) (Con)
The Economic Secretary to the Treasury (John Glen)
The covid-19 winter plan, published on 23 November, sets out the Government’s plans for the coming months, and our objective is to find new and more effective ways of managing the virus to enable this route back to normality. That will be achieved through the deployment of vaccines, but also through improved medical treatments, expanding the capacity of the test and trace programme and using rapid testing to quickly identify and isolate cases. These measures will provide confidence as we approach spring that life will get back to normal.
Ruth Jones (Newport West) (Lab)
Robert Halfon (Harlow) (Con) [V]
John Glen
I thank my right hon. Friend for his question. Throughout the crisis, as he has acknowledged, the Government have spent over £280 billion. He referred to the self-employment income support scheme. Support for the grant has recently been increased from 55% to 80% of average trading profits from November to January, capped at £7,500 in total, and the claims window will be open until 30 November. Obviously, a range of additional support mechanisms have been put in place, including the additional restrictions grant. As my right hon. Friend the Financial Secretary said earlier, we will continue to look sympathetically and constructively at all other representations made.
Munira Wilson (Twickenham) (LD)
Financial Services Bill (Ninth sitting)
John Glen ExcerptsTuesday 1st December 2020
(5 years, 3 months ago)
Public Bill CommitteesRead Full debate Financial Services Bill 2019-21 View all Financial Services Bill 2019-21 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 1 December 2020 - (1 Dec 2020)
The Chair
Before we begin, I have a few preliminary points to make. Please switch electronic devices to silent. Tea and coffee are forbidden during sittings, but I will allow Members to take their jackets off, as Chris Clarkson politely asked at the start, so feel free to remove outer layers if you wish.
I remind Members of the importance of social distancing. Everyone is sitting in the right place, but if necessary, people will have to sit in the Public Gallery. Hansard reporters have asked for speeches to be sent to hansardnotes@parliament.uk. Today we will continue with line-by-line consideration.
Clause 25
Individually recognised overseas collective investment schemes
Question proposed, That the clause stand part of the Bill.
The Economic Secretary to the Treasury (John Glen)
Thank you for your continued chairmanship of this Committee, Dr Huq.
The clause makes changes to section 272 of the Financial Services and Markets Act 2000, which allows individual investment funds from other countries and territories to be marketed to the general public, including retail investors, in the United Kingdom. Although we have separately introduced a new overseas funds regime to allow specified categories of overseas funds to market to retail investors, section 272, the existing provision, will remain and will be available for investment funds that do not fall within the scope of an equivalent determination under the OFR, but still wish to market to retail investors in the UK. Investment funds that are eligible to apply under the OFR will not be able to make an application under section 272. This is to ensure that funds always apply through the most efficient route possible.
We have proposed simplifications to section 272 and sections relating to it, which are supported by both the Financial Conduct Authority and industry. First, the changes will streamline the FCA’s assessment of individual investment funds from other countries. In making its assessment, the FCA would now need to consider only issues that are subject to existing rules on UK authorised funds rather than potential laws that do not yet exist. Secondly, we will simplify when the fund operators have to notify the FCA of changes to their funds and, thirdly, we will make wider changes so that section 272 is compatible with the new OFR.
Also, provisions are added to FSMA, mirroring the ones in the OFR, to enhance consumer protections and ensure consistency in comparability between the two regimes. This includes requiring fund operators to notify such persons as the FCA may direct, such as investors, if the fund’s permission to market is suspended or revoked. The FCA will also have the power to make public censure if certain rules and requirements are breached. Finally, we are also making it clear that sub-funds can be recognised under section 272 if investment funds are part of an umbrella and sub-fund structures.
As I noted earlier, an umbrella fund is a legal entity that groups together different sub-funds where each sub-fund has a separate pool of assets that typically has its own investment strategy. The changes set out in clause 25 will improve the process in section 272, reducing the administrative burden for the FCA and asset management firms. I therefore recommend that the clause stand part of the Bill.
Mr Pat McFadden (Wolverhampton South East) (Lab)
It is a pleasure to serve under your chairmanship, Dr Huq.
I want to ask the Minister where the clear water is. In simple terms, is this about granting equivalence recognition to individual companies from countries where we do not grant the overall country the equivalence recognition? The Minister nods, so perhaps that is what it is about. That implies that those firms might need a higher level of monitoring or observation, given that they are from countries that have not been granted equivalence recognition—presumably, we think that the regulatory system in the country in which they are based is perhaps not quite of the standard of some other countries. Will he tell us a little more about how that would work? Will there be a set of firms that the FCA keeps an extra eye on? If the FCA decided that equivalence recognition permission should no longer be granted to an individual firm, how would the process work? Is it something that can be withdrawn quite quickly if we think things have changed?
John Glen
I thank the right hon. Member for Wolverhampton South East for his questions. His characterisation of what this is about is absolutely right: the clause provides a mechanism to ensure that funds that are not eligible for the new overseas fund regime may still apply and secure access. In terms of the FCA, monitoring and protection, it is important to point out that the FCA’s online register shows that there are currently four stand-alone funds, seven umbrella funds and 27 sub-funds that have permission to be marketed to UK retail investors under section 272. Some of those funds have been carried over from a previous regime for overseas funds marketing to the UK, set out in section 270 of FSMA.
To give some comfort about investor protection, the FCA is required to examine whether the fund gives adequate protection to investors in the scheme. It will examine whether the fund’s arrangements for constitution and management are adequate; the powers and duties of the fund’s operator, trustee or depositary must also be adequate. It is another mechanism to be applied in conditions where a country as a whole is not given the adequacy equivalence decision.
Under the clause, the FCA has suitable powers to verify the full context of the fund’s operations and to take account of the risks associated with the fund. It would make a determination based on the full range of factors available to it.
Mr McFadden
We will be discussing a couple of similar clauses very soon, but it strikes me that quite a big role is envisaged for the FCA in advising the Government on equivalence recognition and regulation in other countries. It has not performed such ongoing monitoring up until now. It is quite easy to go through the Bill clause by clause, subsection by subsection, and think that each change is a nothing more than a small change here and a small change there that do not add up to much, but the impression gained is that the Bill creates a big job for the FCA. Is it properly resourced and equipped to carry out that role?
John Glen
As ever, the right hon. Gentleman makes a very reasonable point. In this context, the obligations on the FCA and the Prudential Regulation Authority will continue to be considerable. They will have significant responsibilities. In previous sittings, we talked about the necessity of having a clear framework for the regulator to be accountable to Parliament, subject to Parliament’s determination of what that will be. The resourcing of the FCA with the right sort of skills to carry out the proposed functions will be an issue that its new chief executive will consider in due course. We will seek to co-operate with him to ensure that he has those resources.
The section 272 provision is extant and I outlined the number of funds that are using it, but I accept the right hon. Gentleman’s general point about the FCA. It is something of which we are very aware.
Question put and agreed to.
Clause 25 accordingly ordered to stand part of the Bill.
Clause 26
Money market funds authorised in approved countries
Question proposed, That the clause stand part of the Bill.
John Glen
Clause 26 is a core element of the overseas funds regime, the equivalence regime for money market funds. As I am sure a number of colleagues know, money market funds are a type of investment fund that invests in liquid assets such as cash, Government bonds and corporate debt. They are considered to be a low-risk, short-term and high-liquidity investment. Many organisations in the UK, such as local authorities, use money market funds to invest their cash in the short term as an alternative to bank deposits, and the vast majority of money market funds currently available to UK investors are domiciled overseas. UK investors need continued access to those overseas money market funds to use for cash management purposes. Money market funds are subject to separate regulations for other types of funds, and the Government therefore believe it is necessary to have a separate equivalence regime for money market funds that allows the Government to consider the additional factors and regulations.
Clause 26, and the new article 4A equivalence regime that it creates, will ensure that overseas money market funds that wish to become recognised in the UK must be from a country or territory where the relevant regulations have equivalent effect to the MMF regulation in the UK. I therefore recommend that the clause stand part of the Bill.
Mr McFadden
We have met the capital requirements regulation, we have met undertakings for collective investment in transferable securities, and now we meet the money market funds regulation. I have a couple of questions for the Minister on this issue. First, new article 4A(2) of the money market funds regulation says that the Treasury must be satisfied that the requirements on money market funds
“have equivalent effect to the requirements imposed by this Regulation.”
The key phrase here is “have equivalent effect”. That is the yardstick by which judgments will be made. How will this be assessed? What exactly will the Treasury be looking for when it makes such an assessment? How are we judging equivalent effect?
Secondly, article 4A(4) says that when considering the revocation of equivalence,
“the Treasury may ask the FCA to prepare a report on the law and practice of the country”
that is involved. That harks back to what I said a moment ago. Will preparing reports on the law and practice involved be a new task for the FCA? The Bill states only that the Government “may” ask the FCA, but I would have thought that if the Treasury were to consider the revocation of one of the equivalence recognitions, it would be pretty essential that the FCA be involved in that.
Thirdly, there is nothing in new article 4A that requires the UK to continuously monitor the law and practice of other countries once equivalence has been granted. That is important, because we grant the equivalence recognition on the basis of a view at the time that a country’s regulations have equivalent effect. However, how can we guarantee that there might not then be a process of regulatory or deregulatory change in the country that had been deemed equivalent, with consequential risks for UK consumers if—to put it in lay terms—the rules become a lot more lax in that country? Really, I am asking how this will all be monitored again in the future, and I would be grateful if the Minister has some comments on that.
John Glen
I thank the right hon. Gentleman for those questions. Essentially, there are two parts. The first is about how the assessment will be made. The UK is committed to what we describe—I have said it before—as an outcome-based approach to equivalence. That is based on the principles of FSMA, which means acknowledging how different regulatory practices can combine to achieve the same outcomes, as opposed to the prescriptive rule-by-rule-based approach that our friends in the EU have often preferred. We would not expect to see identical line-by-line regulations.
The OFR does not require countries to have those exact rules and regulations, but they must have laws and practices that have an equivalent effect in terms of the outcomes achieved. Obviously, there is considerable expertise involved in evaluating that and a particular group of people who are capable of doing that within the FCA. We believe that that outcomes-based equivalence can provide a high level of consumer protection while also allowing the UK to maintain a competitive market for overseas funds.
The second part of the right hon. Gentleman’s question addressed the issue of future evolution and divergence in standards, and how that would be monitored. The monitoring would be conducted in line with the equivalence guidance document that the Government published on 9 November. It sets out the framework for ongoing monitoring, recognising this outcomes-based approach, but being cognisant of changes in the underlying regulatory regime. This would not be a question of going through a gateway, gaining approval and that would be it forever. There would be some monitoring proportionate to the nature of the risks and the assurance that we had around the regime. I hope that answers the right hon. Gentleman’s question.
Question put and agreed to.
Clause 26 accordingly ordered to stand part of the Bill.
Clause 27
Provision of investment services etc in the UK
Question proposed, That the clause stand part of the Bill.
John Glen
Clause 27 gives effect to schedule 10 and amends the markets in financial instruments regulation. MiFIR is a piece of retained EU legislation that will continue to have effect in the UK after the end of the transition period, with amendments made under the European Union (Withdrawal Agreement) Act 2020 to ensure that it continues to operate effectively.
In summary, the amendments that the Bill makes to MiFIR broadly reflect the changes that the EU has introduced to its own third country regime, so it makes sense for us to do so. The third country regime in MiFIR established the basis on which overseas investment firms will be able to offer investment services and undertake investment activities in the UK. It allows overseas firms to apply for recognition that will allow them to provide cross-border services to more sophisticated clients, without establishing a local branch, if there has been an equivalence in respect of their home jurisdiction.
The changes made in this Bill will ensure the effective operation of the equivalence assessments and the subsequent operation of the recognition regime. That will mean that we can access the EU and treat EU investment firms in the same way that the EU will assess the UK and treat UK firms in the future. I will detail the specific amendments that this Bill makes to MiFIR during my explanation of schedule 10. I recommend that the clause stand part of the Bill.
Mr McFadden
I have two questions about schedule 10. The Minister has set out what it is intended to do, but I want to ask a few questions on the theme of monitoring and compliance.
New paragraph 5A of article 46 of the regulation defines reverse solicitation, and therefore an exemption from the equivalence rules, as when a business is not initiated at a client’s own initiative. Is the Minister confident that this is a tight enough turn of phrase to mean that firms cannot solicit business in the UK while dodging the stricter regulations that come within such marketing activity?
Secondly, and more important, new paragraph 1C of article 47 of MiFIR says that when making an equivalence determination the Treasury must take into account whether a country is classed as high risk for money laundering. Surely that is not strong enough. We will talk more about money laundering shortly. Why do we not say outright that the UK should not consider any such jurisdiction as equivalent until it is no longer considered a high-risk location for money laundering?
New article 48A of the regulation gives significant powers to the Treasury to impose additional requirements on third-country firms, but there are no details of what those requirements might be. Again, I would be grateful if the Minister said a bit more about that.
John Glen
I thank the right hon. Gentleman for his comments. He raises a number of specific points around drafting, and if there is anything that I cannot answer, I shall write to him today.
On the first point, the FCA needs to register overseas firms, which will give the right oversight, and also needs to monitor the overseas framework on an ongoing basis. From June 2021, the EU will be able to assess the UK and treat UK firms under a new regime. These changes are necessary to ensure that the Treasury is well equipped to assess the EU and that the FCA can exercise the appropriate level of oversight over overseas investment firms operating in the UK under this regime.
The core thrust of the right hon. Gentleman’s questions relates to the apparent weakening of the UK’s position. The Treasury has not yet determined which additional requirements, if any, would apply to overseas firms; that will be done when an equivalence determination is made, after the Government have fully considered the views of the FCA and other relevant matters.
The point the right hon. Gentleman makes about protection for consumers is obviously a critical one. Firms operating on a cross-border basis under this regime are not allowed to service UK retail consumers. The regime only applies to more sophisticated professional clients such as other financial services firms. None the less, I recognise that it is clear that we need to ensure that firms that are accessing UK markets from overseas are subject to similarly robust regulatory standards to those we place on our firms at home, and these amendments will do exactly that.
The Treasury will be able to determine whether a third country has a regulatory framework that has an equivalent effect to the UK’s, meaning that we can be confident that these third-country firms are regulated to the same level as our own. For firms that do not play by the rules, it is important that we have the right mechanisms to call that out, and the FCA will be able to step in where needed to protect UK investors and the integrity of our financial system.
On the right hon. Gentleman’s last point about money laundering specifically, we need to assess a jurisdiction’s regulatory framework as equivalent. That provides a high bar for anti-money laundering risks, and that is reflected in the guidance document that I referred to earlier. I will make the general point, though, that I understand the sensitivity to this fear and anxiety around wilful divergence to have a less regulated and less secure environment. I want to put it on the record that the Government do not see the changes as a mechanism to achieve some loosening. However, we will need to take account of the new directives that the EU continues to develop without our being at the table, and we will also need to develop our own response. Even though it will not be identical, that does not mean that we will not observe the high standards.
Mr McFadden
I think the Minister is getting to the heart of it. I asked detailed questions, but at the core of them is this one: is there a policy intent in these little changes of words, when we transpose the regulation, to have a loosening in some way, or are those little changes almost incidental—with no policy intention to have a less rigorous regime than MiFIR proper would apply to money laundering, recognition or any of the other things that I asked about?
John Glen
There is no intention to moderate or significantly alter the effect of the regulation. This is about doing what is necessary to ensure that we regulate the services and activities of overseas investment firms following an equivalence determination. The changes are designed to be consistent with the direction of travel that we have pursued within the EU, but making changes that are necessary for the different outcomes-based approach that we have always taken in the UK.
Ms Angela Eagle (Wallasey) (Lab)
Just briefly to add to the questions from my right hon. Friend, why on earth is there all this faffing about when we are having total equivalence and companies will want the rules to be the same? Is this just another obtuse obsession with sovereignty, which will cost a hell of a lot more money because we will have to have our own bespoke regime that is meant to do exactly the same thing?
John Glen
I think the hon. Lady’s point goes back to the decision made to leave the EU and the implications of that. I recognise that we had a conversation in the previous sitting about the nature of the regimes that have been mooted as a possible solution.
I did an extensive session with the Lords EU Services Sub-Committee yesterday morning dealing with the issue of equivalence. We see this as a technical process. We have filled in several thousand pages of forms across 17 questionnaires for the EU, and it has not made those determinations, so we moved forward and made our determinations of the EU and are seeking to bring as much clarity as possible. This is another example of our bringing clarity to industry in as straightforward a way as possible, and the changes reflect that.
Ms Eagle
I praise the Minister for his diplomacy. Having been a Treasury Minister myself, I know that diplomacy is extremely important when he sits in his bivouac. Has he made any assessment of the extra red tape that he is putting on our own financial services sector by insisting, for reasons of sovereignty, on a different but hopefully equivalent route? He and I both know that the minor differences between what is allowed and what is not can turn into weaknesses and reasons for arbitrage and rule breaking if those who regulate are not extremely careful.
John Glen
I acknowledge the hon. Lady’s deep experience in this matter and I am grateful for her empathy with the need to be diplomatic as a Treasury Minister. The measure is about extending limited supervisory powers to replicate EU powers. Her general point about the additional costs that can accrue to industry is something that we are very concerned about. We have always had within the UK a different approach to onshoring regulations, and that will continue.
FSMA 2000 gives us that outcome-based approach. When we downloaded the directives that we participated in creating in the EU and the Commission process, we always did it in our own way as per those principles. The hon. Lady’s main point is a key concern for the Government. That is why we are anxious to give assurance of continuity where it is plainly necessary and illustrate how we can do things as smoothly as possible, to minimise disruption to industry in a time of prolonged uncertainty, which I hope will come to an end soon.
Question put and agreed to.
Clause 27 accordingly ordered to stand part of the Bill.
Schedule 10
Amendments of the Markets in Financial Instruments Regulation
John Glen
I beg to move amendment 18, in schedule 10, page 164, line 7, leave out “services” and insert “investment services, or performing investment activities,”.
This amendment provides that the Treasury’s regulation-making power under new Article 48A of the Markets in Financial Instruments Regulation applies to third-country firms performing investment activities, as well as to third-country firms providing investment services.
The intention of this amendment is to make a correction to article 48A for the markets in financial instruments regulation by replacing the word “services” in line 7 of page 164 with
“investment services, or performing investment activities,”.
This will mean that the Treasury may impose requirements on overseas firms performing investment activities in the UK in addition to overseas firms providing investment services in the UK.
Amendment 18 agreed to.
Question proposed, That the schedule, as amended, be the Tenth schedule to the Bill.
John Glen
Schedule 10 amends the retained Markets in Financial Instruments Regulation. This regulation will continue to have effect in the UK after the end of the transition period. In part, it regulates overseas firms that provide investment services and activities in the UK, following an equivalence determination, as I described in relation to clause 27.
Under MiFIR, investment firms in a jurisdiction the regime of which has been found to be equivalent can provide a specified range of services in the UK under a recognition regime. The amendments the Bill makes to MiFIR broadly reflect the changes that the EU introduced to its own overseas regime for investment firms where those changes make sense for the UK. These changes will ensure that we can assess the EU and treat EU firms seeking to operate in the UK in the way the EU will assess the UK and treat UK firms in the future.
Schedule 10 provides the FCA with a power to specify reporting requirements for overseas firms that register under the regime. As the expert regulator, the FCA is best placed to specify that level of detail. Schedule 10 also updates the assessment criteria for equivalence to reflect the latest changes in the UK’s prudential regimes, as updated by this Bill. Countries will be required to have provisions in place that are equivalent in effect in areas such as prudential rules, business conduct, market transparency and other areas. That means that overseas firms accessing UK markets will be subject to the same level of investor protection and prudential regulatory standards as that which we place on UK firms.
The process of equivalence is a dynamic one. Indeed, we need to ensure that equivalence can be monitored, not only now but in the future—that speaks to the point made earlier by the right hon. Member for Wolverhampton South East. That is why the FCA will be required to monitor the regulatory and supervisory developments and enforcement practices of an overseas country that has received an equivalence determination and report its findings to the Treasury. By doing that, we will be able to ensure that we can continue to protect UK consumers as much now as in the future.
Schedule 10 also enables the FCA to temporarily restrict or prohibit an overseas firm from accessing UK markets if the firm does not co-operate with the FCA. In some cases, the FCA may withdraw an overseas firm’s registration. These important tools need to be exercised carefully and, as such, schedule 10 also specifies the procedures that the FCA must follow when using them.
Finally, schedule 10 will enable the Treasury, where appropriate, to impose specific requirements on overseas firms that register under the MiFIR regime as part of the equivalence decision. That will allow the FCA to account for the specific nature of overseas firms providing services across borders to UK markets. The schedule therefore provides the Treasury and the FCA with the appropriate powers to ensure that the UK remains open to global investment, while upholding the highest standards of investor protection and ensuring the effective functioning of UK markets.
Ms Eagle
The powers are necessary to prevent not only exploitation that might pose some systemic risks to the financial system, but catastrophic loss to UK investors due to rogue investors or investments. Regulators are reluctant to use the more draconian end of their powers, and there is little evidence that they actually go there.
Is the Minister satisfied that the practical effect of the changes will be that the FCA is determined to use those powers, if need be? It seems to be reluctant to go to the stage of closing firms down. That would be a huge decision that may involve considerable disruption. Is he convinced that the FCA has the resources, the aptitude and the determination to do that if necessary?
John Glen
The hon. Lady makes a good point. This goes to the heart of the evolution in the FCA’s responsibilities in an environment where it is being asked to do things differently and to account to Parliament for its actions. The future regulatory framework discussions through the next six months will allow us to solidify what those responsibilities will be.
The hon. Lady is right to say that the FCA will be required to make significant judgments on regulatory and supervisory developments, enforcement practices and other relevant market developments in third countries. The Treasury will request reports from the FCA with regards to overseas jurisdictions. We will consider those reports and other sources of information and take appropriate action, which would involve reviewing and equivalence determination or withdrawing equivalence.
Resourcing is a matter for the FCA itself, which it reflects on and establishes a levy for. I have conversations every six weeks with the FCA’s chief executive and chairman, and such matters are under ongoing review. Clearly, in the light of these changes, the FCA will need to update its provision. The FCA has a new chief executive officer who is undertaking a significant transformation project. I welcome his appointment and his plans, but reviews will be ongoing, and I am confident that he and his organisation will rise to the occasion.
Ms Eagle
I am sorry to press the Minister again, but this area is crucial to ensuring that our financial services industry is properly and appropriately regulated. We will be discussing crime, money laundering, and market abuse later today, I think, but the powers arranged against a regulator wanting to take drastic action, particularly in the form of disruption, trouble, lawyers, threats and all that, can mitigate decisive action. With Action Fraud and the failures in some of these areas, we have seen that even when criminal liability and offences are in the mix, rather than just regulatory offences, we do not seem to have developed a system that is as effective as it needs to be.
To what extent does the Economic Secretary think that the FCA’s use of levies to finance that activity is good enough given their volume and the drastic effects of some decisions, especially considering the funding of other regulators? Across the pond—we will increasingly have to look across the Atlantic—regulators are much better resourced than our own. Is he convinced that he has got the balance right for capacity and resources?
John Glen
The hon. Lady is taking me further and further away from the Bill. Her core point is about the suitability and sufficiency of the FCA’s capability. The FCA has provision to take account of consumer and market conditions and intervene, and I am clear that it has the capacity and the experience to do that work. The broader economic crime challenges that she mentions are why the March Budget contained an additional £100 million economic crime levy to support existing public investment and levies.
These are an ongoing, challenging, evolving and changing set of risks across that market, with the application of new technology—I have mentioned cryptocurrencies—and new ways of doing business that mean that the nature of crime is also evolving. I would never be complacent about the capacity of the FCA, and I recognise that it needs constant review and refresh to ensure that it is aligned with the other agencies involved in monitoring and dealing with threats to market integrity.
Question put and agreed to.
Schedule 10, as amended, accordingly agreed to.
Clause 28
Part 4A permissions: variation or cancellation on initiative of FCA
John Glen
Clause 28 introduces schedule 11, which amends the Financial Services and Markets Act 2000 to put in place a new process so that the FCA can more quickly cancel the authorisation of firms that it believes are no longer continuing regulated activity.
Since the existing grounds and method for cancellations were introduced, the FCA-regulated population has expanded, such that the FCA now regulates approximately 59,000 firms. Under the current cancellation process, it can take considerable time for the FCA to build its evidential case that the firm is no longer carrying out authorised activity, even when it is likely that the firm is no longer doing so. That means that there is a delay between the firms being identified as inactive by the FCA, and the FCA being able to remove or vary their authorisation.
The FCA estimates that at any point in time, the number of firms no longer carrying on FCA-regulated activities but which have not sought cancellation to their authorisation is about 300 to 400. Although that is a small proportion of the 59,000 FCA-regulated population that I mentioned, the Government nevertheless consider that it creates a risk, particularly in regard to the financial services register. Fraudsters can take advantage of inaccuracies in the register to their benefit by cloning inactive firms to scam consumers. That involves impersonating a firm that is on the register to give people the impression that they are dealing with a regulated entity.
Alison Thewliss (Glasgow Central) (SNP)
What is the interaction between that register and the Companies House register? If we removed an inactive business from one register, it would make sense to remove it from the other.
John Glen
As far as I am aware, the Companies House register is a separate entity run from the Department for Business, Energy and Industrial Strategy. A considerable amount of work is going on at the moment to look at how the data around Companies House registration works, reflecting concerns raised in the December 2018 Financial Action Task Force report. The hon. Lady makes a very reasonable point about the alignment of the two registers, and I will need to come back to her on that matter. Clearly, it would be perverse to remove an FCA-registered entity but not have a forfeit of registration from Companies House. I shall write to the Committee and to the hon. Lady on that matter.
I want to ensure that consumers can take informed financial services decisions. To achieve that, we need to ensure that the financial services register is accurate and that consumers are not exposed to unnecessary risk. This new process will sit alongside the existing process, to allow the FCA to streamline cases in which it suspects that a firm is no longer carrying on an authorised activity, enabling the FCA to more quickly cancel the firm’s authorisation and update the financial services register accordingly. In cases in which the FCA is looking to cancel a firm’s authorisation for another reason, this will continue to pass through the existing process.
I therefore recommend that this clause stand part of the Bill.
Mr McFadden
I suspect that I am going to follow up on the question from the hon. Member for Glasgow Central. As the Minister has explained, the problem that this clause and schedule are intended to resolve is dormant companies that no longer do the things that they were doing when originally registered with the FCA. Regulation is sometimes described as a needle-in-a-haystack problem, because there are so many companies and there is so much going on. Okay, it is not a massive number; it is 300 or 400 among 59,000 companies, but if we can strip those out, we make the job of the regulator that little bit easier because it is monitoring fewer companies and there is less danger of the cloning activity that the Minister described.
However, this does prompt a question: if 59,000 companies are regulated by the FCA and some 4 million to 5 million are registered with Companies House—we will come on to this under other clauses shortly—surely the process that the Minister has just outlined for clause 28 and schedule 11 should apply to companies there, if we find that they are simply paper organisations that may be designed as much to deceive as to actually carry out any business. Where they are engaged in activities that they should not be, they should be taken off the register, too, but that would of course imply a change in job description for Companies House. It has traditionally regarded itself more as a register and library rather than a real regulator or what might be called a partner in law enforcement. Therefore, can the Minister at least—he will hear this more than once today—talk to colleagues in BEIS to encourage a parallel approach with Companies House? It seems to me that what is being done in clause 28 is sensible, but it is only part of the picture of clamping down on illegal activity.
John Glen
The point here is that clearly a business could be registered at Companies House, could historically have done regulated activity under the FCA and that regulated activity could have ceased; it may have other business activities that are completely compliant with Companies House law, but it should not be registered for doing financial services regulated activity. The question would then be this: what would be the obligation on Companies House to make an interaction so that, as the right hon. Gentleman said, the definition of its activities would be amended?
Obviously, there are complex legal issues here. This is associated with the review that BEIS will be coming back to, responding to. I think it is important that we acknowledge that issue about not doing a regulated activity but continuing to trade legally in other realms. But the point that I hear and recognise needs to be clarified is this: what is the interaction between the two processes? I undertake to examine that and to make clear to my colleagues in BEIS what the risks are and what the view of this Committee is.
Question put and agreed to.
Clause 28 accordingly ordered to stand part of the Bill.
Schedule 11
Variation or cancellation of Part 4A permission on initiative of FCA: additional power
Question proposed, That the schedule be the Eleventh schedule to the Bill.
John Glen
I have already explained why we are acting to create a new process so that the FCA can more quickly cancel the authorisation of firms that it believes are no longer continuing regulated activity. Schedule 11 amends the Financial Services and Markets Act 2000 to give the FCA the necessary power to do that If it appears to the FCA that an FCA authorised person is no longer carrying out a regulated activity, it can vary or cancel that firm’s permissions. Examples of where the FCA might pursue this approach could be when the firm has failed to pay its fees or levies or provide information to the FCA as is required in the FCA handbook.
John Glen
Clause 29 makes two small technical changes to the market abuse regulation. The first concerns insider lists, which are lists of all persons who have access to inside information and are working for firms that issue financial instruments or those acting on their behalf. They are a crucial tool for regulators and for firms themselves in controlling the flow of inside information. Currently, the market abuse regulation requires issuers or any person acting on their behalf or on their account to maintain an insider list. This has created uncertainty as to whether third parties acting on behalf of an issuer should be holding their own list or sending it to the issuer to hold, leading to a risk that some of the parties are not maintaining insider lists. These lists are vital. In this clause, we are acting to remove this uncertainty by making it clear that both issuers and any person acting on their behalf or on their account are required to maintain an insider list.
The second part of the clause concerns the timetable within which issuers are required to disclose transactions by their senior managers in the issuers’ own financial instruments to the public. Under the market abuse regulation, senior managers—referred to as persons discharging managerial responsibilities, or PDMRs—need to notify the issuer and the FCA of any transaction undertaking in financial instruments related to the issuer. This notification must be made within three working days of the transaction and the issuer must also notify the public within the same three working days of the transaction. This means it is possible that an issuer may only receive the notification from the PDMR on the day that they are required to publish the transaction. We are changing this to require notification to the public within two working days after the issuer receives notification of a transaction. This introduces a more practical and sensible timetable for observing timely and transparent disclosure of PDMR transactions to the market. I therefore recommend that the clause stand part of the Bill.
Question put and agreed to.
Clause 29 accordingly ordered to stand part of the Bill.
Clause 30
Maximum sentences for insider dealing and financial services offences
Question proposed, That the clause stand part of the Bill.
John Glen
Clause 30 concerns the penalty for criminal market abuse. Market abuse undermines integrity, reduces public confidence and impairs the effectiveness of the financial markets. Market abuse is comparable to other types of economic crime, such as fraud, so it should carry an equivalent penalty.
The clause will increase the maximum prison sentence for such crimes from seven to 10 years, demonstrating that the Government take criminal market abuse offences just as seriously as other types of economic crime offences. In 2015, the findings of the fair and effective markets review were published jointly by the Treasury, the FCA and the Bank of England. This report assessed market standards in the financial services industry, looking for ways to improve fairness and effectiveness in fixed income, currencies and commodities markets. The report contained 21 recommendations to improve market standards assigned to a number of public bodies. The Government are committed to delivering the improvements to the body of financial services legislation that were recommended in the report, and the clause follows the recommendation of the report. I therefore recommend that the clause stand part of the Bill.
John Glen
I thank Opposition Members for the last three speeches. I think that they expressed a broad understanding of and agreement with the measure, but more general concern about the capacity for implementation and the need to ensure that the issue is addressed more broadly. I am happy to try to respond to those points.
The right hon. Member for Wolverhampton South East started the conversation about enforcement and prosecution. The terms of the clause will help to ensure that market abuse is recognised as serious misconduct in the same way as fraud is currently judged, and that will send a clear message to individuals who break the law: they will be held to account.
The hon. Member for Glasgow Central spoke about the length of sentencing. Since 2009, there have been 36 successful prosecutions for market abuse offences—the average sentence is 1.7 years, and the longest sentence was 4.5 years. To date, no criminal market abuse case has been tried that resulted in a seven-year sentence. That does not preclude the possibility of convictions in future cases that require a longer sentence as a result of aggravating factors, such as a significant breach of trust by senior individuals or sophisticated criminality by organised criminal groups.
In the light of the comments of the hon. Member for Wallasey about the challenges faced, I also want to add that in last week’s spending review an additional £63 million was allocated to the Home Office to boost Action Fraud. I also mentioned the economic crime levy in an earlier response, although that is anti-money laundering specific, and will not cover fraud. But a number of other activities are relevant to the points raised by Opposition colleagues.
A significant amount of work is going into the reform of suspicious activity reporting, where banks highlight transactions that give reasons for concern. That reform will be integral to our response to economic crime, and it is vital in uncovering and combating wider criminal activity. The Home Office is leading on that work.
The hon. Member for Wallasey made a point about the £100 million levy and the outsourcing, essentially, of capacity. It is important that we have joint working between the Home Office, the Treasury and the private sector on this matter. Just last week, I had a conversation with the payments regulator and UK Finance about push payment scams and the need to increase the confidence in the way those matters are treated. They are complex and involve sophisticated fraud against many of our constituents. I completely empathise with the hon. Lady’s frustration regarding the apparent lower prioritisation of this area. Across my 12 broad areas of responsibility, it is this that I find most challenging to move forward on definitively because the nature of the challenge is evolving. However, the work going on there and the payments regulator’s imperative to act, which it will do following the consultation, is significant.
However, with respect to the questions on this particular clause, I hope that the value of that enhanced sentence, which reflects the 2015 report, is understood. We will not bring the broader measures to a conclusion now, but I hope that I have signalled some of the ongoing efforts to try to deal with what is a particularly challenging area.
Ms Eagle
To some extent, this is illustrated by the fact that the enhanced sentence was in a 2015 report but we are only just legislating for it now. Five years later, we are still only talking about a sentence that is highly unlikely ever to be used, based on the past record—the Minister just quoted it himself. I wonder whether he might increase the confidence that some of us have that this is being tackled in a coherent way—we will get on to some of this later—by talking about the fragmented supervisory system and what he is doing to help bring that together so that the fragmented regulation of this whole area can actually be done more coherently, so that we can get enforcement on abuse. We all know that, prior to the big bang in the City, this was all done informally anyway, by gentleman in their clubs. It seems to me that we never really got a grip, after the big bang, in dealing with that informal networking that goes on, where a lot of the gaps and a lot of the potential insider dealing actually lurks. Perhaps he could give me a little bit more confidence about that.
Mr McFadden
I want to double check something that the Minister said a minute ago. I think he said that there have been 36 prosecutions since 2009.
Mr McFadden
That might illustrate the point that we are making, because by my rudimentary maths, that would suggest—
Mr McFadden
Something between three and four a year, which is hardly the sign of a system that is working, unless we think that only three or four people a year are doing insider dealing. However, for those who do not believe that, and who believe that hundreds of investigations go on but only three or four people are prosecuted a year, that illustrates the point that increasing the sentencing alone will not deal with this problem.
John Glen
I would never say that the measure was a panacea for economic crime or the complexity of the evolving and changing nature of the risks that we face in financial services. It is obviously an interconnected world across different jurisdictions. I empathise with the frustration around which of the multiple agencies will get a grip on this. It is necessarily complex because of the sophisticated nature of the way that data flows are reported and the way that different specialist agencies of crime enforcement and regulators need to work together.
I do not think I will give satisfaction to the Committee on this matter. The right hon. Member for Wolverhampton South East makes a reasonable point about the implied annual number of successful prosecutions. It is impossible for me to comment on what is lost, because it is counter-factual; I cannot prove what is not there. However, I recognise that there is more work to be done and that this is one step, amid others in other Departments—particularly the Home Office—to move this forward.
Question put and agreed to.
Clause 30 accordingly ordered to stand part of the Bill.
Clause 31
Application of money laundering regulations to overseas trustees
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
New clause 30—Application of money laundering regulations to overseas trustees: review of effect on tax revenues—
‘(1) The Chancellor of the Exchequer must review the effects on tax revenues of section 31 and lay a report of that review before the House of Commons within six months of the date on which this Act receives Royal Assent.
(2) The review under sub-paragraph (1) must consider—
(a) the expected change in corporation and income tax paid attributable to the provisions in this Schedule; and
(b) an estimate of any change attributable to the provisions of section 31 in the difference between the amount of tax required to be paid to the Commissioners and the amount paid.
(3) The review must under subparagraph (2)(b) consider taxes payable by the owners and employees of Scottish Limited Partnerships.’
This new clause would require the Chancellor of the Exchequer to review the effect on public finances, and on reducing the tax gap, of section 31, and in particular on the taxes payable by owners and employees of Scottish Limited Partnerships.
New clause 35—Money laundering and overseas trustees: review—
‘(1) The Treasury must, within six months of this Act being passed, prepare, publish and lay before Parliament a report on the effects on money laundering of the provisions in section 31 of this Act.
(2) The report must address—
(a) the anticipated change to the volume of money laundering attributable to the provisions of section 31; and
(b) alleged money laundering involving overseas trusts by the owners and employees of Scottish Limited Partnerships.’
This new clause would require the Treasury to review the effects on money laundering of the provisions in section 31 of this Act, and in particular on the use of overseas trusts for the purposes of money laundering by owners and employees of Scottish Limited Partnerships.
John Glen
This amendment to the Sanctions and Anti-Money Laundering Act 2018 ensures that the Government have the power to change, and Her Majesty’s Revenue and Customs has the power to enforce, elements of our anti-money laundering regime relating to extraterritorial trusts. Enacting this amendment will cement HMRC’s power to access information on who really owns and benefits from overseas trusts with links to the UK. This is part of our wider reform efforts to improve beneficial ownership transparency.
It is important to stress that this merely ensures the continuation of existing powers. After the end of the transition period, the Sanctions and Anti-Money Laundering Act will take over from the European Communities Act 1972 as the statutory framework for implementing sanctions and anti-money laundering policy in the UK. Changes introduced by the Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020 provide for the expansion of the HMRC trust registration service. Some non-UK express trusts with a connection to the UK, including those buying UK land or property, will need for the first time to register with HMRC’s trust registration service. The number of registered trusts is expected to increase from 120,000 to an estimated 3 to 6 million as a result of those changes made by the money laundering regulations.
The amendment made by the clause will confirm the Government’s ability, after the end of the EU exit transition period, to make regulations applying to trustees of overseas trusts with links to the UK, even where they are non-resident. It also confirms HMRC’s ability to take enforcement action against those trustees. I therefore recommend that the clause stand part of the Bill.
Alison Thewliss
New clauses 30 and 35 are the result of long-standing concerns that I and my hon. Friend the Member for Aberdeen South have about money laundering in the UK. That was accentuated by what the Minister said about increasing the number of trusts. It goes some way to reflect the evidence we took during prelegislative scrutiny of the draft Registration of Overseas Entities Bill, where a witness suggested that if he were going to hide some money, trusts are pretty much where he would go to do so. The Government should be doing an awful lot more on this, because with this increase in trusts and the Government’s response, it feels as though the Government are pursuing a Whac-a-Mole strategy. However, Whac-a-Mole is not a mole-eradication strategy; it just makes them pop up somewhere else. The Government need to be wiser to that.
Our new clauses would require the Treasury to review the effects on money laundering of the provisions in clause 31, and in particular on the use of overseas trusts for the purposes of money laundering by owners and employees of Scottish limited partnerships. The Minister will be fed up with me talking about Scottish limited partnerships, because I and the colleagues who preceded me have never shut up about them, but they remain a problem. The number of people fined for misuse of SLPs remains pretty much at zero, as far I am aware. The Government need to do a huge amount more.
It beggars belief that the Sanctions and Anti-Money Laundering Act left an oligarch loophole, allowing money laundering by overseas trusts to buy UK property with impunity. That Act contains the framework that the UK will use to implement sanctions and anti-money laundering policy after leaving the European Union single market. However, as the Government have observed, it is not clear that under the current drafting anti-money laundering regulations can be made in relation to non-UK trustees of trusts based outside the UK. Even though a trust may be based outside the UK, and the trustee may be a non-UK corporate or individual, the trust may have links to the UK—for example, because it owns UK property. We start to see the very complexity of the web that exists here, and the difficulty in dealing with it and finding who is really in control. New clause 31 would amend schedule 2 to the 2018 Act to ensure that regulations can be made in respect of trustees with links. Without this, any powers HMRC sought to exercise to access information about such trusts are at risk of being held invalid under legal challenge.
The Government, for their part, believe that the change will reaffirm the UK’s global leadership in the use of public registers of beneficial ownership, as identified by the Financial Action Task Force mutual evaluation of the UK in 2018. They will further support public and private sectors sufficiently and effectively target resources towards potential criminal activity using trusts, maintaining the resilience of the UK’s defences against economic crime. That is quite a joke; it really is not good enough. Trusts are the largest gaping loophole that we have. We want the Government to accept our amendments and come clean on how little impact this measure, as with many others previously, has had on money laundering.
In June 2019, HMRC published revised estimates that put the tax gap at £35 billion for 2017-18, representing 5.6% of total tax liabilities. While welcome action has been taken and that gap has had some impact, no Government have yet created a comprehensive anti-avoidance rule, because at the moment people are allowed to move around in different ways and find different loopholes and different mechanisms to avoid paying their tax.
Mr McFadden
Sometimes, when I look at this Bill and all the different things it attempts to deal with, I have an image in my head of somebody cleaning out a cupboard in the Treasury, finding lots of policy things and looking for a legislative truck on which they can be loaded.
Ms Eagle
I suspect you have just wiped out most of my speech, Dr Huq. We want to hear from the Minister about the adequacy of having just this clause, and not a lot else, to deal with the issue in this portmanteau Bill. In the debate on clause 30, we heard that it had taken the Treasury five years to increase from seven to 10 years the potential sentence for market abuse. The Treasury Committee’s 2019 report—I am now a member of that Committee—was excoriating about the scale of the problem, with between tens of billions and potentially £100 billion lost. As we have discussed in relation to other parts of the Bill, we know that small weaknesses in the defences can be ruthlessly targeted and become much bigger if they are not closed off.
We are reassured about the point that the Minister is trying to make with clause 31, but given that our country has been described as a laundromat for money laundering, perhaps the Government could have used this Bill as a suitable legislative opportunity to make other changes to the money laundering legislation that this clause amends. Perhaps the Minister could explain why that action has not been taken and give us an idea of what will follow. He has already referred to a reform of the suspicious activity reports regime. Why is that not included in this Bill, given that an analysis of it has found that over 80% of the reports are from banks, and very few from other places where there might be suspicious activity, such as property ownership in the UK? As we know, that is how money can be laundered.
We seem to have got ourselves into a situation where the banking structures just produce suspicious activity reports in massive numbers—three quarters of a million of them in a year, I think. Among those, the real ones are perhaps hidden, but the regulators are trying to get through them all and do very little. At the same time, we know that when the FinCEN papers were actually leaked, that involved, between 2000 and 2017, the transfer of close to $2 trillion of transactions, which were included in these suspicious activity reports.
Many transactions laundered money through our systems—many from overseas, in terms of what we are dealing with in clause 4. HSBC allowed fraudsters to move millions of dollars of stolen money around the world even though they knew it was a scam. J.P. Morgan allowed a company to move more than one billion through a London account without knowing who owned it. I could go on.
It seems that clause 31 is a tiny little attempt to stop an abuse, given that the abuse going on is of that scale. There is also the husband of a woman who donated £1.7 million to the UK’s Conservative party, secretly funded by a Russian oligarch with close ties to President Putin. Again, I could go on. I hope that the Minister is going to at least give us some view about what is going on here and whether clause 31 is the be-all and end-all of what the Government intend to put in place to deal with this issue.
On victims of fraud, criminals have successfully stolen £1.2 billion from individuals through banking fraud; in an earlier debate, the Minister was talking about his own frustrations with trying to get a grip of that issue. That figure on scams comes from 2018. It is also estimated that £5.9 billion a year is defrauded from businesses in the public sector.
The issue is not just about oligarchs running their money around the world and laundering it into property and other things. It is not just about mafiosi or corrupt political leaders doing the same, although all that is happening. This involves your constituents, Dr Huq, and my constituents, who are losing money through banking scams. Our public sector is losing money through other scams, which bleeds away the resources available to us to do the other things we need to, especially when these resources are scarce.
This issue can sometimes look very technical—it is about overseas investors and is only little clause 31. But it is not only about corrupt laundromats, Russian reports and corruption on a scale we can only think about. It is also about some of our well-known high street banks indulging in such activity and covering it up somehow, because having the business is so profitable for them—and, again, the risks of being caught and fined are outweighed by the profits that can be made by turning a blind eye. It involves all of the major banking and investment institutions. It involves estate agents, lawyers and accountants who are facilitators—wittingly or unwittingly—to all these activities.
We had better get a grip: the more this kind of money is present, the worse and dirtier it makes our structures and systems and the more cynical it makes our constituents. It makes all of us less likely to follow the rule of law and agree that the right thing should be done. It changes the balance that people calculate between the risks of doing something wrong and the rewards of not being caught. None of that helps the rule of law; none of it helps honesty; and none of it helps those of our constituents who strive their whole lives to do the right thing and yet see others profit massively from scams and reprehensible behaviour—criminal behaviour, in a lot of cases.
Dr Huq, I have ranged a bit wider than the terms of clause 31, but I think that it is the start of a fightback on money laundering regulations. Even though it represents a tiny, tiny little step, the Government have yet to persuade me that they want to get a grip of the situation and intend to do so through the Bill.
John Glen
I thank Members for their contributions, although at times as I listened I thought that I was in the wrong place, given the wider conversation about economic crime. However, I greatly respect the sentiments and points expressed and I will try to address the questions put.
The right hon. Member for Wolverhampton South East spoke of a mental image of a cupboard being cleared out. I will not deny that in my three years as Economic Secretary I needed to legislate on a number of matters, and the Bill necessarily brings together a number of them. However, there will be more legislation if I can persuade the authorities in this place to grant me that opportunity. I assure him that the Bill does not represent the end point on a number of matters. The clause, however, merely ensures the continuation of, and ability to vary in future, existing powers and requirements with respect to overseas trusts.
New clause 30, proposed by the hon. Member for Glasgow Central, would impose a requirement on the Treasury to report on the impact of the provisions of clause 31 on the expected change in corporation tax and income tax paid, and the expected change in the difference between the amount of tax required and the amount tax paid in relation to overseas trusts and Scottish limited partnerships. I reiterate that the Government are committed to ensuring that the UK’s corporate structures are not exploited by those seeking to avoid or evade tax. For reasons that I will outline, however, the Government cannot support the proposed new clause.
As I have said, the Government have introduced changes through amendments to the money laundering regulations that directly aim to improve the transparency of the ownership of trusts. In particular, those changes significantly expand the requirement for non-UK trusts to register with the HMRC trust registration service. Trusts will have to provide evidence that they are registered before entering into business arrangements with regulated firms under the money laundering regulations. HMRC needs clear powers to take enforcement action against those who do not comply with registration requirements, and the Government need to maintain the ability to amend those requirements in future.
The powers in the Sanctions and Anti-money Laundering Act 2018 will ensure that the UK Government can continue to make and amend their regulations. The proposed new clause would require the Treasury to publish a report on the effects of clause 31 on the amount of taxes paid, but it is not in line with effects of that clause, which does not make changes to taxes. The provision is not expected to bring about any changes in the amount of corporation tax and income tax paid nor any change to the tax gap in relation to Scottish limited partnerships or otherwise. Neither is it envisioned that it would be possible to attribute any variation in taxes paid, nor the tax gap, to clause 31.
New clause 35 imposes a requirement on the Treasury to report on the impact of the provisions in clause 31 on money laundering volumes involving overseas trusts and Scottish limited partnerships. I understand that it seeks to measure the impact of our efforts to prevent money laundering through trusts, but may I remind hon. Members that the current Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020 and the 2017 regulations that they amended, namely, the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, already require the Treasury to carry out a review of its regulatory provisions and publish a report setting out the conclusions of its review by June 2022? That wider review will provide a more meaningful evaluation than simply reporting on the narrow provision of the clause, and provide continuity in the Government’s powers to make changes in the UK’s anti-money laundering regime.
I also remind colleagues that Scottish limited partnerships are not specifically within the scope of the trust register, and point them towards separate legislation that deals with transparency for those vehicles. In June 2017, Scottish limited partnerships were brought into scope with the public register of beneficial ownership maintained by Companies House. Since the Government introduced new reporting requirements for Scottish limited partnerships in 2017, new registrations of Scottish limited partnerships have greatly reduced, with registrations falling from 4,932 in 2016-17 to 2,689 in 2017-18, and falling further to 657 in 2019-20.
I want to take this opportunity to address some of the broader points on the alleged failures, and the work in progress, with respect to anti-money laundering and trusts. I think it reasonable to say that the UK is recognised as having some of the strongest controls internationally for tackling money laundering and terrorist financing. In recent years, we have taken a number of steps, including creating a new National Economic Crime Centre, passing the Criminal Finances Act 2017, and establishing the Office for Professional Body Anti-Money Laundering Supervision.
The hon. Member for Wallasey referred to the challenge of suspicious activity reports processing. The economic crime levy, in working with industry, is a direct attempt to invest in that reform. She asked specifically why legislation on that is not included in the Bill. That is continuing work that urgently needs to move forward, but provision for extra investment to process SARs more efficiently is being conducted at pace.
Last year, the Government published the landmark economic crime plan, which brought law enforcement and the private sector together in closer co-operation than ever before to deliver a whole-system response to economic crime. This year, we completed the transposition of the fifth anti-money laundering directive into domestic law. That remains comprehensive and responsive to emerging threats, in line with the evolving standards set out by the Financial Action Task Force—the international body that monitors such matters.
The expansion of the trusts registration service referenced today will bring millions more trusts in scope, including overseas trusts that purchase land or property in the UK. We will ensure that information on the register is made available in certain circumstances to those with a legitimate interest. We do recognise—I acknowledge the sentiments that have been expressed—that more needs to be done, and we are committed to making further progress, building on that made so far, to lead the global fight against illicit financial flows.
New clauses 30 and 35 make small amendments to clarify that the Government can enforce extraterritorial trust registration in relation to non-UK resident trustees and update those requirements in future. On why we are not doing more in the Bill, I have mentioned a number of the activities that the Government are undertaking, but I recognise that more needs to be done.
I should also mention the overseas entities Bill. In line with the ongoing commitment to combatting illicit finance, we intend to implement a register of beneficial owners of overseas entities that buy or own land in the UK as a measure of the economic crime plan 2019 to 2022. The register will be the first of its type in the world. The Government published a draft of that legislation, which accepted many of the subsequent recommendations by the Joint Committee that carried out that pre-legislative scrutiny. As the hon. Member for Glasgow Central knows, the Queen’s Speech last year committed to this Bill and to the continuing progress of that draft legislation. Lord Callanan’s written ministerial statement in July outlined the progress to date of that draft Bill.
On Companies House register reform—another matter mentioned by several colleagues—the Government are currently considering a broad package of reforms to Companies House to boost its potential as an enabler of business transactions and economic growth, but also giving it a bigger role in combatting economic crime. Following last year’s consultation, the Government issued our response to the corporate transparency and register reform on 18 September. The response summarises the views received and sets out how the Government will take forward those plans.
The Government will legislate when the parliamentary calendar allows and intend to deliver more reliable information on the companies register—reinforced by the verification of the identity of people who manage, control or set up companies, as has been referenced—and greater powers for those at Companies House to query and challenge information, so they are not just librarians, as I think they were described.
We will bring effective protection of personal information provided to Companies House and a more effective investigation and enforcement regime for non-disclosure and false-filing; the removal of technological and legal barriers to allow enhanced cross-checks on corporate data with other public and private sector bodies; continued investment in technology and in the skills of Companies House staff to make that register more efficient, effective and resilient; and broader reforms to clamp down on the misuse of entities I hope that my answers have done some justice to the questions asked, and I ask the hon. Member for Glasgow Central to withdraw the new clauses.
The Chair
Actually, new clauses 30 and 35 will not be decided until Thursday because of where they are on the amendment paper, so the hon. Member for Glasgow Central can decide then whether to press or withdraw them. For now, we are on clause 31 stand part.
Question put and agreed to.
Clause 31 accordingly ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned.—(David Rutley.)
Financial Services Bill (Tenth sitting)
John Glen ExcerptsTuesday 1st December 2020
(5 years, 3 months ago)
Public Bill CommitteesRead Full debate Financial Services Bill 2019-21 View all Financial Services Bill 2019-21 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 1 December 2020 - (1 Dec 2020)
The Economic Secretary to the Treasury (John Glen)
Let me see if can get straight to the right hon. Gentleman’s point. The statutory debt repayment plan is an option that will be available to people who go into the breathing space scheme. That will be up and running on 4 May next year, and the SDRP is an option that we would move the regulations for as soon as possible after this Bill is passed. After Royal Assent, we will consult on those regulations. Given the challenges and complexity involved, we need to work very closely—as we did on the breathing space scheme—with the debt advice sector, creditors and regulators to ensure that we deliver the policy successfully.
The regulations that come from this work will need to be developed and consulted on over a longer timetable, and we will consult on those draft regulations as soon as possible after the Bill receives Royal Assent. In the meantime, we are pushing ahead with the implementation of the breathing space scheme, which will come into force on 4 May next year. Other voluntary and statutory debt schemes will continue to be available to debtors in the meantime. This is an option to add to the list of options available to those who go into the breathing space scheme.
Amendment 29 would require the Government to make regulations establishing a debt respite scheme within one year of the Financial Guidance and Claims Act 2018 coming into force. As that Act has been in force since 1 October 2018, that would make it a retrospective requirement and I do not think that is quite what is intended. The regulations establishing the first half of the Government’s debt respite scheme—the breathing space scheme—were made in November 2020, and the right hon. Gentleman participated in the debate on that statutory instrument. That part of the scheme will commence in May 21, as set out in those regulations.
Leaving aside the drafting issues, I understand that hon. Members are keen that the Government do not delay introducing the second part of the scheme, the statutory debt repayment plan. I assure the Committee that it is our intention to support those who are experiencing problem debt swiftly and effectively. The Government will consult on those regulations as soon as possible after the Bill receives Royal Assent. We set out our outline policy in the June 2019 consultation response, but there is significant ongoing work to be done. In the meantime, the breathing space scheme will be up and running from next May and all existing statutory and voluntary debt solutions remain available to those in problem debt. I respectfully ask that the amendment be withdrawn.
Mr McFadden
As I said, I do not intend to press the amendment today. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
John Glen
Forgive me, Mr Davies; I did not acknowledge what a pleasure it is to serve under your chairmanship in my previous remarks, so I do so now. I will address amendment 34 and new clause 11, but first I feel that I should respond to the general context that colleagues have raised. The hon. Member for Walthamstow is right that I share many of her perspectives, if not always her solutions.
High-cost credit will always be with us; the question is about the terms on which it is made available and what we can do to make available better alternative provision of credit. As the hon. Lady acknowledged, we have had conversations and debates about the issue many times. It will be useful for the Committee to know that Chris Woolard, the former interim chief executive of the FCA, is currently conducting a review into high-cost credit, particularly looking at the explosion of new models of payment—“buy now, pay later” in particular.
I have also been very focused on making more of the alternatives, by supporting the credit unions to allow them to lend more easily and by looking with the Association of British Credit Unions, one of their trade bodies, at what legislation we can bring forward. That is something we have committed to. I have also committed to working on pilots for the no-interest loan scheme, because that could be really useful; if we can establish where that can be used, it would provide a meaningful alternative.
Some of my most compelling experiences as an MP have come from working on the all-party parliamentary group on hunger and food poverty with the hon. Member for South Shields (Mrs Lewell-Buck) and the former Member for Birkenhead. On a visit to South Shields in 2014, I remember seeing first hand some of the really challenging situations that people get into with debt. That has been echoed in my own constituency in Salisbury, where the Trussell Trust was founded. That is why it is really important we have invigorated the support that the debt advice sector can have. We have allocated an extra £37.8 million in May, so that it has £100 million this year.
The main objective of the breathing space mechanism is to get people to a place where they can evaluate their situation and find the right option. The effect of amendment 34 is to require the Government to provide protections that last at least 120 days when making future regulations concerning breathing space or the statutory debt repayment plan. The amendment does not amend the existing breathing space regulations, which, I believe, was probably the intention. The aim of breathing space is to provide temporary debt relief, and extending the duration by that amount of time does not align with the policy intent.
In the 2017 manifesto, we committed, as an aspiring Government, to a six-week moratorium breathing space period. That is what we consulted on and it was, I think, through my direction as the Minister two and a half years ago that we committed to extend that to 60 days. That was the expectation and consensus among those who contributed to that. The Government consider those 60 days to be an appropriate period for a breathing space moratorium. I have not received any direct representations from charities, although StepChange believes that 60 days is the right period, although that could be changed in exceptional circumstances. I recognise that that charity may consider that as being met, but I am told by my officials that I have not received direct representation about that.
Stella Creasy
Apologies; I just want to clarify. Some 80 debt advisers have written to the Committee to support the measure on precisely the grounds that I have set out. Is the Minister saying he has not seen those representations or that he does not see them as a voice of the sector? There is a difference and I do not know whether that is an absence we need to address.
John Glen
The difference is that, as a Minister, I have not been written to by them. I recognise that there is a range of views out there, but I also recognise that a significant piece of work was done to consult on and to establish these measures and to secure cross-party support for them.
We believe that the time period will allow individuals to identify and access a debt solution, while the fixed period will provide certainty to creditors. It is important to reflect on that: this is in the interests of both the debtors—the individuals who have significant debt—and also creditors, often small businesses, who are owed money. There is a judgment to be made about how that balance is achieved.
Given the current circumstances, I understand why Members believe that a stronger moratorium would benefit those in problem debt who are struggling with their finances during this difficult time. The Government have put in place an unprecedented package of support to help people with their finances during the covid-19 pandemic. We have worked with mortgage lenders, credit providers and the FCA from the outset to help people manage their finances. A lot of work has been done and is still being done by financial services firms to make those measures work.
During the consultation period, the Government explained their position on the duration of the scheme and were supported, as I said, by many stakeholders. The regulations were approved by Parliament in October and by the Welsh Senedd in November and have subsequently been made.
The amendment would also apply to any regulations made in the future on the statutory debt repayment plan—the second part of the debt respite scheme, which the clause is focused on. It would set a new minimum duration for an SDRP of 120 days. Of course, in practice, most SDRPs are likely to last for a period of years rather than months, allowing individuals to repay their debts to a manageable timetable. Introducing a minimum duration is not likely to be a necessary protection in this scheme.
New clause 11 would do two things. First, it would require the breathing space scheme to commence on 31 January 2021 instead of 4 May 2021, which was set out in regulations that we approved in October, as I said earlier. Secondly, the new clause would also extend the duration of a breathing space moratorium from 60 days to 12 months.
Increasing the duration of the scheme to 12 months would create much greater interference in creditor rights without increasing any of the corresponding safeguards. For example, the midway review process, which regulations stipulate must take place between days 25 and 35 of a breathing space moratorium, would need to be reconsidered and redesigned.
As the breathing space regulations have already been made and the proposed amendments would not achieve the policy intent, I ask, with some regret, the hon. Member to withdraw the amendment.
Stella Creasy
I thank the Minister for his response. I am sorry to hear that he did not see the document, which I know was sent to his office yesterday by the debt advice workers, because I think we all recognise that we are dealing with unusual circumstances. Covid is that Monty Python foot coming down on any of the plans that might have made the policy intent 60 days prior to our current situation.
Unless the Minister thinks that the Office for Budget Responsibility is wrong about the levels of redundancies, unemployment and financial contraction—we have not even mentioned the B-word, Brexit, on top of that—that will face the economy that we want to provide the jobs that allow people to earn the money to pay off their debts, he is having a bit of a tin ear to what people are saying. In this circumstance, we need to extend the breathing space for it to be a breathing space.
This is not just about high-cost credit; this is about the people who are stuck on credit cards as well—the people who will end up spending 25 years to pay back the credit card average debt at minimum repayments. He talks about small businesses. This is about people who have mortgages, for example—
Stella Creasy
Well, but there are also major banks. If we push too quickly, problem debt will sink any possible financial recovery. We have never learned that lesson as a country. I really wish we would. With the greatest respect to the Minister and his talk about policy intent, he is in the wrong place on these measures at this point in time. I will press this to a vote because I think it is important that we set on the record the concern that we should listen to the debt advisers who say that we will need longer in the pandemic to sort the issues out.
Question put, That the amendment be made.
Alison Thewliss
We should recognise the professionalism, expertise and qualifications of those giving debt advice to our constituents, and not try to put a provision in the Bill that prejudges what they do. Speaking from experience, they have worked incredibly well, over time, with my constituents, so I question whether the midway review is necessary.
Let me give a case from my constituency. A woman came to my office very upset, very much in the way that the hon. Member for Walthamstow described, because she was being evicted the next day. We had to swing into action and try to find ways around that, and spoke to the Glasgow Housing Association. It did take time to make that happen, but the GHA sat down with her, went through all her bills and outgoings and worked with her intensively over a period, to make sure it would get the rent money and that the other debts she had, that were also causing her problems, were taken care of.
I was struck by the professionalism of the GHA advisers and by the fact that they were experienced and were tough but compassionate with the woman. They made sure she could see a way through. If people see an arbitrary cut-off point halfway through, that will give them fear, not reassurance. There is a risk that the respite will be removed from people who are supposed to be helped by the midway review, if it is put at an arbitrary halfway point. The Minister should consider whether that is really the outcome that he wants to achieve. Yes, there should be some kind of review mechanism, but my experience is that it is done all the way through the process. There is no need for the midway review, because reviewing is already happening.
John Glen
Amendment 35, put forward by the hon. Member for Walthamstow, would restrict the Government’s ability to require debt advisers to complete any review of debtor eligibility in any future regulations made concerning breathing space or the SDRP. As the Committee will be aware, breathing space regulations were approved by the House in October, and they state that a debt adviser must complete a midway review after day 25 and before day 35 of the moratorium.
The amendment would not amend the existing breathing space regulations, which I believe was the intention. In addition, it would apply to any regulations made in the future on the SDRP and the second part of the debt respite scheme, which the clause is focused on. That would restrict the Government’s ability to require debt advisers to complete any review of debtor eligibility related to a plan. It is expected that SDRPs will be reviewed annually, or when requested by a debtor, to ensure that payments are set at the right level and the plan remains appropriate. If those reviews could not consider a debtor’s eligibility in any way, that could be a significant constraint on the design and effectiveness of the scheme in future, and would remove the safeguards put in place for creditors.
Stella Creasy
What the Minister has just said suggests he thinks there is a binary choice between debt advisers reviewing and being involved in seeing how the breathing space is working, and their being completely absent. Does he recognise that, in the words of a previous Prime Minister, there could be a third way? Debt advisers could be given the professional courtesy of having the responsibility of doing their job. As part of that there might, absolutely, be some people they would spend more time with, whereas they might know that others had got on the right course. It is not that debt advisers would be absent if not put under a requirement; sometimes red tape can be a burden, not a benefit.
John Glen
Absolutely; that is why we listened carefully to the sector in constructing the measure. For example, when we were designing the breathing space scheme, we worked with the Money and Mental Health charity to design a different pathway for different groups with chronic crisis in mental health, allowing them to re-enter the scheme on multiple occasions in a year, and giving an extra provision. It is not something where I am being prescriptive when, alongside the SDRP regulations, it is being consulted on. However, we are in danger of making arbitrary changes in a similar vein.
If I leave aside the question of drafting, which I think I have addressed, the Government consider that a midway review is necessary to the breathing space scheme, to assess whether the debtor continues to comply with the conditions of the moratorium. I see that not as a policing exercise but an appropriate step in reviewing the suitability of the mechanism. The breathing space mechanism will not work for everyone, and it is important for a review to take place.
During the consultation period the Government explained their position on the midway review and it was supported by many stakeholders. The regulations were approved by Parliament in October and by the Welsh Senedd in November, and were subsequently made. I respectfully ask the hon. Lady to withdraw the amendment.
Stella Creasy
Again, I am afraid that the Minister has a slightly tin ear to the reality of what people will be asked to do and what they are trying to do. We cannot have it both ways. It cannot be claimed that our amendments about how services should be run are too prescriptive but it is not prescriptive for the Government to specify that after 30 days there must be another meeting, something which puts at risk the ability of debt advice providers to manage their own diaries. That does feel like the dead cold hand of the state going overboard, and I am sure that many Conservative Members present who perhaps have pledged their lives to fighting such intervention would recognise that that requirement is rather prescriptive.
Above all, I am listening to the sector, and those debt advisers say that in the current environment, when they will be overwhelmed by so many people needing their help, they should be allowed to do it in the way that they know best. I do know that the Minister wants to get this right, but I think he is not listening, and I think it is important that Parliament does, so I will press the amendment to a vote. We can then say to the sector that we have tried to articulate its concerns about this particular prescriptive clause.
Question put, That the amendment be made.
John Glen
Amendment 33, tabled by the hon. Member for Walthamstow, would dictate specific eligibility criteria for a statutory debt repayment plan, which would involve requiring debt advice providers to carry out a complex assessment of a debtor’s resources against external data and benchmarks and, where a debtor is unable to repay their debts within three years, to conduct a revised assessment of the debtor’s circumstances and advise on insolvency solutions.
I reassure the Committee that the Government are keen for any eligibility criteria to strike the right balance between allowing suitable debtors to enter the protections of an SDRP and ensuring that creditors are repaid over a reasonable timeframe. The Government set out the proposed eligibility criteria in their consultation response of June 2019, and they expect the principles to remain the same.
Imposing an additional obligation on debt advice providers to conduct an assessment of a debtor’s living standards, fixed by reference to income distribution and local house prices, could lead to inflexibility and inconsistency in the way the SDRP is provided. In any case, the appropriate mechanism for setting out that level of detail is the regulations, on which, I absolutely reassure the Committee, the Government will consult.
I turn to the suggestion that debt advice providers be required to conduct an assessment of a debtor’s circumstances, and to consider insolvency solutions if the debtor is unable to repay the debt within three years. Again, let me reassure the Committee that it is absolutely the Government’s intention for debtors’ plans to be reviewed regularly. In fact, our consultation response proposes that debt advice providers complete an annual review to ensure that a debtor’s plan continues to be the most suitable solution for them. This review can propose changes to the planned payments if the debtor has experienced a rise or fall in surplus income.
In line with the consultation response, we expect to include in the SDRP regulations provision for a debtor to request a review, and provision for payment breaks in the case of an income shock. The ability for an individual’s plan to last longer than three years, and up to a maximum of 10 years in exceptional circumstances, is intended to support sustainable repayment plans over time. If, once the SDRP scheme is up and running, a debt adviser considered an insolvency solution more appropriate for an individual than their entering into an SDRP over a longer period, that option would remain available.
Stella Creasy
I thank the Minister for what he is saying, and I appreciate that he is setting out that he thinks the amendment is not needed because there will be earlier interventions. Does he understand that the £680 cost of going bankrupt can be a barrier to taking up the options that he is talking about? It could lead to people above these very low thresholds staying in the same position not for a couple of years, but for seven, eight, nine or 10 years—not because they want to live like that, but because they have not got enough money built up to take the alternative.
John Glen
I recognise that these are complex matters. There will sometimes be a need to pay fees over a much longer period, and that option exists. The consultation on how the regulations will work will engage very closely with the sector, and I anticipate that it would get to the right place. I do not think that I have reassured the hon. Lady, but I hope that I have reassured other members of the Committee about the Government’s intentions. I ask her to withdraw the amendment.
Stella Creasy
I thank the Minister for what he said. If he is saying that he is prepared to engage on the subject of debt advice—perhaps the debt advisers’ writings for the Committee on this point were lost in translation—I am happy to withdraw the amendment. It is about recognising that the thresholds have to change, and it sounds like the consultation is the right place to have that conversation. If the Minister nods and says that that is the sort of thing that the consultation will consider, that is perfect.
Stella Creasy
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
New clause 12—Impact of COVID-19 on the Debt Respite Scheme: Ministerial report—
“(1) The Treasury must prepare and publish a report on the impact of the COVID-19 pandemic on the implementation of the Debt Respite Scheme.
(2) The report must include—
(a) a statement on the extent to which changes to levels of household debt caused by the COVID-19 pandemic will affect the usage and operation of the Debt Respite Scheme;
(b) a statement on the resilience of UK households to future pandemics and other financial shocks, and how these would affect the usage and operation of the Debt Respite Scheme; and
(c) consideration of proposals for the incorporation of a no-interest loan scheme into the Debt Respite Scheme for financially vulnerable individuals affected by the COVID-19 pandemic.
(3) The report must be laid before Parliament no later than 28 February 2021.”
This new clause would require the Treasury to publish a report on the impact of the COVID-19 pandemic on the implementation of the Debt Respite Scheme, including consideration of a proposal for the incorporation of a no-interest loan scheme into the Debt Respite Scheme.
New clause 19—Report on functioning of debt respite scheme and compatibility with personal insolvency regime—
“(1) The Treasury must prepare a report on—
(a) the functioning of the debt respite scheme under section 32;
(b) the extent to which it is achieving its objectives;
(c) its compatibility with personal insolvency legislation and policy.
(2) That report must be laid before Parliament no later than one year after this Act is passed.”
New clause 25—Debt Respite Scheme: review—
“(1) The Chancellor of the Exchequer must review the impact on debt in parts of the United Kingdom and regions of England of the changes made by section 32 of this Act and lay a report of that review before the House of Commons within six months of the date on which this Act receives Royal Assent.
(2) A review under this section must consider the effects of the changes on debt held by—
(a) households,
(b) individuals with protected characteristic as defined by the Equality Act 2010,
(c) small companies as defined by the Companies Act 2006.
(3) In this section—
“parts of the United Kingdom” means—
(a) England,
(b) Scotland,
(c) Wales, and
(d) Northern Ireland; and
“regions of England” has the same meaning as that used by the Office for National Statistics.”
This new clause would require a review of the impact on debt of the changes made to the Financial Guidance and Claims Act 2018 in section 32.
John Glen
Clause 32 builds on existing legislation, and will allow us to implement a statutory debt repayment plan that will help people who are in problem debt. The Government want to incentivise more people to access professional debt advice, and to do it sooner. To this end, we are introducing a debt respite scheme.
The first part of the scheme is a breathing space, which commences on 4 May 2021. The second part is the SDRP, which will be a new debt solution for people in problem debt. It will provide a revised, long-term agreement between the debtor and their creditors on the amount owed, and a manageable timetable over which those debts are to be repaid. It is intended that during the agreement, debtors will be protected from most creditor enforcement action, and from certain interest and charges on debts in the plan.
The clause amends sections 6 and 7 of the Financial Guidance and Claims Act 2018 to allow the Government to implement the SDRP effectively, as set out in their policy consultations on the debt respite scheme. The amendments will allow the Government to make regulations that can compel creditors to accept amended repayment terms and provide for a charging mechanism where creditors will contribute to the running of the scheme, ensuring it is fair and sustainable.
The clause will also allow the SDRP to include debts owed to central Government, which is crucial to helping people in problem debt. In time, I hope that will encourage more people to access debt advice sooner and enable them to repay their debts within a more manageable timeframe.
We are debating a number of new clauses alongside the clause, and I will allow hon. Members to speak to those before I respond to them. I recommend that the clause stand part of the Bill.
Stella Creasy
I will speak to new clauses 12 and 19. New clause 12 appears in the name of my friend, the hon. Member for Edinburgh West, but I recognise that she and I share a similar concern about seeing these measures in the round. As the Minister has spoken this afternoon, he has made the case for doing that, because he has talked very strongly about the policy intent and all the work that has been going on, but he has said limited amounts about the Monty Python foot of covid coming down on those best intentions.
Both of these new clauses speak to that Monty Python foot and the very different circumstances people face in terms of having a stable income to be able to repay any debt, problem or not, over the coming years. We know that there is already a problem brewing on top of a problem—a double problem, as it were. I am sure I could think of a better analogy if it was not a Tuesday afternoon.
One in three of those people reporting a fall in income over the past seven months has already borrowed to try to make ends meet. They are already on that carousel, going round and round, putting a bit of money here, hoping they can put another bit there and wondering when it will stop—hoping that schemes will come through. I am sure we will have heard about the economic impact in the debate in the main Chamber today, so I simply say to colleagues on the Government Benches: “You cannot be concerned about the economic impact of the tier system if you turn a blind eye to the debts in our communities and what happens to them.” It is dangerous simply to presume that we can spend our way out of this, knowing that debt is not equally distributed in our country.
That is why the new clauses are about having that evidence in front of us. I am a big fan of evidence-based policy making—although it has not often been in vogue in the 10 years I have been an MP—particularly when it comes to debt. That is partly because the figures change. As I said in my first set of contributions, there is some evidence that people are paying down their debts and trying to be more financially resilient, but we know that a tsunami of unemployment and low incomes is coming our way, and we know it will hit people who have not had to deal with it before—people who have never had to budget in the way that they will have to budget in the coming months.
The new clauses are about having that information and understanding why people take up particular options. Again, I do not wish to prosecute the Insolvency Act 1986 and how it works, but I do wish to set out that, if people cannot access those mechanisms, the breathing space is no breathing space at all—it is just limbo. We will not know that unless we put those measures in the context that these new clauses create by asking to have that information and that detail. If we do not ask ourselves why it is that every six minutes a person is declared insolvent and bankrupt in the UK, is that going to change over the year ahead? If not, is the breathing space working, or is it that people are not able to access alternative support?
The Minister will need that information to be able to flex the policies, as he inevitably will have to because of the Monty Python foot of covid. The longer this place pretends that that is not going to be a problem—that debt is not going to be part of everyday life for millions of people who have never really had to deal with it before—the more the vultures will circle. I have tabled other amendments later on in the Bill, and I do not know whether we will get to them today, but I know we will get to them on Thursday. Those amendments are about how we protect consumers, but sunlight is the best disinfectant—knowing where the damage is being done.
These new clauses and this data are about recognising that we will not get everything right now. There may be all sorts of consequences. What happens if the implementation of the vaccine takes longer to do and more industries go bust? We have already seen Arcadia going into administration today. What happens if it comes in more quickly, but the jobs that are created or the jobs that are available to people pay a fraction of what they previously earned? There are huge uncertainties ahead in the policy context into which the policy intent is being put.
I hope the Minister will see the new clauses from myself and the hon. Member for Edinburgh West as they are intended, which is to be forewarned and forearmed so that we can take a muscular and proactive approach in this place to not just protecting consumers and our constituents, but preventing problem debt in the first place. We would then not have to have that conversation with people about whether it is a problem that they have put everything on the credit card, taken out a payday loan in one of its various forms, taken out an Amigo loan or gone to the buy-now-pay-later industry, which we are going to come on to.
Mr McFadden
I should begin by acknowledging that the Minister has put an awful lot of work into the debt respite scheme. He has encouraged it, consulted the sector widely and really tried to get it right. As I said at the beginning, the Opposition support it. It is a valuable addition and a source of help for people in debt.
The new clauses call for a review of the scheme at some point in different ways, which is the right thing to do with a new scheme. It makes sense to look at how it works and see if any changes need to be made to it. We have already had a debate about whether 60 days or 120 days is the best timescale, and a review could consider that sort of thing. Of course, there is also the covid impact, which new clause 12(2) specifically references. Covid will have an impact on household finances. We had an exchange in Treasury questions an hour or two ago about corporate debt and small business debt. I therefore do not think that the new clauses on review are in any way a threat to the basic integrity of the scheme. They simply ask for a look back at the scheme after a year or so of operation.
I could give the Committee a long and enthusiastic speech about the merits of the third way, but I suspect I will fall foul of your instructions about scope, Mr Davies. I award the prize for word of the day to my friend the hon. Member for Glasgow Central who has given Hansard the challenge of spelling “wheeched”, which I can roughly translate as forcibly or speedily removed. I think we would agree on that definition, but I look forward to seeing how that appears in our record.
John Glen
We are considering several amendments and I turn first to new clause 12. Its effect is to require a report to be published by 28 February 2021 on the impact of covid-19 on the debt respite scheme. That would include statements on the impact on levels of household debt and financial resilience, and what that might mean for how the scheme works, and consideration of the incorporation of a no interest loan scheme.
As the Committee knows, covid-19 poses many uncertainties. The Government have responded dynamically to the challenges posed and taken unprecedented action to support individuals and businesses during this time. With that in mind, teamed with the fact that both elements of the debt respite scheme are new policies, arriving at any sort of meaningful estimate of the impact of covid-19 on the scheme’s expected usage and operation will be very difficult.
Expected demand and take-up of both elements of the debt respite scheme have been quantified to the extent possible and published in the appropriate impact assessments, which have been approved by the Regulatory Policy Committee. A more detailed impact assessment will be developed alongside implementing regulations establishing the statutory debt repayment plan to a longer timetable, which will of course need to consider the full impact of covid. We will be more able to evaluate it over that period. The Government will of course closely monitor both schemes’ usage once they are up and running, and consider the impacts of covid-19 and the wider economic recovery.
Turning to the suggestion for the report to explore financial resilience more broadly, I point towards the Government’s annual financial inclusion report, which was published only last week. We also work closely with the Money and Pensions Service, which was established in the last two years, the FCA and other stakeholders to monitor personal finances, including financial resilience. Earlier, I mentioned some of the measures I have been engaged in as the Minister for this area with the Pensions and Financial Inclusion Minister.
Finally, the new clause also requires a report exploring the incorporation of a no-interest loan scheme into the debt respite scheme. The Committee will be pleased to hear that the Government are working closely with stakeholders towards a pilot of a no-interest loan scheme, building on the findings of a feasibility study published earlier this year. I am personally passionate about that. It will be an amazing breakthrough if we can institutionalise the scheme and establish its credibility. That will have to be on the basis of international comparisons, establishing which groups of people would benefit most from it, and how we can establish a protocol around the cost. Clearly, given the vulnerability of the people to whom we seek to apply it and make it available, it will be expensive to deliver, but I continue to persist with it.
Any pilot will take time. Of course, it is urgent, but I would rather ensure that it is credible and can be supported more broadly. Reporting by February 2021 on the viability of a no-interest loan scheme risks coming to a premature judgement based on inadequate evidence—I say that with some experience, given that I have been working closely on this for some while. I can assure the Committee, however, that I will keep Parliament updated on progress as we continue that work over the coming months.
Alison Thewliss
Looking at the clause, we feel that it is important to protect customers who may have put money into help to save accounts but do not necessarily follow all the things that come in the post and risk losing their bonus or losing track of the funds. It is important to ensure that those people, who are the most vulnerable—the type of people who might turn up to my surgery with a plastic bag full of unopened letters—are protected, along with the savings that they have made, and do not risk losing anything as a result of the changes being made.
Help to save customers really have enough on their plate at the moment without having to navigate myriad savings products to transfer the funds over. We think it particularly important that their accounts continue to earn interest until this crisis is over. Amendment 36 ensures that customers will not be given a lower bonus should their funds be moved from a matured account to a new one.
In the Savings (Government Contributions) Act 2017, the Government introduced help to save accounts with the big purpose of encouraging working people with very low incomes and who were in receipt of certain benefits to save money. Since the launch of the scheme, more than 222,000 people have opened help to save accounts, with £85 million deposited. That is quite a significant number of people and a significant amount of money. My worry is that between opening the account and now, people may have moved house multiple times or may have been difficult to trace, and it is important the Government do all they can to ensure that people do not lose the money to which they are entitled.
I would be interested to hear from the Economic Secretary how the Government manage to keep in touch with those 222,000 people. How many of them do the Government expect to contact in advance of the Bill’s passage? What protections will be put in place? It seems important to ensure that those people, who are not the most financially literate people in the country, get as much advice as possible. StepChange, in its evidence to the Committee, was quite happy with the idea of accounts staying open just that wee bit longer, to give people extra time and reassurance so that they can transfer funds when they can. Many people up and down country have seen bank branches closing in their local communities, and it is now a lot more difficult to go and set up a new account than it was before.
The Government need to make the changes as easy and as simple as possible, to ensure that those who have money saved know where it is and can access it, and do not lose out in any way by changing from one scheme to another.
John Glen
The Government are committed to supporting people of all income levels to save, including those on low incomes, through the pioneering Help to Save scheme. To be clear, the scheme provides generous Government bonuses of 50% on up to £50 of monthly savings after two and four years—I say to all hon. Members that it is a great scheme to promote among all their constituents. This means that an individual could save £2,400 and receive £1,200 in bonuses over a four-year period. I hope the Committee will agree that this is an attractive incentive to encourage people to save and build up that resilience. In fact, as of September 2020, more than 47,200 account holders had benefited from their first bonus payment, with an average value of £375 two years after opening their accounts.
The effect of amendment 36 would be to extend Help to Save accounts beyond their intended four-year term. The aim of Help to Save is to kick-start a regular, long-term savings habit, and encourage people to continue to save via mainstream savings accounts. The Government’s view is that a four-year Help to Save period is sufficient to achieve this objective. Therefore, the Government do not consider it necessary to extend the bonus incentive beyond four years.
Clause 33 relates to what happens to the customer’s savings at the end of the four-year period. This clause provides the legislative basis for successor accounts, which is one of a number of options that the Government are considering for supporting those customers who have become disengaged from their Help to Save account. We expect that the majority of account holders will make an active decision about where they want to transfer their money. Indeed, HMRC and National Savings and Investments will communicate with account holders ahead of accounts maturing, to ensure that savers receive appropriate information and guidance on the range of retail options available to continue saving once their participation in the scheme ends.
On the specifics of amendment 37, if the Government decide to proceed with successor accounts, account holders will be contacted both before and after the transfer. Ideally, once customers have been contacted to highlight that their account is maturing, the vast majority will take an active decision to transfer the funds elsewhere. This policy is designed to support those who have disengaged from their account and failed to provide instructions for transferring their balance upon maturity. Hopefully, with those clarifications, the hon. Member for Glasgow Central will be willing to withdraw the amendment.
Alison Thewliss
I still have a wee bit of hesitation about how the Government intend to communicate with people. If the Minister wants to write to me with a wee bit more reassurance about that, I would welcome that, because I am particularly worried. I know how often people move about and how they might lose contact with their accounts, and it would be useful to have a bit more detail from the Government about how many of those accounts they deem to be active and have money put into them, how many are relatively dormant, and the extent to which people are contacted to let them know what their options are.
Like I say, if there is money out there and it belongs to people in my constituency, I want them to be able to get it and have that money in their hand, because people need it, particularly at this time. If they have put money away, it should be there for them when they need it, and I would like a bit more detail from the Government about precisely what their communications strategy is, and how they are going to follow up with people. If they do not get in touch with those people the first time, are they going to follow them up a second time, and what then happens if they cannot reach somebody? A bit more detail on how the mechanics of that would work would be very useful, because, as I said, the purpose of amendment 37 is to make sure that customers are contacted and informed before anything happens to the money that is rightfully theirs. I ask for additional reassurance that they are not going to lose this money they have scrimped, saved, and done their very best for.
John Glen
I am happy to give that reassurance. I would just say that since this scheme has been operating, the Government have been working hard to understand better ways of promoting it, and the most cost-effective way of doing that. I have had meetings at the University of Birmingham with academics and charities to try to establish the best way forward. Obviously, we have only got to the early stages of the first two-year bonus, but the hon. Lady makes a perfectly reasonable point about wanting to make sure that those who have saved and have become disengaged can get hold of that bonus money, which the Government are very happy to give.
Alison Thewliss
Specifically on the point about engaging with academics and people who understand how best to do this, I would gently say that it is not necessarily the academics that the Minister wants to be speaking to, but the guy who turns up on a rainy Friday morning with a Farmfoods bag full of bills and unopened envelopes. That is the guy who the Government need to reach. That is the person they need to understand, and who needs to get that money if it belongs to him.
John Glen
Absolutely. I am just trying to demonstrate my willingness to engage with creative ideas about it. Obviously, our comms strategy has not yet been defined because of the gap between the maturing of it, but I will undertake to keep in touch with the hon. Lady and Committee members on the evolution of this construct.
The Chair
With this it will be convenient to discuss the following:
New clause 3—Help to Save annual report—
“(1) The Treasury must prepare and publish an annual report on the Help to Save scheme for each financial year in which the scheme remains open to new accounts.
(2) The report must cover the following matters—
(a) the performance of the scheme;
(b) observations on take-up including, where applicable, reasons for take up being low;
(c) actions the Treasury proposes to take to increase take up of the scheme; and
(d) progress towards implementing successor accounts for the Help to Save savers.
(3) A report must be laid before both houses of Parliament no later than 31 October in the financial year following the financial year to which the report relates.
(4) The first annual report would be laid before both Houses of Parliament by 31 October 2021 and relate to the 2020-21 Financial year.”
This new clause would require the Treasury to publish an annual report on take up levels of the Help to Save scheme.
New clause 14—Help-to-Save accounts: report on effectiveness—
“(1) The Secretary of State must, within six months of the passing of this Act, and thereafter on an annual basis until 2027, lay before the House of Commons a report on the effectiveness of Help-to-Save accounts.
(2) The report in subsection (1) must cover—
(a) levels of take-up of Help-to-Save accounts;
(b) an analysis of the typical financial assets held by target users of the Help-to-Save scheme;
(c) an analysis of alternative forms of access to finance available to target users of the Help-to-Save scheme; and
(d) the effectiveness of the measures introduced by section 33.”
This new clause would gather the data required to enable policy makers to understand the effectiveness of the help to save scheme in addressing asset inequality amongst the UK population.
John Glen
The clause will insert new paragraph 13A into schedule 2 of the Savings (Government Contributions) Act 2017. The clause gives the Treasury a power to make regulations that provide for the transfer of funds from a mature Help to Save account to a new or existing savings account with NSNI in the National Savings Bank where the account holder has not provided instructions upon maturity for it to be transferred elsewhere. It will be known as the successor account. The clause also provides that any regulations made under it cannot override the account holder’s instructions for the transfer of the balance to an account of their choosing. Where a transfer is made to a successor account, no charge may be imposed on the account holder for the transfer.
The Help to Save scheme supports individuals on low incomes to build a savings fund over four years, providing a generous 50% bonus. More than 222,000 accounts have been opened as of July 2020, and more than 47,200 savers have benefited from their first bonus. At the end of the four-year term of the Help to Save account, savers will be encouraged to provide instructions on where they want their savings transferred—for example, to a new or an existing savings account. However, some savers might not provide instructions, and the Government are in the process of evaluating the best way to support such customers, who have become disengaged from their accounts, to continue to save. A successor account is one of a number of options that are being considered. I therefore recommend that the clause stand part of the Bill.
Abena Oppong-Asare (Erith and Thamesmead) (Lab)
It is a pleasure to be under your chairmanship, Mr Davies. I would like to speak to new clause 3, which calls on the Government to prepare and publish an annual report on the Help to Save scheme for each financial year that it remains open to new accounts.
The Help to Save scheme is a form of savings account that allows eligible people to receive a bonus of 50p for every pound they save over four years. The scheme is particularly good, as it targets people who are entitled to working tax credits or who are in receipt of universal credit. Given the failure to support jobs during covid-19, the number of households currently receiving universal credit has risen from 1.8 million in May 2019 to almost 4.6 million as of October 2020. I am sure everybody on the Committee agrees that that is a very high figure, although I appreciate that we are going through really difficult times because of covid.
One of the things that I am seeing as a local MP in my constituency—I am sure it is the same for everybody on the Committee—is a huge increase in universal credit claimants. We are likely to see an even bigger increase as people are no longer able to rely on their personal savings, so the Help to Save scheme is more important than ever.
After a two-year delay, the Help to Save scheme was launched by the Government in September 2018, to much anticipation. However, the scheme to date cannot be considered a success, and I am eager to find out why. We tabled the new clause because we feel that an annual report would help us in uncovering that. Of the 2.8 million people eligible to take up the scheme, only 132,150 accounts had been opened by July 2019—just 4.6% of those eligible for the scheme. I am still struggling to understand those figures and to believe that the Government are truly committed to a savings scheme and to creating a culture of household saving.
Furthermore, in last year’s spring statement of March 2019, the Government’s Budget watchdog slashed by half its forecast of how much the taxman would have to spend on Help to Save by 2021, citing lower than expected take-up. However, as I mentioned, I am in favour of the scheme and want it to succeed. That is, after all, why the previous Labour Government spent time highlighting the scheme and planning to launch it in 2010 as a savings gateway, only for it to be scrapped in 2010 by the then Chancellor.
Members may agree that the information we have so far does not paint a picture of commitment from the Government to supporting people to save. When the savings gateway was created, Labour worked with banks, building societies and credit unions, which invested in software and promotional literature for the launch. Some potential savers had received letters informing them of their eligibility and telling them about local providers just hours before the scheme was scrapped by the incoming Conservative Government.
I am really interested to hear what measures the Government have implemented to promote take-up of the scheme. I could raise many issues about universal credit and working tax credits, but as you advised, Mr Davies, we need to keep to the new clause, so I will raise them another time. My primary concern is to ensure that those who are eligible can access the scheme, now and in the future.
The Government’s pilot scheme found that 45,000 individuals saved a total of £3 billion during the trial period. We know that the scheme works. Charities and debt support services are hopeful that it can directly tackle asset poverty. The Help to Save scheme is due to come to a close in three years’ time, in September 2023, which means that we still have time to support people to save over £800, if we act now to make the scheme more widely accessible.
Publishing an annual report on the scheme, as provided for by the new clause, would allow us to see in detail where take-up has been successful and what we can do to ensure that people are aware of the scheme and how to engage with it. We feel very strongly that a report would help us to capture what areas we need to improve. The Minister mentioned that the Government are committed to providing support. I hope that they are, but agreeing to have an annual report would show further commitment.
In the meantime, I believe that more can be done, particularly to integrate with credit unions and debt management services so that the scheme functions more effectively in the years it has left to run. I would also be really interested, in lieu of an annual report for 2020, given that at the end of last year it was estimated that only 4% of eligible people have signed up to the Government’s Help to Save scheme, if the Minister could tell the Committee whether he thinks it has been unsuccessful and what the Government are doing to promote take-up.
John Glen
Understandably, this topic brings out some very deeply held beliefs about the sort of society that we live in and the inequalities and challenges we face. I very much respect the points made by the hon. Member for Walthamstow and the hon. Member for Erith and Thamesmead.
I will try to respond to new clause 3 and new clause 14, but before I do, I think it would be helpful to clarify a few points about the Help-to-Save scheme. It is open to new entrants until September 2023 and those individuals will then be able to have it open for four years from that point. It is possible to save between £1 and £50 a month, so various modest savings can be made.
The hon. Member for Erith and Thamesmead asked about the schedule of promotion activities. Some of the full schedule was curtailed for this financial year because of covid, but we anticipate resuming our promotional activity early in 2021. We promoted Help-to-Save through Talk Money Week, we have engaged with Martin Lewis, who is also a key advocate of this scheme, and we will continue to work with the DWP to target those in receipt of universal credit and on working tax credits. The other point I would like to make clear to the Committee is that if somebody is in receipt of either of those benefits for just one week, they are eligible to open an account that is then valid for four years.
New clauses 3 and 14 require the Government to publish reports into the Help-to-Save scheme. Of course, the Government are prepared to inform Parliament on the progress of the scheme. Indeed, the Government committed to Parliament in 2018 to monitor and evaluate the scheme and has been publishing data every six months, in February and August. Therefore, we do not consider it necessary to enact these amendments as a statutory requirement. The latest statistics, published this August, show that by the end of July 2020 more than 222,000 accounts had been opened, with over £85 million in deposits between them. This has been a 37% increase in the total number of accounts opened by the end of January 2020, and a 57% increase in the total deposits into the scheme, compared with in the previous six-month period from August 2019 to January 2020. I am sure the Committee will agree that this is excellent progress, despite the difficult economic period.
The Government already work closely with stakeholders to monitor personal finances, including financial resilience; the Money and Pension Service monitor financial difficulty through an annual survey; and the Financial Conduct Authority undertake the biannual financial lives survey. It is not clear that this amendment would improve the data available to the Government in shaping policy. The Government are also working with stakeholders to raise awareness and encourage eligible individuals to open an account and benefit from the scheme, and I indicated some of the ways that is happening earlier. In fairness to the hon. Member for Walthamstow, who made a passionate and wide-ranging set of observations about these matters, I do not think I can fully do justice to them today. However, I share her belief that there are significant inequalities and certain obligations on people who have more to do more to support those who are more vulnerable in society. This measure is a good policy that we should all be able to promote and I am committed to promoting it further. I would ask the hon. Members to withdraw the new clauses.
Question put and agreed to.
Clause 33 accordingly ordered to stand part of the Bill.
Clause 34
Amendments of the PRIIPs Regulation etc
Mr McFadden
I beg to move amendment 30, in clause 34, page 40, line 33, after “performance” insert
“including information relating to environmental, social and governance standards.”
This amendment would require that consumers are given information about the environmental, social and governance standards of PRIIPs.
John Glen
Amendment 30 seeks to require that information about the environmental, social and governance standards of PRIIPs products be included in the key information document, the KID. Now is not the time to address this, as I shall explain, but I have a lot of sympathy with the intent behind the amendment proposed by the right hon. Member for Wolverhampton South East. The reason I do not believe it is the right time to address this is that it would result in significant uncertainty for industry.
Clause 34 makes changes to the PRIIPs to address the potential for unintended consequences for consumers. The PRIIPs were created by the EU to improve the quality of financial information given to retail investors purchasing PRIIPs, by introducing a short, consumer-friendly and comparable disclosure document. The Government are committed to the original aim of the regulation and has proposed changes in this Bill to ensure it functions as intended.
In particular, there is not a fixed definition of environmental, social and governance standards and no standardised precedent for how such disclosures could be made in a comparable way for PRIIPs products. That is why I sincerely say that I agree with the sentiment, but I do not think we are yet at a level of maturity in definitional terms for such a measure to work. To put this in place, and ensure that the ensuing disclosures are appropriate and useful for consumers, significant policy development would be required.
As a result, the amendment would bring significant industry uncertainty, as they do not report in a standardised way on environmental, social and governance issues at a product level, which is what this would be, and have minimal guidance on how to do so. That would come at a time when the Government are intending, through the Financial Services Bill, to provide more certainty to industry on PRIIPs disclosures.
I recognise that high-quality sustainable finance disclosures that enable investors to take environmental impacts into account in their investment decisions will be crucial in facilitating the growth of green finance and supporting the transition to a lower-carbon economy. As I have previously stated, it would also be premature to adopt an environmental, social and governance amendment in the specific context of PRIIPs when the Government are considering the requirements for legislation relating to the sustainable finance disclosure regulation.
Amendment 31 also seeks to amend the PRIIPs disclosure regime, to require that changes to performance information that will be made by the FCA do not leave consumers with a reduced understanding of the levels of risk involved in buying PRIIPs products. I respectfully submit that the amendment would have little or no effect. The Bill is already intended to address concerns about the information provided to consumers in order to avoid the potential for consumer harm. The issues with the PRIIPs regulation, addressed by the Bill, include concern that the requirement to include performance scenarios in the key information documents may result in potentially misleading disclosures. That has been the key concern that has led to that measure being included.
Clause 34 will replace
“performance scenarios and the assumptions made to produce them”
with “information on performance”. That change will allow the FCA to amend the PRIIPs regulatory technical standards to clarify what information on performance should be provided. The FCA already has a statutory objective to secure an appropriate degree of protection for consumers and, as the expert regulator, is best placed to work with consumers and industry to understand issues and respond to them effectively. Moreover, changes the FCA makes to the information provided to consumers in the key information document are subject to a consultation, which it expects to publish next year. Requiring the regulator to ensure that changes to the KID do not reduce consumer understanding of risk would have no effect.
The changes we are making to the Bill address the potential for consumer harm and the FCA is best placed to ensure the appropriate degree of consumer protection. I hope that offers reassurance to the right hon. Member for Wolverhampton South East. I therefore ask that he withdraw the amendment.
Mr McFadden
At this stage in our proceedings we begin to recognise the debates that we are having, because we have had them more than once. I find the Minister’s answers on the subject of ESG slightly circular. He says—and I believe him—that he has great sympathy with the intent, but now is not the time or this is not the quite the way to do it, and so on. The reason I find that unconvincing is that I think the Government will do this, or something quite close to it, and will then claim credit, saying that doing it makes the UK a more friendly environment for environmentally sustainable investments. Because of that, I will press the amendment to a vote. Then, as is the way of these things, what we did when we had the chance to make a decision about this, both at the level of the regulator and at the level of the investment product, will be on the record.
John Glen
May I express my regret at the right hon. Gentleman’s decision? I acknowledge that this country is going on a journey, and it is very important that we make progress with regard to such disclosures, but this specific measure in this specific Bill at this time would not be in the interests of consumers or the regulation. I respectfully disagree, and I look forward to the vote.
Question put, That the amendment be made.
John Glen
Clause 34 makes changes to the packaged retail and insurance-based investment products—PRIIPs—regulation to address the potential for unintended consequences for consumers. PRIIPs are a category of financial assets regularly provided to retail investors, and the PRIIPs regulation will form part of retained EU law from the end of the transition period. The regulation sets the requirement for a standardised disclosure document known as the KID—key information document—which must be provided to retail investors when they purchase certain packaged investment products.
The regulation, while its aims are laudable, has arguably been less successful in its achievements. The clause demonstrates our balanced approach to remedying the issues with the regulation by addressing the most pressing concerns ahead of the further wholesale review of the disclosure regime for UK retail investors to which the Government are committed. This will limit any disruption to the disclosure of information to investors while seeking to improve the existing framework in this area.
To address uncertainty regarding the precise scope of the PRIIPs regulation, the clause will enable the Financial Conduct Authority to clarify the scope of the PRIIPs regulation through its rules, allowing it to address existing and potential future ambiguities. To address concerns that the methodology used to calculate performance scenarios misleads consumers, the clause will also replace performance scenarios and the assumptions made to produce them with information on performance. After the transition period, that change will allow the FCA, the expert regulator with a responsibility to protect consumers, to amend the PRIIPs regulatory technical standards to clarify what information on performance should be provided in the KID.
The final change allows the Government to extend the exemption currently in place for undertakings for the collective investment in transferable securities—UCITS, a type of investment fund—from December 2021 for a maximum of five years. That will allow the Government to consider the most appropriate timing for the transition of UCITS funds into any domestic successor that may result from the planned review of the UK framework for investment product disclosure.
We recognise that there is more to be done to improve the overall disclosure regime for UK retail investors. That is why we have committed to a wholesale review. In the meantime, these changes will provide greater certainty to PRIIPs manufacturers and address the potential for consumer harm. I therefore recommend that the clause stand part of the Bill.
Question put and agreed to.
Clause 34 accordingly ordered to stand part of the Bill.
Clause 35
Over the counter derivatives: clearing and procedures for reporting
Question proposed, That the clause stand part of the Bill.
John Glen
Clause 35 makes two small technical amendments to the UK’s version of the European market infrastructure regulation. This is important to help improve the overall functioning of the UK’s regulatory regime for derivatives.
The first amendment to UK EMIR will promote transparency and accessibility in the clearing of derivatives transactions, by ensuring that the clearing members of UK central counterparties and their clients offer clearing services on
“fair, reasonable, non-discriminatory and transparent”
commercial terms. Clearing contributes to the safety of the UK’s financial markets, especially our derivatives markets. It does this by ensuring that a trade will still be honoured if one party to a contract does not fulfil their side—for example, if a firm goes bust. This will reduce barriers to accessing clearing services, which will in turn make it easier for firms to fulfil their clearing obligations. It will strengthen incentives to clear centrally and reduce systemic risk in financial markets.
The second amendment to UK EMIR will increase transparency in derivatives markets. Such transparency is vital to ensure that regulators in the UK can monitor risks in financial markets and ensure financial stability. This amendment will also make the environment in which trade repositories operate more competitive. This is achieved through ensuring that trade repositories put in place procedures to improve the quality of the data they collect, and establish policies to transfer their data to other trade repositories in an orderly fashion when it is necessary to do so. Trade repositories collect and maintain records of derivatives trades with the aim of helping regulators to monitor the build-up of systemic risk.
Overall, these two sensible technical amendments to UK EMIR will bolster the UK’s regulation of derivatives markets, further delivering on the UK’s G20 commitments in this area. I therefore recommend that the clause stand part of the Bill.
Mr McFadden
I have just one question. As the Minister said, this clause deals with the EMIR directive, which governs the sale of over-the-counter derivates. To add to our joys, we have EMIR and something called EMIR refit. The clause is about access to clearing for people dealing in these products. Over-the-counter derivates are perhaps among the more opaque financial services products on the market, but we learnt during the financial crisis that whatever their other qualities, these products exposed the interconnection between different companie, and the vulnerability of that interconnection. That is why clearing is important. It acts as what could be called a circuit breaker to ensure that if one party to the transaction gets into trouble, we do not have a domino effect right throughout the system, so the clause is designed to ensure that smaller traders have access to this circuit breaker or clearing activity. I ask the Minister: is what we are doing here mirroring what the EU have done through this EMIR refit process, or are the two measures in this clause—the data one, and the fair and transparent one—a departure in any way from that?
John Glen
The changes are almost identical to those made through EMIR refit in the EU. The UK played a pivotal role in the design of the EMIR refit and previously voted in favour of this legislation. Now that the UK has left the EU, we continue to believe that these measures are helpful to UK industry and will improve the financial stability of the UK. As I said, the FCA will design the implementation of the new frameworks in a way that works best for the UK. In making these observations, I underscore the comments I have made throughout that we will always seek to maintain the highest standards but to make them work optimally in the United Kingdom.
Question put and agreed to.
Clause 35 accordingly ordered to stand part of the Bill.
Clause 36
Regulations about financial collateral arrangements
Question proposed, That the clause stand part of the Bill.
John Glen
Clause 36 serves to clarify existing legislation concerning financial collateral arrangements. This issue dates back to 2003, when the Treasury introduced the Financial Collateral Arrangements (No.2) Regulations 2003, or FCARs, to transpose the EU financial collateral arrangements directive, or FCAD, into UK law. The FCAD was introduced to simplify the process of taking financial collateral across the EU.
Subsequent litigation has questioned the UK’s implementation of the FCAD—specifically the extent to which the FCARs went beyond the scope of the FCAD. However, that litigation has not invalidated the FCARs, and they are extensively relied on by market participants entering into financial collateral arrangements. The clause removes any doubt about the validity of the FCARs. The clause has retrospective effect, confirming the legal effectiveness of the financial collateral arrangements made in reliance on the FCARs since their introduction in 2003. It also confirms the legal effectiveness of any future such arrangements.
By reaffirming the FCARs, the risk of legal doubt and any resulting financial instability is removed. This measure will therefore help to facilitate the Bill’s broader aims of promoting financial stability and maintaining the effectiveness of sound capital markets. I therefore recommend that the clause stand part of the Bill.
Question put and agreed to.
Clause 36 accordingly ordered to stand part of the Bill.
Clause 37
Appointment of chief executive of FCA
Question proposed, That the clause stand part of the Bill.
John Glen
The Government believe that the appointment of the FCA’s chief executive officer should be brought into line with similarly high-profile appointments in financial services, such as the deputy governor of the Bank of England or the CEO of the Prudential Regulation Authority. The clause will therefore set out in statute that the FCA CEO should be subject to a fixed five-year term, renewable once. This delivers on a commitment made to the Treasury Committee during the passage of the Bank of England and Financial Services Act 2016. I therefore recommend that the clause stand part of the Bill.
Question put and agreed to.
Clause 37 accordingly ordered to stand part of the Bill.
Clauses 38 to 44 ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(David Rutley.)
Financial Services Bill (Seventh sitting)
John Glen ExcerptsThursday 26th November 2020
(5 years, 4 months ago)
Public Bill CommitteesRead Full debate Financial Services Bill 2019-21 View all Financial Services Bill 2019-21 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 26 November 2020 - (26 Nov 2020)
Mr Pat McFadden (Wolverhampton South East) (Lab)
I beg to move amendment 28, in clause 8, page 7, line 38, at end insert—
‘(7) In reviewing critical benchmarks in accordance with Article A20 of the Benchmarks regulation as amended by this Act the FCA must have regard to—
(a) ensuring a benchmark is based on actual trades or contracts;
(b) preventing a benchmark from manipulation for the benefit of anyone submitting information to that benchmark; and
(c) robust sanctions up to and including custodial sentences for anyone found to be engaged in manipulation or attempted manipulation of a benchmark.’
This amendment would require the FCA to have regard to ensuring a benchmark is based on actual trades or contracts, that it is not open to manipulation and that robust sanctions are in place for those who manipulate, or attempt to manipulate, a benchmark.
Thank you for your chairmanship today, Mr Davies. Perhaps with your indulgence I may, as I did the other day, explain how I shall try to approach this morning’s sitting. I believe that within a sometimes impenetrable Bill the clauses we are to debate this morning may be the most impenetrable. That is often the case when clauses change provisions elsewhere, as in this instance. I shall, as I go through my remarks on the provisions, ask the Minister some questions. The real meat will come at about clauses 13 to 16, and I will speak for a bit longer. I just want to give the Committee the shape of my approach.
To return to the amendment, it begins, I guess, with LIBOR. I want by way of illustration to ask the Committee to think about the price of bread. If we were all asked what the benchmark price of a loaf is, it would be easy to establish it. We would go to a supermarket, look on the shelf, and see the price of a loaf. If we were keen shoppers with a good eye for a bargain, we might go to two or three supermarkets and compare the price of a loaf. I could pop-quiz the Committee, but I shall not put anyone through that.
The price of a standard loaf in one of our supermarkets is roughly £1.10, give or take; people who want to go for one of those sourdough loaves can pay a bit more if they want, but for what I would call a normal brown loaf it is about £1.10. That is the benchmark price of a loaf, dictated by the supply and demand of a competitive supermarket environment.
Now I want Members to imagine a different way of setting prices, where we were setting the price of a loaf and could all submit our opinion on what the price of the loaf might be—and we owned bakeries, and were selling loaves. We would have a debate every day to set the price of bread. Perhaps the Minister and I would converge on about £1.10, but someone else might say, “Look, could we just edge that price up? Could you do me a favour and make today’s price £1.11 or £1.12? It would be a really good favour and, by the way, if you do it I might send you a case of champagne at Christmas.”
The trader might be saying those things in the knowledge that they had a lot of loaves to sell that afternoon—maybe millions. The penny difference in price could make a great difference to the profit. Alternatively, a benchmark price of £1.09 instead of £1.10 could mean that they would lose a lot of money on the bread they had to sell. That is basically what was happening with LIBOR. That is the problem that was unveiled.
The problem is exacerbated where there is not a liquid market for bread and where the benchmark relies more and more on what our oral witnesses last week called “expert judgment”. That is one phrase for it, but we could also call it opinion, and if we did not have supermarkets selling millions of loaves every day and the price of bread was down to the opinion of only the bakers, we can see there would be the potential for price manipulation.
That is what was happening with LIBOR and what was uncovered as traders around the world shaved tiny proportions off the daily rates. The volume of money being traded meant that even a tiny proportion—0.01% or something like that—could make a huge difference to their own trading account over the course of the year. That is the problem that this set of clauses is trying to deal with.
How do we deal with the problem? We focus a lot on what the Bill calls the representativeness of the benchmark, because there is not really a problem when millions of loaves are being sold and there is a competitive environment; if I do not like the price at Tesco, I can go to another supermarket and try my luck elsewhere. But when wholesale markets were not very liquid and relied more and more on expert opinions, there was the potential for—indeed, the reality of—manipulation. That is what happened.
That matters because this benchmark underpins trillions of pounds’-worth of trades, yet was found to be vulnerable to the kind of manipulation I have just tried to illustrate. I have tried to show that even the tiniest movement in the daily benchmark could make a big difference to traders because of the volumes of money that they were trading. The benchmark’s flaws were exposed a number of years ago, yet its use to underpin trading has persisted because of the volume of contracts linked to it.
One of the problems in the complexity of this set of clauses is that it takes us into the area of contract law, which is both complex and, in this case, international. Huge volumes, contract law and international jurisdictions are involved, so—to be fair to the regulators and the Treasury—it is not easy to get this right. Our amendment does not try to get into the contract issue, which we will come to later when we debate a few clauses further on, but rather tries to set out some ground rules for the regulator in establishing and sanctioning successor benchmarks to LIBOR.
The criteria that we have set out ought to be uncontroversial. The first is that the benchmark should be based on actual trades in the market for which real prices were paid. I confess I have been away from the issue for a while, although I served on parliamentary inquiries into it some years ago, but we learned last week that those so-called expert judgments are still being used to set LIBOR prices. That is someone’s opinion of what a trade might cost, not necessarily what it does cost in a real marketplace. That use of expert judgments has created the potential—and, as we have seen, more than the potential—for manipulation.
We also learned that SONIA, the sterling overnight index average and the favoured successor to LIBOR in the UK, is based on much more liquid markets. That is a good thing, but there is also a potential problem. LIBOR is an internationally used benchmark. While we are debating this legislation, the United States is also legislating, the European Union has parallel legislation and the Swiss have parallel legislation—and they have all gone for slightly different successors. That raises the problem, which the Minister and I will get into discussing: how to take contracts based on an internationally used benchmark and try to ensure fairness to those who signed up to contracts under it when the countries legislating for successors to it are all choosing slightly different overnight rates for those successors.
The amendment, therefore, goes with the grain of how trades are moving. We all agree that a benchmark based on large liquid markets will be more accurate than one based on opinion. The second and third elements of the amendment give the regulator a duty to prevent manipulation by those submitting information to the benchmark and to have robust sanctions, including custodial sentences, when that occurs.
We will get back to debating that elsewhere in the Bill. When the LIBOR scandal unfolded some seven or eight years ago, I remember that both the Treasury Committee and the Parliamentary Commission on Banking Standards heard evidence from chief executives of the major banks. Often, their defence was, “I had no idea what my traders were doing. I did not know that they were doing this.” There was a constructive ignorance built into the system. Although that did not make the chief executive look good, it was far better than the chief executive admitting that they knew what the trader was doing but they looked the other way because it was making more profit for the bank and the trader. The sanctions and the responsibility up through the institution are very important.
All that is hugely important for trust in the system. The average constituent probably does not know much about LIBOR or what it does, but the truth is that the financial products they buy are often related to this benchmark, so it does have an impact in the real world. No matter how esoteric the financial products are—they have become too esoteric—in the end there is a customer, and the customer should only pay a fair price. The imbalance of information should not result in the customer being fleeced or the trader being unfairly enriched, and it is the job of the regulator and the financial institution for which that trader works to ensure that is the case. That is the intention behind our amendment: to set that as a clear goal for the regulators before we get into the meat in the clauses of how we will transition from LIBOR to other kinds of benchmarks.
The Economic Secretary to the Treasury (John Glen)
It is a pleasure to serve under your chairmanship again, Mr Davies. I appreciate the opening remarks of the right hon. Member for Wolverhampton South East and his compelling attempt to contextualise the complexity of the scrutiny of the clauses that we will undertake this morning. In that spirit, it might be helpful if I contextualise for the Committee what benchmarks are, what the LIBOR benchmark is and where we are with the EU benchmarks regulation before I respond to the Opposition amendment.
A benchmark is a standard against which the performance of a fund can be measured or by reference to which payments can be calculated. They are most commonly found in financial instruments, but are used to compare a variety of products, from commodities—oil, gold and diamonds—to the weather. The most widely used benchmarks are interest rate benchmarks, such as LIBOR, the Euro Interbank Offered Rate and SONIA. They reflect interest rates for inter-bank lending and borrowing. They are regularly calculated and made publicly available. As was mentioned, they are used in a wide array of financial instruments used in global financial markets. They also have a use in trade, finance, valuation, accounting and taxation.
Stella Creasy (Walthamstow) (Lab/Co-op)
It is wonderful to serve under your chairmanship, as ever, Mr Davies. The Minister is explaining that there is a process for enforcement. We all know that this issue is very specialist. If he thinks the current regulations and sanctions are appropriate, could he set out how they are being enacted and monitored? Frankly, it requires someone with a specialist understanding of how these rates can be manipulated to enact them in the way he outlines. If he does not want to add the amendment, could he explain how these issues can be investigated, and what resources there are to do that?
John Glen
I thank the hon. Lady for her point. These matters are administered by the FCA. I have set out the framework under which it operates. Its resourcing is a matter for it, and I speak on a six-weekly basis to the chief executive about that. The sanctions available to the FCA vary considerably according the nature of the breaches. Some will be small, modest technical breaches.
Stella Creasy
The Minister has set out the criminal sanction. I am interested in whether there is support and resourcing expertise in relation to the criminal element, as opposed to the regulatory element.
Stephen Flynn (Aberdeen South) (SNP)
It is a pleasure to serve under your chairmanship, Mr Davies. I will be brief. The Minister has made a compelling case, but perhaps not as compelling as that made by the right hon. Member for Wolverhampton South East, who made illuminating remarks on the potential price of bread, although I encourage him to go to Aldi, where he will get it for a lot cheaper than £1.10.
What is proposed here is a common-sense approach that would give the wider public confidence that the Government are taking this matter seriously, notwith- standing the Minister’s remarks thus far. In general terms, I do not think there is a huge difference between the two positions, but looking at both sides, I think the common-sense approach would be to tighten this process and make it more robust; that would provide the public with the confidence they feel they need on these matters, particularly given the scale of past scandals.
Mr McFadden
I listened carefully to what the Minister said. I do not think anyone looking at the issue would conclude that the responsibility for these actions had been fairly allocated, so there is an issue. I am not saying we want to go around looking to put people’s heads on spikes—we do not want that sort of politics—but it does rankle with our constituents when certain types of crime that are, candidly, easier to understand are met with heavy punishments while somebody who does a very complex crime that is more difficult to understand can somehow get away with it.
Having said that, I accept that legislation for criminal offences, and particularly for custodial sentences, needs to be very carefully drafted in exactly the right way, and I cannot say that I am 100% certain that my amendment is, so I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
John Glen
Clause 8 is the first of 14 clauses that amend the benchmarks regulation in order to provide the FCA with the powers it needs to oversee the orderly wind-down of critical benchmarks such as LIBOR. Critical benchmarks are benchmarks that meet certain criteria—for instance, they are used in a significant volume of transactions, or the benchmark is based on submissions by contributors, the majority of whom are located in the UK. A number of powers in the benchmarks regulation are limited to the oversight supervision of critical benchmarks or the administrators of such benchmarks.
Clause 8 adds new criteria for what may be designated as a critical benchmark. As a result, a benchmark will be considered critical if its cessation would cause significant and adverse impacts on market integrity in the UK, even where the benchmark has market-led substitutes, provided one or more users of the benchmark cannot move on to a substitute. The new test means that, as a critical benchmark winds down, the value of contracts that use the benchmark diminishes. The powers available to the FCA to manage the wind-down of critical benchmarks will remain available, provided that the benchmark meets the relevant tests to remain designated as a critical benchmark.
In addition, one of the existing tests for what may be designated as a critical benchmark has been changed. The test originally stated that a benchmark would be designated as critical where it met either both a qualitative and quantitative threshold of use in more than €400 billion-worth of products, or the qualitative threshold only. The quantitative threshold has now been removed, as it has become redundant. This measure has been welcomed by industry as an important development in managing LIBOR transition, and will ensure that the FCA has the powers it needs to manage the orderly wind-down of this critical benchmark.
I am aware, as a result of my engagement with industry—indeed, the Committee heard evidence of this last week—that there is support among market participants for additional safe harbour provisions to complement the provisions in this Bill. I can assure the Committee that we are committed to looking into that further issue and providing industry with the reassurance it needs. That conversation is ongoing and, I think, is to the satisfaction of the industry; we are working to a conclusion with it. However, given what I think the Committee will concede is the complexity of the matters involved, I cannot commit to an outcome, and I think the industry recognises that.
Abena Oppong-Asare (Erith and Thamesmead) (Lab)
I want to go back to what happens if moving to another benchmark is “not reasonably practicable”. I note that the Minister is looking into that and seeking reassurance. One thing that we are particularly concerned about in this clause is the question of whether “one or more users”, if it is reasonable and practicable, can switch to a market-led substitute benchmark. How do the Government define what is reasonably practicable in this case? Will he explain that to me, please?
John Glen
I am grateful to the hon. Lady for her question. In terms of the benchmark’s being classed as critical and the appropriateness of substitutes, certain contracts face barriers to moving off a benchmark. While some contracts are bilateral and that renegotiation may be possible, many contracts are multilateral and involve the consent of multiple parties before a change can be made. Therefore, in some cases, achieving consensus on the changes is likely to be difficult or impossible, due to the absolute number of parties that will be involved, or due to the threshold at which consent would be achieved. In those situations the existence of an appropriate substitute is not relevant, as users will not be able to move on to it. The complexity of what they are on means that there is not anything substitutable.
Abena Oppong-Asare
On the point about the Government making a direct evaluation, if the benchmark user argues that it would not be reasonably practical to move to a market-led substitute, but the Treasury disagrees with that, what recourse does the user have to challenge this decision?
John Glen
These matters will be governed by protocols with the industry. The industry would have a dialogue with the FCA, through which these matters would be resolved. There would be a dispute, I would imagine, about the number of contracts, the number of people involved in those contracts, and the readiness of an available alternative. Usually, these matters would be resolved through dialogue and consultation.
Abena Oppong-Asare
That is really helpful, in terms of the dialogue with the FCA. Will a process be followed to ensure a fair system is applied with regard to substitutes that disagree with the Treasury process, or will how it is done be judged at that time?
John Glen
The complexity of these contracts and their reference to these benchmarks necessitates ongoing dialogue. There is a significant team in the FCA that deals with this work. The industry has been very concerned about this. This is a live, ongoing conversation. Given the context, and the history that the right hon. Member for Wolverhampton South East and I set out, and how appalling this situation was previously, there is wide consensus that this should be done in an open and collaborative way. This regulation will be used in that spirit.
Alison Thewliss (Glasgow Central) (SNP)
Paul Richards from the International Capital Market Association, who gave evidence last week, said there were around 520 legacy bond contracts to be moved over, and only 20 had been converted in the market so far, because it is a difficult and time-consuming process. Is there more the Government could be doing to reassure and help? Does the Minister envisage bringing forward any amendments to make this any easier? It sounds like this process will cost the markets money.
John Glen
I thank the hon. Lady for her question. The evidence from the ICMA last week underscored the ongoing complexity and challenges of this. It may be that legislation will be required in a future Session, but that would be subject to a resolution. There is no point of crystallisation from the industry; it is not compelling us to bring something forward. There is no resistance on the part of the Treasury to doing that; it is a question of working out what would be appropriate for the market. That dialogue will continue, and the Government will respond in the appropriate way in due course. I think the gentleman who gave evidence last week was appropriately making the Committee aware of that ongoing additional dialogue regarding that safe harbour provision. But there is no point of conflict between the Treasury and the industry on this matter.
Mr McFadden
The questions asked by my hon. Friend the Member for Erith and Thamesmead expose the potential for litigation if the Government and regulators are moving contracts from one basis to another; some of the people involved will have deep pockets and expensive lawyers. The Minister tells us that it will all be sorted out—thrashed out—and I hope he is right; but I am not sure that we can guarantee that.
I have a couple of questions about the clause and those clauses that follow. First, is it all about LIBOR, even though it talks about critical benchmarks, or is it more general? For example, might the provisions be used on a benchmark related to the price of a particular metal, or something like that? For our understanding of the matter, should we, wherever the provisions refer to a critical benchmark, just be thinking about LIBOR—because that is what we really mean; and is there some parliamentary drafting reason why the Bill does not say that?
Secondly, the clause deals with a review of which benchmarks are critical benchmarks. The Minister said, and the clause says, that that seems to be a benchmark for which a market-led substitute exists, although for some reason it is not practical to transfer activity to such a market-led substitute. That is what is confusing about the clauses. We are told that the policy decision, and the regulatory decision, is to move away from LIBOR and to cease using it by the end of 2021. That is my understanding. Yet it seems that the clauses both facilitate that and facilitate the continued use of such benchmarks.
My reading of the clause and the one that follows is that the FCA will retain the power to compel organisations to submit information to a critical benchmark, even though the policy decision has been made to move away from that benchmark. The question then is why the regulator would want to do that, and what the power means for the 2021 LIBOR end date. Does the power mean that the FCA could compel submitters to keep submitting information to LIBOR, and is that because so many contracts depend on it? Is that really why the power to continue submitting information to critical benchmarks is engaged in this? What I am really asking is whether the clause is putting the brakes on LIBOR or, in some ways, continuing a facilitation of LIBOR after the end of 2021, for some things.
John Glen
In the UK, LIBOR is the only critical benchmark. However, for reasons that the right hon. Gentleman has alluded to, we do not want the provision to be on just the LIBOR benchmark. For reasons to do with the type of legislation that that would mean—private legislation referring to something specific—a different process would be created. We have to use benchmark legislation—benchmark regulations; but LIBOR is what it pertains to. That is the only critical benchmark in the UK.
A mechanism to compel panel banks to continue to submit data beyond the end of 2021 does not exist. We have to be able to wind down in an orderly way and make provision for continuity, which is needed for the tough contracts that continue to exist and will need some reference point. We need to do that in a way that satisfies the market and maintains stability. It is in that context that we are giving the FCA the powers.
Question put and agreed to.
Clause 8 accordingly ordered to stand part of the Bill.
Clause 9
Mandatory administration of a critical benchmark
Question proposed, That the clause stand part of the Bill.
John Glen
Clause 9 amends article 21 of the benchmarks regulation, which concerns the mandatory administration of a critical benchmark.
Article 21 gives the FCA the power to compel the provision of a critical benchmark where the administrator notifies the FCA of its intention to cease providing the benchmark. Clause 9 amends article 21 to increase from five to 10 years the maximum period for which an administrator can be compelled by the FCA to continue to provide the benchmark. This will increase the time which the FCA has to manage the wind-down of a critical benchmark.
Under the clause, if the FCA decides to compel an administrator to continue publishing the benchmark, the FCA must assess the capability of the benchmark to measure the underlying market or economic reality and inform the administrator in writing of the outcome of this assessment. The FCA’s assessment that a critical benchmark is no longer representative of its underlying market, or is at risk of becoming unrepresentative, is the first step in providing the FCA with its wider powers to manage the wind-down of such a benchmark. We therefore wish to ensure that the FCA can take steps towards starting the managed wind-down of a critical benchmark in circumstances where the benchmark administrator itself proposes to cease the benchmark. I recommend that the clause stand part of the Bill.
Mr McFadden
The clause takes us, in a sense, to the next step after a review. Again, I have a couple of questions. First, subsection (2) refers to a period of 10 years. The Minister made clear a few minutes ago that LIBOR is definitely winding up by the end of 2021, so to what does 10 years refer? With something that is supposed to be winding up in one year, I still cannot quite understand why we are giving the regulator powers to continue it in a form for up to 10 years. I am confused about that, and I do not know if I am the only one.
Secondly, subsection (3) refers to an assessment of a benchmark. That assessment revolves around the question of the representative nature of the benchmark. It says that the FCA will always give either
“a written notice stating that it considers that the benchmark is not representative of the…economic reality”—
perhaps it has become too illiquid, in the way we discussed, or too reliant on expert opinion—or
“a written notice stating that it considers that the representativeness of the benchmark is not at risk.”
In other words, we have a good competition going here for the price of the bread. Does the 10-year period of extended mandatory information apply when the FCA has judged that the benchmark is not representative, or could it apply in cases where it is judged that it is representative as well? Subsection (3) seems to indicate that the assessment could go either way. I am trying to get at what this 10-year power is for and to which kind of benchmark it applies.
John Glen
I thank the right hon. Gentleman for his entirely reasonable and appropriate questions. The compulsion period of 10 years is about having a timely period to continue with the revised methodology of the synthetic LIBOR. One of the main aims of the Bill is to provide an appropriate mechanism for the wind-down of LIBOR and to reduce the risk of contractual frustration in the event of an unplanned or sudden cessation of LIBOR. To enable a managed wind-down of LIBOR, it may be necessary for the FCA to compel the benchmark administrator to continue to provide the benchmark for a period of time, to allow a portion of LIBOR-referencing contracts to mature and end. We expect a significant number of outstanding LIBOR legacy contracts at the end of the five-year compulsion period, and those outstanding contracts will still pose a material financial stability risk, as the Financial Stability Board noted in 2014.
Mr McFadden
The Minister’s phrase, “synthetic LIBOR”, helps us to understand this. I think it might mean something like this: that the regulator has the power to designate a benchmark as critical when it is unrepresentative of market reality, but in a way LIBOR is not really ending at the end of 2021, because we have synthetic LIBOR—the ghost of LIBOR, we might say—and the ghost of LIBOR is necessary because of those legacy contracts.
Where I still get confused is that the reason LIBOR is being wound up, and the reason that the FCA can designate it in this manner, is that it is unrepresentative—yet for the ghost of LIBOR, or synthetic LIBOR, to have any validity, the FCA has to continue to compel submitters to submit information to it. I do not know what the implications of that are for the quality of the ghost of LIBOR; we must remember that the reason it has been designated in the first place is that it is failing the market representativeness test. How is it, therefore, that for up to 10 years we can compel submitters to submit information to something that the regulator has judged invalid?
John Glen
The right hon. Gentleman has accurately summarised the issue around synthetic LIBOR, but we are getting into suppositions about the time period for which that synthetic LIBOR would be necessary. The FCA recently published a paper on this. It is about evolving circumstances in the market. It is very difficult to be prescriptive, hence the 10-year provision. We are now getting into the realm of market operating realities at some point in the future. We have to have something that references the fact that we have a considerable volume of contracts that reference the historical LIBOR and we have to have a reference point going forward. I hope that is helpful.
Question put and agreed to.
Clause 9 accordingly ordered to stand part of the Bill.
Clause 10
Prohibition on new use where administrator to cease providing critical benchmark
Question proposed, That the clause stand part of the Bill.
John Glen
Clause 10 inserts article 21A to the benchmarks regulation. This article provides the FCA with the power to issue a notice prohibiting some or all new use of a critical benchmark by supervised entities. The FCA may use this power where the administrator has stated that it wishes to cease providing the benchmark and the FCA has assessed the administrator’s plans to cease the benchmark or otherwise transfer it to a new administrator.
The FCA can exercise this power only if it considers that it is desirable to advance its consumer protection objective or its integrity objective under the Financial Services and Markets Act 2000. The notice will contain the reasons for the prohibition, the date when it is to take effect and any further information that the FCA considers appropriate to allow supervised entities to understand the decision. The FCA’s ability to prohibit new use in circumstances where the administrator is seeking to cease to provide the critical benchmark is an important step in preventing the pool of contracts referencing a benchmark from growing ahead of its possible cessation. I therefore recommend that the clause stand part of the Bill.
Mr McFadden
I thank the Minister for his explanation. This clause is about the prohibition of the use of benchmarks. Again, I have a few questions. Is it the case that prohibition can take place only after the kind of assessment of the representative nature of the benchmark that we discussed under clause 9(3), or are there other grounds for issuing a notice prohibiting the use of a benchmark, such as suspected criminal activity or manipulation in some other way?
My second question is about use. New article 21A prohibits “new use” of a benchmark. I think the Minister is saying that there should not be new use of a benchmark, but there may be continued use for the reasons that we have discussed—for legacy reasons. Could the Minister confirm that existing contracts referenced in the benchmark would not be covered by this “new use” provision?
My third question is about paragraph 4 of new article 21A, which says that the FCA must have regard to effects outside the UK of any decision to cease use of a benchmark. I can see why such a provision would be there, because LIBOR is used to underpin contracts all over the world. However, what can the regulator, which only has jurisdiction in the UK, do to stop the use of a benchmark elsewhere in the world? To what degree does this require work with other regulators through, for example, the Financial Stability Board, or is the judgment that action by the FCA alone would be enough, even though that action might have international effects, because of the importance of UK benchmarks? I suppose it is as if some jurisdiction has a particular influence in a sport, so when they change the rules, everybody else has to change the rules, too.
I assume that those criteria about the protection of the consumer and so on that the Minister referred to are in the Bill to protect the FCA from litigation risk by making clear that in acting on this, it was doing so in line with its statutory objectives, because the danger of litigation risk runs right through this.
John Glen
The right hon. Gentleman raises a number of questions, and I should start by making it clear that we in the UK cannot stop use overseas. The provision applies to UK-supervised entities working with international partners. He is right to say that there is interconnectedness between those institutions, and the FCA has a significant role in terms of LIBOR.
The simple purpose here is that, where a benchmark is to be ceased, the pool of contracts referencing that benchmark should stop growing. The prohibition power that the right hon. Gentleman referenced is available only at the point at which the benchmark administrator has informed the FCA that it is planning to cease to publish it and the FCA has considered whether it is realistic for the benchmark to be ceased or transferred to a new administrator. Clearly, it would not be desirable for the pool of contracts that reference the benchmark to continue to grow in circumstances where it is likely that that benchmark is on a pathway to ceasing to be used. It is therefore appropriate at that stage to stop supervised entities entering into new contracts that reference the relevant benchmark.
In terms of the rules broadly governing the FCA in exercising this power, it can do that only if it is desirable to do so in order to advance this FSMA consumer protection objective or the integrity objective, so it would have to be confident that it would secure an appropriate degree of protection for consumers or advance the integrity of the market, and it would have to publish a statement along those lines. I recognise that this is complex, but we are really trying to give an appropriate toolkit to the FCA to do what is necessary not only to safeguard the appropriate ongoing construction of benchmarks, but to ensure that it has the authority to justify the management of the wind-down in circumstances where that is necessary.
Question put and agreed to.
Clause 10 accordingly ordered to stand part of the Bill.
Clause 11
Assessment of representativeness of critical benchmarks
Question proposed, That the clause stand part of the Bill.
John Glen
Clause 11 introduces two new articles to the benchmarks regulation. New article 22A requires the administrator of a critical benchmark to undertake,
“an assessment of the capability of the benchmark to measure the underlying market or economic reality”.
The administrator must undertake such an assessment when a contributor to the benchmark is proposing to withdraw, when the FCA requires the administrator to undertake a review of the benchmark, or every two years as part of a biannual review process. New article 22A also requires that:
“If a supervised contributor…intends to cease contributing input data to a critical benchmark”,
it must provide written notification to the administrator at least 15 weeks ahead of the date it intends to cease contributing. That replaces the existing four-week notice period, which is insufficient.
New article 22B requires that the FCA must conduct its own representativeness assessment of the benchmark once it receives an assessment from a benchmark administrator under article 22A. The FCA may also proceed with its assessment where the administrator has failed to provide an assessment within the timelines specified by the legislation. After making its assessment under this article, the FCA must provide the benchmark administrator with a written notice setting out its findings, which could be that it considers that the benchmark is not representative of the economic reality it is intended to measure, that it is at risk of not being representative, or that the representativeness of the benchmark is not at risk.
Those assessments play a crucial role in the process we have designed for managing the wind-down of a critical benchmark. A finding that a benchmark is no longer representative or that its representativeness is at risk is the first step in activating many of the new powers that are being granted to the FCA. I recommend that the clause stand part of the Bill.
Question put and agreed to.
Clause 11 accordingly ordered to stand part of the Bill.
Clause 12
Mandatory contribution to critical benchmarks
John Glen
Clause 12 amends article 23 of the benchmarks regulation, which concerns the mandatory contribution to a critical benchmark by supervised entities. Article 23 already provides the FCA with certain compulsion powers over the administrator and supervised entities, which contribute to a benchmark, including the power to compel supervised contributors to continue to contribute to a benchmark. These powers were previously only available where the representativeness of the benchmark was judged to be at risk.
The clause amends the article to ensure that it works with the new representativeness assessments we are introducing under the Bill, and that these powers are available either where the benchmark is at risk, or where the benchmark has actually become unrepresentative. The changes mean that, for instance, the power to compel a contributor will now become available whenever the FCA has made a finding that the benchmark is unrepresentative, or its representativeness is at risk.
The clause also extends the compulsion powers to supervised third country contributors and requires that if a contributor gives notice that it intends to withdraw on a specific date, it may not cease contributing on that date without written permission from the FCA. It also clarifies that the FCA’s compulsion powers and other powers in paragraph 6 of article 23 are available specifically for the purpose of restoring, maintaining or improving the representativeness of a benchmark.
These powers are important in ensuring that a critical benchmark does not simply cease in circumstances where the representativeness of the benchmark could reasonably be maintained or restored through appropriate FCA action. I recommend that the clause stand part of the Bill.
Mr McFadden
I have one or two questions to the Minister. The clause gives the FCA the power to mandate contributors, including those outside the UK—it will be interesting to see how that works—to continue to submit information to a benchmark for up to five years. However, clause 9 states that synthetic LIBOR—the ghost of LIBOR—can be kept going for up to 10 years. Why is it five years in this clause but 10 years in clause 9?
John Glen
I thank the right hon. Gentleman for his question. He draws attention to the discrepancy between the provision for five years in clause 12 and 10 years elsewhere. It is important to remember that the powers in the Bill are not just for LIBOR but will be relevant to benchmarks that are designated as critical in the future. The changes in the clause ensure that the existing compulsion powers work with the amendments made to the wider regulation. Where we have a benchmark that is unrepresentative or is at risk of being unrepresentative, the FCA should have access to these powers.
With respect to LIBOR, the amendments ensure the FCA will have the required time to implement the various processes that we are introducing, to access their new powers, and to mitigate the risk of the rate simply ceasing due to insufficient input data. The 10-year provision is a contingency about the ongoing use of the benchmark. The timeframes are constructed with respect to both the LIBOR provision and the wider needs of benchmarks and have been constructed in consultation with the FCA over quite a long period.
Mr McFadden
I am not sure that that is entirely convincing, because neither clause refers specifically to LIBOR, for reasons that the Minister has explained. They both refer to benchmarks in general.
The different timescales used throughout this section are somewhat confusing. There are reviews every two years; other timescales of three months are mentioned here and there. I am genuinely confused about why clause 9 gives the power to compel contributions for up to 10 years, yet here we are a few clauses on talking about five years. I accept that the Minister says that the 10 years might be a maximum, but if these powers are to deal with the issue of legacy contracts, I am still not sure why we have this discrepancy. It could be that I am not understanding something or that I am missing something. That is certainly possible. Is this an arena where the Government may come forward with an amendment during the later stages of the Bill’s passage?
John Glen
I am always open to looking at the possibility of amendments, as I have demonstrated during the sittings we have had so far. The 10-year reference was under the revised methodology for LIBOR to be produced by the administrator. It will probably be useful for me to reflect on this exchange, and to write to the right hon. Gentleman and the Committee to clarify the apparent discrepancies and rationale for this. I recognise that this is genuinely complicated. I want to bring satisfaction to the Committee and I am happy to do that.
Julie Marson (Hertford and Stortford) (Con)
It is a pleasure to serve under your chairmanship, Mr Davies. The shadow Minister is obviously concerned and quite rightly scrutinising the detail of every clause. Does my hon. Friend agree that it would be apposite to recall from the evidence from the regulators, including the Prudential Regulation Authority, the FCA, and specifically the LIBOR transition director for UK finance, how supportive they are of the provisions of this Bill? The LIBOR transition director said explicitly in his evidence:
“These powers, in preventing all those negative outcomes for both customers and market integrity, are absolutely critical as part of the transition.”––[Official Report, Financial Services Public Bill Committee, 17 November 2020; c. 18, Q30.]
That plays back into the consultation and regulators’ support for the Bill.
John Glen
I appreciate my hon. Friend’s intervention. It demonstrates that there is widespread concern for this legislation to be passed. The right hon. Gentleman is pressing me, quite appropriately, on these apparent anomalies, and I am happy to submit to his questions. The issue is that synthetic LIBOR is related to the 10-year provision, but the five-year provision is for other critical benchmarks, which do not have the same context in terms of their contractual longevity. As I said in my response to the right hon. Gentleman, I will write to him and to the Committee to bring clarity on this matter. It is an important matter that needs clarifying.
Question put and agreed to.
Clause 12 accordingly order to stand part of the Bill.
Clause 13
Designation of certain critical benchmarks
Question proposed, That the clause stand part of the Bill.
John Glen
The clause inserts a new article into the benchmarks regulation that, in essence, provides the FCA with the power to designate a critical benchmark as an article 23A benchmark, if they consider that the representativeness of the benchmark cannot reasonably be restored, or there are not good reasons to restore and maintain its representativeness. This designation allows the FCA to use a number of the new powers that are set out later in the Bill, such as the ability to require that the administrator change the benchmarks methodology.
Given the significant impacts of making such a designation, we have included a number of safeguards to the designation power. First, if the FCA considers it appropriate to designate a benchmark, they must inform the administrator and allow 14 days for the administrator to make representations before proceeding with the designation. If the FCA decides to proceed with the designation, they must publish a notice. That should include, among other things, the reasons for their decision, the date it takes effect and any further information that the FCA considers appropriate to assist supervised entities in understanding the effects of the designation.
In summary, clause 13 sets out the procedure by which the FCA can designate a benchmark and access the powers detailed later in the Bill. I therefore recommend that the clause stand part of the Bill.
Mr McFadden
I am grateful to the Minister. Before I begin, I say to the hon. Member for Hertford and Stortford that we are under a duty here to try to understand what we are doing. It is in that spirit that I am asking these questions. I was reminded by a colleague about a different kind of Standing Committee, which some years ago was considering the Hunting Bill. He told me that after a month they were still on clause 1, which was about the title of the Bill, so I do not think we have gone over the top in asking these questions.
With your and the Minister’s indulgence, Mr Davies, I would like to make a few points about the next few clauses; I think they go together and get to the heart of what this area of the Bill is about. As I said, the Opposition understand why LIBOR is being wound down; we have gone over the history of the manipulation and so on. It is why the Bill rightly places such an emphasis on benchmarks being representative of market activity: so far, so uncontroversial.
However, there is a problem in the transition from LIBOR to SONIA or other new benchmarks. As we have referenced several times, there will clearly be some impact on the value of LIBOR-based contracts. That impact is openly acknowledged by the FCA when it says:
“Where parties to contracts referencing LIBOR cannot reach agreement on how those contracts would operate in the event of LIBOR’s cessation, discontinuation could cause uncertainty, litigation or loss of value because contracts no longer function as intended. If this problem affects large volumes of contracts it could pose risks to wider market integrity of contracts/financial instruments.”
Remember that, given the volume of money involved—we are talking about not millions or billions but trillions—this is a systemic risk, as well as a risk to individual parties to contract.
My understanding of the provisions in clause 13 and a few that follow is this. When the FCA feels that a benchmark is no longer representative of the market to which it relates or that that representativeness is at risk, it can designate the benchmark under article 23A of the benchmark regulation. Then there are various provisions about notices being published, reasonable fees being charged and so on; we can leave those aside. When such a benchmark is designated by the FCA, that can only be done in line with the statutory duties, to which the Minister referred, of consumer protection and market integrity. When a benchmark is designated in that way, new use of the benchmark is prohibited, but—this is the critical “but”—the FCA can mandate continued legacy use of that benchmark. The Minister may come back to me about timescales—five years, 10 years or whatever it is.
Finally, if the potential disruption brought about by the discontinuation of LIBOR—or a critical benchmark, if we want to refer to it in that way—is too great, it is suggested in the Bill that the FCA may compel its continuation, as we have discussed. How realistic is it for the FCA to continue to compel administrators to submit information to something that they have said they want to phase out in a year’s time? The provisions are intended to allow the FCA to wind down a critical benchmark but in a way that protects these legacy contracts, which are based on the old benchmark. That brings us to those legacy contracts and what is or is not included, and to the potential legal risks.
As I understand it, there might be two issues. First, what is the definition of a legacy contract? Is it one where there has not been agreement between the two parties to transfer to the new benchmark, or is it something different? What are we talking about when we discuss legacy contracts? What would we do if there were a dispute between the parties about whether something should be treated as a legacy contract or not?
Secondly, how will the provisions cope with the potential legal action and/or market disruption as a result of parties feeling aggrieved, for one reason or another, about the switch from one benchmark to another or, in consequence, taking action that results in disorderly markets? In other words, to what degree is the process subject to disruption through legal action by the parties involved, which could feed into market operation, given the volume of money involved in these contracts?
Mr McFadden
However, I thought it better to take these next few clauses together and raise those points with him in this way.
Alison Thewliss
I want to ask a quick question about what is perhaps neither synthetic nor ghostly LIBOR, but zombie LIBOR, because it seems to be lurching on and not quite dead.
I am curious about the monitoring of whether these critical benchmarks are becoming unrepresentative, how that practically would work and at which stage that happens. I also note that there is an obligation under clauses 13 to 16 to bring things to the attention of the public and the supervised entities, but no such requirement to bring them to the attention of Parliament. Will the Minister reflect on whether it would be useful to us as parliamentarians to hear about those things? We cannot necessarily be expected to monitor things on the FCA website as members of the public, and those things might be something that parliamentarians might usefully want to find out.
John Glen
I thank the hon. Lady and the right hon. Member for Wolverhampton South East for their questions, and I will do my best to address them.
On legacy use, this is broadly where a benchmark was used in specified existing contracts or instruments prior to its designation as an article 23A benchmark. The right hon. Gentleman went on to ask a series of questions about the concept of safe harbours, the different jurisdictions of legal process, and the compulsion process. The Government believe that the proposal is realistic. The administrators do not submit information; the contributors do. On safe harbours, which we picked up on from the evidence from the gentleman from the trade association last week, we recognise the challenges identified in that session, and the powers are designed to assist those contracts that cannot feasibly move away from LIBOR, as Paul Richards described. I am committed to looking to address the issue of safe harbour through further work with industry.
In practice, it will not be possible to table amendments during the passage of this Bill, but that is not down to my unwillingness to do so; it is a matter of the maturity of the conversation, and I think that will be acknowledged. A live productive conversation is going on.
Mr McFadden
Is the parallel legislation in the United States and the EU part of that consideration? When we received the oral evidence last week, I confess that I had not appreciated that parallel legislation on this subject, with safe harbour provisions, was going through in those two jurisdictions. Given the co-operation that already exists through the FSB, involving in the Federal Reserve Bank of New York and the Bank of England, is that part of the consideration?
John Glen
We are looking and working internationally. We have an active dialogue with the US through a regulatory working group, and we will be monitoring that. There is no question of us seeking to find some competitive advantage in this; there will be a need to find as much alignment as possible to give as much clarity and certainty to the market actors. However, the conversation is not at that stage yet here. There is no sense that that is jeopardising the integrity of this process. This is the first step, but we reserve the right to do other things further to the conclusion of those conversations.
As for accountability to Parliament, as raised by the hon. Member for Glasgow Central, the legislation requires the FCA to produce statements of policy and notices when exercising the powers. There is also a requirement to review the exercise of its methodology every two years and to publish a report following that review. The FCA is required to exercise its powers in accordance with the two statutory objectives: consumer protection and market integrity. That is the relationship to parliamentary accountability.
Turning to the other matters raised by the right hon. Gentleman around the administrator challenging a designation, if the FCA decides to designate a benchmark under this article, the benchmark administrator has the option of referring the matter to the upper tribunal. The FCA is required to inform the administrator of its right to refer the decision to the upper tribunal and the procedure for doing so.
As for the continued publication of a benchmark that has been deemed unrepresentative, in the case of a critical benchmark such as LIBOR, the benchmark is so widely used that its discontinuation would represent a risk to financial stability and create disruption for market participants. Therefore, this Bill provides the FCA with the power to require a change to how a critical benchmark is determined, including input data, to preserve the existence of the benchmark for a limited time period to help those contracts that otherwise would not realistically transfer to an alternative benchmark.
I hope I have done justice to most of what the right hon. Gentleman raised. I will seek to review what we have exchanged and, if there are outstanding matters, to write to him. I am relieved we have moved beyond clause 1.
Question put and agreed to.
Clause 13 accordingly ordered to stand part of the Bill.
Ordered, That the debate be now adjourned.—(David Rutley.)